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Friday, September 22, 2006

Talk America Is Going Private, For Now



Talk America (TALK) is going private, but probably for a short period of time.

TALK has entered into a definitive merger agreement with privately held Cavalier Telephone & TV out of Richmond, Virginia. The $251 million cash buyout will translate to an $8.10 buyout price, up from its last $6.57 trade before the halt but well under the $10.20 high over the last year. After it warned and continued its sell-off, the shares had recently been as low as $5.47, so this will net out the bottom-feeders and value traders a nice quick profit. Its shares have been weak up until the last few days. Options trading didn't signal anything massive, and the open interest in the calls is almost non-existent.

I was asking myself why someone would acquire someone like Talk America, but now it makes sense. Cavalier Telephone, LLC is the acquirer.

The merger of Talk America and Cavalier will create one of the largest competitive communications companies in the United States with over $750 million in revenue and $130 million in EBITDA. The combined company currently serves over 550,000 residential customers, 85,000 business customers and employs over 2,000 people. At closing, the new Cavalier will serve customers in 6 of the top 20 metropolitan services areas in the country, including Atlanta, Baltimore, Cleveland, Detroit, Philadelphia and suburban Washington, DC.

Ed Meyercord, CEO of Talk America commented, "The merger with Cavalier will significantly enhance Talk America's competitive position in the market by adding Cavalier's high quality and leading edge product portfolio to our service offerings and by leveraging their extensive fiber network which overlaps our core markets in Michigan, Ohio and the Southeast." At closing, Mr. Meyercord will become CEO of Cavalier and report to Brad Evans, current CEO of Cavalier, who will become Cavalier's Executive Chairman.

Mr. Evans commented, "The combination brings the strengths of two of the nation's most successful competitive carriers together. Talk's state-of-the-art back office support system, their extensive sales and marketing distribution channels and Cavalier's advanced network architecture will help provide our combined customers the newest and most advanced telecommunications' solutions in the marketplace."

The transaction, expected to close in December, has been approved by both companies' boards of directors and is subject to Talk America shareholders' approval, regulatory approvals and other closing conditions. Cavalier Telephone currently services over 35,000 business and 215,000 residential customers in Richmond, Hampton Roads, Northern Virginia, Maryland, Philadelphia, Delaware, Southern New Jersey, and the District of Columbia.

There is something pretty obvious here. Telephone stocks seem to have found their bids from the long-term buyers, and the relentless bloodletting that has prevailed from cable companies, VoIP players, and cellular players has come to a point that is actually defined and easier to quantify. These providers are now competing against each other in almost every aspect. The stock is too thinly covered to get any real consensus of realistic expectations from the company.

When the company slightly lowered guidance back at the end of June it gave the following projections: For the full year, the company expects $437 million to $443 million in revenue, down from a prior forecast of $445 million to $455 million. Adjusted EBITDA is now expected at $53 million to $58 million, compared with a previous forecast of $60 million to $70 million. Without going on and on, this stock is cheap on some metrics and not so cheap on others.

What you can probably expect is that the new company will either come public via an IPO or it will be acquired or merged back into a larger telecom player. It isn't very fun attaching a BAIT SHOP status to a private company or a public company already going private, but maybe we can call it a re-Bait. You can probably expect to see this company either get rolled up or come public in the fairly near future.

We already have a few names we think could want to instantly be eager to review the dealbook for this merger because of its niche footprint. We will hold off on names for now.

Talk America was advised by The Blackstone Group and Cavalier was advised by Jefferies & Company, with Wachovia Bank issuing commitment letters for financing this transaction. It is doubtful that these powerhouse firms got invloved with the sole intention of doing a $251 million merger.

Jon C. Ogg
September 22, 2006
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