Banking on WISP Acquisitions

The U.S. real estate boom may be busting but mom-and-pop WISPs are suddenly a hot commodity on the mergers and acquisitions market. Aggressive public companies with an eye to the main chance are binge buying.

ERF Wireless of League City, Texas is one. The company has made 10 WISP acquisitions in the last two and a half years.

But ERF has a slightly different angle than some of the others. Its main goal is not to build a super-WISP to compete with all the other WISPS—and DSL and cable providers.

The company’s core business is selling broadband network services to banks and, as we’ll see, it’s the synergies between the WISP and bank businesses that brings ERF to the acquisitions derby.

Its most recent purchases: TSTAR Internet in November and Momentum Online in October. TSTAR added 3,000 wireless broadband subscribers to the company’s customer base and $1.2 million in annual revenues. Momentum added 2,500 customers and $1.2 million. No prices were announced.


The buying binge is by no means over.

“You have to realize, in this industry, we’re in a consolidation phase,” says ERF chairman and CEO Dr. Dean Cubley. “And we can grow much more quickly through acquisition than by building the networks ourselves.”

ERF is clearly not the only company that understands this. Tom Millitzer, president of New Commerce Communications and the M&A broker who represented TSTAR, has been involved in 20 transactions involving WISPs in recent years, with more on the table.

There may be as many as 100 companies looking to buy, he says, and hundreds or even thousands of potential targets.

The buyers mostly don’t want to talk about what they’re doing, but a couple of others, like ERF, have been very public about it, including NextPhase Wireless and InternetAmerica has even published a white paper on “Growth & Consolidation of Rural & Suburban Wireless Broadband Markets.”

WISP with a twist

ERF, formed in 2003 from a complex stock transaction involving another Cubley company, Eagle R.F. International Inc., today trades on the Nasdaq over the counter (OTC) exchange as ERFW. Revenues this year will be “somewhere in excess of $5 million,” he says.

The company has about 75 employees, with a main network operations center (NOC) in League City, a backup site in Taylor, Texas and offices in Lubbock and Marble Falls in Texas and Baton Rouge, Louisiana.

ERF has three overlapping lines of business: network services for banks, wireless broadband (mostly residential), and fiber to the home triple-play services.

The fiber business came out of wireless work the company did in Mexico. It later won a contract to deliver fiber-based services to the El Dorado Golf and Beach Club in the Mexican resort city of San Jose del Cabo.

ERF will likely focus exclusively on international markets with the fiber services—”because the margins are better there,” Cubley says candidly.

The core business is, or will be, providing T-1 replacement and other network services to banks using broadband wireless technology (mostly Motorola Canopy).

The company builds networks that link a bank’s branches (BranchNet). The bank owns the network, but ERF manages it, so there is both one-time and ongoing revenue. It also provides connections to the international banking backbone network (through BankNet) and ancillary security services.

ERF has contracts with six banks in three states so far: Texas, Louisiana and Mississippi. Its ultimate goal is to have hundreds of bank customers across the country. But as Cubley says, “We have to build the bank networks one at a time.”

An intriguing part of the business model is that ERF sells excess capacity on the bank networks to residential and small business wireless broadband customers, and shares the revenues with the bank.

The bank business is ERF’s ace in the hole, Millitzer says—both because it will deliver higher margins than run-of-the-mill broadband wireless services and because by establishing itself in the banking industry, the company gains credibility in other markets.

“If banks like and trust you, others will like and trust you too,” he says. “Information with banks is sacred. [The ERF strategy] is a twist that isn’t very sexy, but from a business point of view, it’s really good.”

Today the banking services line only contributes 25 percent of the company’s annual revenues. But the strategy is to change the split over time so that eventually it accounts for 60 percent to 75 percent.

In the meantime, most of the revenue, about $4 million of it, comes from the approximately 10,000 wireless broadband subscribers—two thirds of them residential customers and most inherited from the WISPs ERF has acquired.

The surprising part of the ERF strategy is that the broadband wireless business line is not so much an end in itself as a way to get service personnel in the field in areas where the company has bank customers. Those field service people will handle installations and trouble calls for both bank and wireless broadband customers.

