Primus punctuates turnaround with Cable & Wireless deal

On its way to proving that a struggling business can right itself without relying on Chapter 11 protection, McLean, Va.-based Primus Telecommunications Group deployed a creative acquisition strategy last week that could result in a doubling of its U.S. customer base without any capital investment.

Cable & Wireless USA agreed to transition up to 31,000 mostly small to medium-sized business customers to Primus on a deferred, per-customer payment schedule as it exits the U.S. voice market.

The deal could yield as much as $150 million in annual revenue if Primus transitions the majority of C&W’s customer base and would generate payemtns to C&W of up to $32 million.

“C&W has incentives to aide and encourage the migration in order to realize the benefit of the sale of their customers, because we pay for only those customers that migrate to Primus’ network,” said John Melick, co-president of Primus Telecommunications Inc.

Melick said it was his company’s intent to migrate 100% of C&W’s customers. Primus has two years to complete payment on transitioned customers, which should be completed by January, according to a C&W spokesman.

The customers Primus will acquire are circuit-switched voice users. They are scattered in several regions but with concentrations on the West Coast, with a significant portion in the Midwest, Melick said.

The cooperative arrangement provides C&W access to these customers to sell data services in the future, which was another incentive for C&W to find a transition partner rather than close up shop. “They are not exiting the U.S. market altogether,” Melick said. “They are merely ceasing and desisting to provide voice service. So clearly they have an interest in maintaining a good reputation.”

The acquisition marks a return to growth after Primus found itself looking at $1.3 billion in long-term debt 18 months ago. Since then the company has been on a turnaround strategy that had reduced that debt to $615 million by the end of its second quarter.

“More significantly, we have been steadily growing EBITDA (earnings before interest, taxes, depreciation and amortization) over the last three-to-four quarters. In Q2 we reached a minimum of cash flow neutral if not positive,” Melick said. “And we’re now self-funding. Not many telecom providers can say that today.”

Tough cost-cutting and strategic decisions to exit unprofitable businesses, such as Web design and certain wholesale markets, helped Primus improve its gross margins from 28% one year ago to 34% in 2Q02.

As part of its growing voice-over-IP business, Primus entered into an agreement with Microsoft last month to provide VoIP for MSN Messenger Service customers. Primus owns and operates a global VoIP backbone network with 300 points-of-presence in more than 80 countries, as well as its own public-switched network.