Notable Mergers and Acquisitions 11/9: (GTT) (ENT) (LMOS)

November 9, 2016 9:46 AM EST

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*** GTT Communications, Inc. (NYSE: GTT) announced a definitive agreement to acquire Hibernia Networks, a leading provider of global, high-speed network connectivity solutions and owner of terrestrial and subsea fiber assets including Hibernia Express, the lowest latency transatlantic cable system. The $590 million transaction consists of $515 million in cash and approximately 3.3 million shares of GTT common stock, to be issued to the sellers at closing, valued at $75 million.

This strategic combination:

  • Adds breadth and depth to GTT’s global Tier 1 IP network with owned and leased dark fiber assets including five owned subsea cables and eight cable landing stations
  • Expands GTT’s cloud networking portfolio, composed of wide area networking, internet, managed services and voice services, with the addition of optical and low latency transport, video and CDN services
  • Adds a world-class video transport platform servicing content rights holders, broadcasters, cable companies and OTT providers
  • Grows GTT’s client base, adding marquee clients with depth in the financial services, media and entertainment, web-centric and service provider segments, which will remain strategic verticals of focus for GTT
  • Enhances GTT’s financial profile by adding a substantial, highly complementary recurring revenue business with strong cash flow characteristics

“This acquisition accelerates GTT’s growth strategy by expanding our portfolio of cloud networking services, significantly increasing the scope and power of our global network, and growing our multinational client base,” said Rick Calder, GTT president and CEO. “Hibernia Networks has a demonstrated track record of growth, and brings unique, strategic network assets featuring high-bandwidth, low latency connectivity. We are very excited to welcome Hibernia Networks’ clients and talented team members to GTT. Following our successful, proven acquisition template, we expect to complete integration within two to three quarters post-close, and to achieve a post-synergy multiple of seven times Adjusted EBITDA or better on a pro forma basis.”

“GTT’s acquisition of Hibernia Networks provides great benefit to the entirety of our customer base as well as our two organizations,” said Bjarni Thorvardarson, Hibernia Networks’ chief executive officer. “GTT gains world class global fiber assets, including ultra-low latency routes between key financial markets, as well as optical, low latency and content services, and exceptional employees with a proven track record of network and commercial leadership, and exemplary customer service. Hibernia Networks clients around the world will benefit from the expansive reach of GTT’s Tier 1 IP network, the broader portfolio of products and services, improved scale, and the company’s expertise in delivering cloud networking solutions and managed services to multinational clients.”

The parties expect to close the transaction by the end of first quarter 2017, subject to certain regulatory approvals and other customary closing conditions.

The Bank Street Group LLC served as exclusive financial advisor to Hibernia in connection with this transaction.

Transaction Financing

Under the terms of the agreement, the purchase price is $590 million, subject to customary adjustments for working capital and other items, composed of $515 million in cash, plus approximately 3.3 million shares of GTT common stock, to be issued to the sellers at closing, valued at $75 million. The cash portion of the purchase price will be funded with proceeds from additional debt issuance, consisting of secured term loans as well as senior unsecured notes. The debt syndication process will be led by KeyBank National Association and Credit Suisse, who provided committed financing for the transaction.

At closing, the ratio of total net debt to Adjusted EBITDA is expected to be approximately 4.5:1, using annualized pro forma combined third quarter 2016 Adjusted EBITDA plus expected cost synergies. Within one year after closing, the ratio of total net debt to Adjusted EBITDA is expected to be at or below 4.0:1, reflecting continued Adjusted EBITDA growth and cash generation.

Hibernia Financial Information

For the three months ending September 30, 2016, Hibernia reported, on an unaudited basis, revenue of $45.5 million, Adjusted EBITDA of $16.1 million and capital expenditures of $1.9 million. For the nine months ending September 30, 2016, Hibernia reported, on an unaudited basis, revenue of $138.6 million, Adjusted EBITDA of $49.1 million and capital expenditures of $12.7 million. In 2015, Hibernia reported revenue of $148.9 million, Adjusted EBITDA of $34.2 million and capital expenditures of $161.5 million. Revenue and Adjusted EBITDA growth from 2015 to 2016 is primarily driven by completion of the Hibernia Express low latency transatlantic cable system in September 2015, including the impact of certain prepayments for long-term indefeasible rights of use (“IRUs”) from anchor tenants. The results listed above are as reported by Hibernia Networks, without expected future cost synergies, and without any pro forma adjustments. Detailed Hibernia results and pro forma information will be made available in a Form 8-K within the next several weeks.

*** GEE (“GEE”) (Nasdaq: ENT) announced it has entered into a strategic alliance and an investment agreement with Beijing Shareco Technologies Co., Ltd. (“Shareco”), an affiliate of HNA Group, one of China’s largest conglomerates. GEE and Shareco plan to create a joint venture (“JV”) to provide inflight entertainment and connectivity (“IFEC”) in China and exclusively service aircraft operated by HNA airlines. Shareco will make an initial primary equity investment in GEE of approximately $103 million, as well as contemplated additional primary and secondary common equity purchases upon the formation of the JV that would bring the total expected investment to $416 million.

Under terms of the contemplated transactions, GEE and Shareco would form a JV to provide IFEC and passenger monetization services to HNA airlines. GEE would sell its equipment, including its Airconnect antennas, network services and engineering and product support directly to the JV. The JV would be the exclusive provider of IFEC to HNA aircraft. This fleet comprises over 320 aircraft today and is expected to grow to over 500 aircraft in the future.