“It cuts out one cost [field service for bank customers] and replaces it with a revenue stream,” Cubley says. “For us, the broadband wireless operations don’t have to have high profit margins for [the business] to be really profitable overall.”

So ERF will continue to acquire WISPs, almost exclusively in areas where it already has or anticipates having bank customers. Cubley’s target is to grow revenues from broadband wireless services to $12 million annually by the end of 2008—mostly through acquisitions.

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Despite aggressive players like ERF, Millitzer would not characterize the current consolidation as “intense.” “I don’t feel like it’s big railroad train going down the track,” he says.

The recent up-tick in activity, he adds, may have more to do with supply than demand. Of the hundreds of small-town WISPs started by entrepreneurs in the last five to ten years, it just happens that many are now coming to maturity.

“It doesn’t make any sense [for a company like NextPhase or ERF] to do an acquisition unless the [target] is a certain size, and it takes time to get that big,” Millitzer says. “They won’t buy a company with 50 subscribers but they will buy one with 300 or 400. Many are getting to a size now to be acquired.”

Cubley’s explanation of the current flurry is only slightly different.

“You’ve got to look at who the sellers are,” he says. “Usually they’re local people who saw an opportunity, put their savings into it and built a business.”

But many have now reached the limits of their growth and are faced with a hard choice. Either they find new funding and acquire nearby competitors to get bigger, or they sell. Many opt for selling.

Some are in financial distress, but ERF typically isn’t looking for fire sale goods, Cubley says. “We’re mainly looking for those with $1 million or more in revenues that are either profitable or near profitable.”

Given the supply side factors in the ongoing consolidation, it’s not really a seller’s market, Cubley claims. He says he expects to pay about one times a company’s annual revenue to acquire it, sometimes as little as .5 times revenues. He figures it would cost about 1.5 times revenue to grow a customer base through sales and marketing.

Which would make WISPs a bargain indeed.

Millitzer tells a slightly different story about market values. There may be a perception that there are bargains available, but buyers usually get what they pay for, he warns. The apparent bargains, for example, may be very inefficient because badly managed, or margins may be lower, or equipment is old and needs replacing.

A fair price for a good company, he says, is about four to six times EBITDA—earnings before interest, taxes, depreciation and amortization.

I’m no financial expert, but that still sounds like considerably more than Cubley’s estimate of the going price. My guess? Cubley, always a buyer, and Millitzer, who only represents sellers, are engaging in a little extracurricular negotiation by media. The reality may be somewhere in between.

No pain, no gain

Even if there are real bargains for WISP buyers, there are some post-sale costs and challenges. ERF has to carefully integrate each new acquisition. It typically lets the company operate under its original name at first, gradually retiring the old branding and replacing it with ERF’s over the first year or so.

On the human resources side, the transition can rarely be done without some bloodletting. ERF generally eliminates staff that performed administrative tasks such as accounting that are done centrally for the entire company at headquarters.

And while many entrepreneur managers want to retire or move on anyway, some senior managers in acquired companies may end up getting the sack, especially when ERF buys companies adjacent to areas where it already has operations. In those situations, it keeps the “best” people as regional managers, Cubley says. The others: heave-ho.

Technology integration is another challenge. ERF won’t even consider acquiring companies that use some kinds of wireless infrastructure equipment. But it still has to deal with as many as five to seven different vendors, the two biggest being Motorola and Trango.

“We cross-train our service technicians and customer service personnel on everything we’re running,” Cubley says. “They have to be proficient in all the technologies. But radios all have similar characteristics.”

One interesting question. If ERF’s strategy is to acquire WISPs to get field technicians and customer service personnel on the ground in areas where it has bank customers, does that mean it won’t invest to grow the broadband wireless business? Cubley won’t come right out and say so, but that’s what it sounds like, at least in some cases.

“If [a new acquisition] makes money and adds to the overall profit of the company, we’re going to invest in it,” he says. “But we’re not going to put money in to subsidize [unprofitable operations].”

This story originally appeared at ISP-Planet. It is re-printed here with permission.

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