Competitive carrier Paetec buys McLeodUSA

Telecom carrier consolidation in the U.S. trickled down to competitive service providers on Monday as Paetec Holding Corp. agreed to acquire McLeodUSA, creating a company that will serve businesses in most of the country’s largest metropolitan areas.

Paetec will pay $492 million in common stock for McLeodUSA and assume $65 million of the company’s debt. The deal has been approved by the companies’ boards but still needs to be passed by their shareholders and gain regulators’ approvals. The companies expect it to close in the first quarter of next year, according to a news release.

Both companies offer IP data and voice services to businesses with McLeod serving SMBs and Paetec focused on medium-size and large enterprises. The deal will extend Paetec’s 23-state reach, adding 18 states to its coverage area and a large fiber network to its infrastructure. McLeod, based in Cedar Rapids, Iowa, serves states in the West and Midwest.

Competitive carriers benefitted in the telecommunications boom during the early part of this decade, but worries about overcapacity turned the market sour. Meanwhile, the national incumbent carriers grew more dominant through consolidation. McLeod emerged from bankruptcy in early 2006 after eliminating about $677 million in debt, going private at the same time. In March, it filed for an IPO with the U.S. Securities and Exchange Commission.

The combined company will position itself as an alternative to incumbents AT&T, Verizon Communications, and Qwest Communications International for business customers. For a competitive carrier, it will have some financial heft: In the year ended June 30, 2007, the companies had combined revenue of $1.6 billion, according to the release. Together they have about 3.4 million access line equivalents, with intercity and metropolitan fiber as well as last-mile connectivity. Their services include VoIP, 60Mbps data connections, managed services, and circuit-switched telephony. It will reach 47 of the 50 largest metropolitan areas in the country next year.

Paetec will remain in its Fairport, New York, headquarters and keep McLeod’s base in Grand Rapids. Arunas Chesonis will remain chairman and CEO. The deal is expected to yield about $20 million in cost synergies in the first year.