GEE currently operates live connectivity and television services in the Chinese IFEC market, and since 2013, GEE’s Chinese growth program has included investment in a Beijing office, local engineers, partnerships with Chinese media and advertising firms, connectivity trials and teleport infrastructure. GEE works with all of the Tier-1 telecommunications providers in China and, upon implementation of the JV, expects to be well-positioned in the highly competitive China IFEC market, with the JV having exclusive access to aircraft currently comprising a significant portion of the Chinese commercial aviation market. Currently, GEE has trial contracts with Shareco to provide services to several airlines within the HNA Group.

Shareco is a Beijing-based company that has developed and implemented an established advertising and passenger monetization model as the exclusive provider of e-commerce, games, content and advertising solutions to numerous airlines within and out of HNA’s fleet, including Hainan Airlines, Beijing Capital Airlines, Yangtze River Express, Tianjin Airlines and Okay Airways, among others. Shareco currently provides innovative tablet-based IFEC services to over 200 aircraft. Shareco is affiliated with HNA Group, a Fortune Global 500 corporation based in China with a proven track-record of acquisitions and investments in the aviation and travel industries.

“The transaction would bring together two industry leaders to accelerate IFEC adoption and improve the passenger experience in China. The completion of our JV with Shareco would accelerate our growth and solidify GEE as a major IFEC provider in the rapidly growing Chinese market,” said Dave Davis, CEO of GEE. “We are thrilled to partner with Shareco and HNA Group to drive new revenue opportunities and provide unparalleled connectivity and passenger entertainment products for HNA airlines and the Chinese market.”

“We are investing in GEE based on its leadership in the mobility space and unique position of offering an integrated suite of connectivity and content products,” said Jason Sun, Chairman of Shareco. “Our investment and strategic alliance will accelerate adoption of inflight connectivity, advertising and e-commerce in the Chinese market and bring a differentiated experience to passengers.”

Transaction Details

Shareco’s investment and creation of the JV is planned to occur in two stages. First, Shareco has agreed to acquire newly issued common shares of GEE for $11.00 per share, resulting in a 9.9% post-investment ownership stake. Based on GEE current shares outstanding, the initial investment is expected to total approximately $103 million for approximately 9.3 million newly issued shares of GEE. GEE will use the proceeds from this investment for general corporate purposes. The first stage of the transaction is subject to regulatory review and other customary closing conditions.

In connection with the second stage of the transactions, GEE and Shareco will negotiate binding documentation including an investment agreement providing for additional Shareco primary and secondary equity investments and a definitive JV agreement. Upon formation of the JV, Shareco would purchase up to $150 million of additional primary shares from GEE at $11.00 per share, with the proceeds used by GEE to invest in the JV as described below. In addition, in connection with the second stage of the transaction, Shareco would commence a tender offer to GEE’s stockholders to acquire shares at $11.00 per share in an amount which would result in Shareco holding an expected 34.9% ownership stake in GEE, through an expected aggregate investment of up to approximately $416 million, inclusive of both investment stages of the transaction. The second stage of the transaction is subject to the parties entering in a definitive investment and JV agreements, as well as regulatory review, GEE shareholder approval and other customary closing conditions.

GEE is expected to own up to 49% of the JV, and Shareco would own the remainder. In connection with the formation of the JV, GEE would invest up to $150 million into the JV, and Shareco is expected to contribute substantially all of its assets and liabilities, including exclusive contractual rights to provide IFEC services to HNA airlines. Upon completion of the second investment, Shareco would have the right to nominate GEE Board of Director seats proportionate to its ownership position in GEE. GEE expects to be actively engaged in the management of the JV, including having the rights to appoint key JV officers.

GEE expects that the completion of Shareco’s initial primary investment will occur during the first half of 2017, with the JV and second stage equity investments completed later in 2017.

BofA Merrill Lynch and Barclays are acting as financial advisors to GEE, and Simpson Thacher & Bartlett LLP is acting as legal advisor to GEE. Moelis & Company is acting as exclusive financial advisor to Shareco. Sidley Austin LLP and Fangda Partners are acting as legal advisors to Shareco.

*** Lumos Networks Corp. (Nasdaq: LMOS), a leading fiber-based service provider in the mid-Atlantic region today announced it signed a purchase agreement to acquire Clarity Communications Group (“Clarity”), which operates a 730 mile fiber network with 75 on-net locations located across four states in the south-eastern United States. The vast majority of Clarity’s operations and fiber mileage is in the state of North Carolina.

Timothy G. Biltz, CEO of Lumos Networks said, “I am excited to announce our acquisition of Clarity Communications, which we expect to close in the first quarter of 2017. We believe this transaction will be accretive on an Adjusted EBITDA basis on day one and demonstrates a disciplined approach to efficiently expand our fiber footprint into both new markets and verticals.”

Mr. Biltz continued, “Clarity, led by founders Todd Peverall and Andy Carwile, gives us an instant foothold within the Carrier and Enterprise verticals in many high growth North Carolina markets and gives us a new sales channel into various government end markets, including military installations and e-rate. Clarity will be a contributing factor in Lumos achieving the necessary scale needed to become a pure play fiber bandwidth infrastructure company.”

“We are enthusiastic about becoming part of the Lumos team as they continue their transformation towards a pure-play fiber company,” said Todd Peverall, President of Clarity Communications. “Our team is motivated to continue to grow our North Carolina fiber business and we see numerous opportunities to utilize our expertise within the government space across the entire 9,200 fiber mile Mid-Atlantic footprint.”

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