NewSouth Raises $62M Fifth Round
By Katherine Goncharoff
Published in The Daily Deal
March 5, 2003

While most competitive local exchange carriers are still struggling — if they haven't already been liquidated or acquired — NewSouth Communications is bucking the trend: The Greenville, S.C.-based telecom has received $62.5 million in fifthround financing.

The funding, announced Wednesday, comes from prior investors such as private equity powerhouse Kohlberg Kravis Roberts & Co., Wachovia Capital Partners and Vaxa Capital Partners LP. New investors are M/C Venture Partners and Quadrangle Group LLC.

James F. Wade, managing partner with M/C Venture Partners, said: "The quality of NewSouth's customer base, almost exclusively medium and large business customers, combined with the proven expertise of the management team, made this deal a very good fit" for his firm.

Joshua L. Steiner, managing principal of Quadrangle, said the company has "tremendous growth prospects.“

Other prior investors, Carousel Capital Partners, First Union Capital Partners and J.P. Morgan Capital were not identified as participants in this round.

NewSouth president and CEO Jim Akerhielm said his company will use the funds to expand its highly targeted, regional carrier business, which emphasizes serving medium- and large-sized businesses throughout the South.

The investment "will provide substantial opportunities for accelerated growth and profitability in the future," Akerhielm said.

The 6-year-old, privately held competitive local exchange carrier, or CLEC, has raised more than $387 million overall. KKR led an $85 million round in February 2001, and the company raised $170 million in July 2000.

Akerhielm said the latest fundraising took almost a year, but the success was not surprising, since NewSouth began generating positive monthly operating cash flow in 2002. Current operating cash flow is less than $10 million, the company said.

Last month, the company reported that revenue in 2002 had jumped 25% from the year before, to $156 million. The number of lines installed rose 31%, to more than 210,000. Total costs last year fell by $14.7 million, or 9%.

NewSouth was aided in its fund-raising by boutique investment bank Sonenshine Pastor of New York and represented by law firm King & Spalding LLP of Atlanta.

Lynda Starr, a telecom analyst with Probe Research of Cedar Knolls, N.J., said the additional funding could be predicted, given its highly targeted market focus. "In general, the CLECs that have been successful are the ones that have stayed focused on very specific markets such as NewSouth or [Cogent Communications Group Inc.], rather than trying to be all things to all people," she said.

As a result of the transaction, the NewSouth board will expand to 12 members from nine.

KKR, Wachovia Capital Partners, M/C Venture Partners and Quadrangle Group will each have two seats; Akerhielm will have one; and the remaining three seats will be filled by independent directors, including R. Clint Johnstone, who will continue to serve as chairman of the board; Leighton Cubbage, a telecom entrepreneur; and John Fujii, a telecom investor and former executive with Metromedia Telecommunications, Inc.

NewSouth offers data, Internet, voice and other communications services to business customers in Florida, Georgia, South Carolina, North Carolina, Tennessee, Alabama, Kentucky, Mississippi and Louisiana.

Competitive local exchange carriers have been been squeezed during the last two years, caught between dwindling demand and hefty debt loads.

Several CLECs, such as Focal Communications and Ntelos Inc., are in bankruptcy protection or, like McLeodUSA Inc. and XO Communications Inc., have recently emerged from it.

CLECs won a partial victory in a recent Federal Communications Commission decision that preserves requirements that the Bells lease them residential lines at cut rates.

"In differentiating itself from other providers through disciplined, controlled growth and spending, NewSouth has clearly shown the strength of its strategy," James H. Greene Jr., a KKR partner, said in a statement.

- Chris Nolter contributed to this report