MERGER CREATES TEXAS-SIZED OVERBUILDER

Grande Communications announced last week that it will purchase ClearSource in an all-stock transaction, proving that even Texas apparently isn't big enough for two cable overbuilders.

The combined operator, which will retain the Grande name, will merge Grande's high-speed broadband network along the Austin-San Antonio corridor with ClearSource's franchises in Corpus Christi, Midland, Odessa and Waco. The resulting competitive carrier will square off against Time Warner Cable for video, SBC Communications and Verizon Communications for voice, and all three for high-speed data.

More important, though, is the incestuous relationship between the companies' lineage and executive ranks. Grande and ClearSource were spawned by Knology Holdings, which operates as an overbuilder in the Southeast. Grande Vice Chairman and CEO William Morrow once ran Knology and, while there, helped set up ClearSource.

Grande now provides ClearSource's telephone services, Morrow said, and both companies are part of the Broadband Service Providers Association, which Knology CEO Rodger Johnson chairs. Johnson, who declined to comment on the merger, is on the ClearSource board of directors.

All three companies also have similar business models, building fiber all the way to the home, transitioning to coax and offering a bundled package of video, data and voice, Morrow said. “ClearSource is a lot like Knology and a lot like Grande,” he said. While seemingly logical, a merger with Knology is unlikely because Knology lacks a presence in Texas, said Imran Khan, a senior analyst with The Yankee Group. “Bringing Knology into the equation would probably have meant some kind of expansion, and that would have cost quite a bit of resources.”

Having completed their initial franchising and network spadework, San Marcos-based Grande and Austin-based ClearSource will start with approximately $450 million in contributed equity and a $70 million bank facility, when the deal closes in 60 to 120 days, Morrow said.

Though structured as an acquisition, the deal is likely to benefit both companies, emphasized ClearSource CEO Bear Poth.

“There's nothing fishy here. It makes good business sense,” said Poth, who warned ClearSource employees that some competitors will likely claim ClearSource was forced into an acquisition. “There was no financial need to do this.”

The merger has particular logic in the rough-and-tumble world of cable overbuilds where major telcos have stumbled on more than one occasion.

“Any competitive offering that's going to come in and compete is going to need some scale,” Khan said. “Their markets are similar, the billing systems are similar, their back-office customer support systems are similar.”

Grande passes 250,000 homes and has 100,000 revenue generating units subscribing to Grande's voice, video and data offerings. ClearSource does not reveal subscriber numbers.

“Grande and ClearSource typically sell 2.2 [revenue generating units] per customer,” said Morrow. “All our customers take cable and telephone, and 20% of them also take data.”

Bundling services will continue to be important going forward. “If you're going to go out and build broadband last-mile infrastructure, you want three revenue streams as opposed to one,” said Poth.

Now there will be a little more muscle to push that offering.

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