I’ve spent the last week rolling over the proposed merger of Veracity and Broadweave as well as their proposal to Provo City upon which it is contingent. I’ve gotten more information from Veracity and Broadweave on their position and talked to other people who’ve been keeping an eye on things. I’m still not sure if the deal is in the city’s best interests, but I don’t know that it’s necessarily rotten or the only option either.
Veracity’s proposal to the city is, for all intents and purposes, a loan of $1.5M over the next 18 months to reduce the bond payments to be paid back over the seven years following that at 5.1% interest. (Ironically, this is the amount Provo City would have paid on the bond had they kept the network.) Veracity has said it has pursued private financing for the deal and has been unable to secure it, though I imagine the terms were also not as favorable as what’s being proposed to the city. Under the proposal, Provo would use the energy reserve fund to make the payments, money that would have been earning 1% interest. Taxes wouldn’t increase to finance it nor would other budgets be cut into.
So why does Veracity want a loan to reduce the payments? They’re looking to buy time to move their Provo customers onto iProvo to slash costs and improve operating efficiencies. Not only does that cut Qwest transport out of the picture, but they can also sell services that would not have been easy to provide given the wholesale rates that Qwest charges. Moving those customers will cost a fair amount of money, so Veracity needs time to get it done.
Given Veracity’s financial state, I have my doubts as to whether or not they could secure private financing for this deal. They reportedly operate debt-free with a very healthy cash flow and I would hope that they presented the council with scenarios under which they use private financing combined with current revenues to accomplish the same ends. They have been opening the books to the city council and some staff for their review, but there also needs to be a Plan B. Right now, the proposal feels very “take it or leave it”.
This isn’t to say that I doubt Veracity’s capability. They’re an exceptional company offering exceptional service that I use in my job every day. Their management team is full of smart people and Broadweave has done a much-needed sweep of almost all of its management team. My reservations hinge on asking the city to extend their role in the financing of the sale.
So what’s the alternative? Broadweave is fast-approaching the date where the network will have to be returned to the city since investors aren’t willing to put any more money into it. If that happens, Provo will have several months of the reserve to use for paying off the bond while they regroup. It sounds like a worst-case doomsday scenario, but I don’t think it’s quite as dire as even I would have once predicted. Provo will still have a couple of options at their disposal.
The first option would be to resume control of the wholesale side and allow Broadweave to continue as the main retail provider. This option would only work if, after being relieved of the wholesale obligations, Broadweave would have sufficient funds to find new customers and finance install costs. There’s also the problems of re-staffing the NOC as a city department and relocating Broadweave to another office. It may also be very difficult for a single retailer to secure enough customers to cover the wholesale side of the operation
The second option would be to bring in new retail providers to compete with (or replace) Broadweave. If Provo entered into some kind of reciprocity agreement with UTOPIA that allowed a provider from one network to participate on the other, it would secure the residential contract on UTOPIA that Broadweave wouldn’t mind having and bring in a half-dozen new providers to Provo to scoop up new customers. This would also mean that at least two different head-ends on both networks would be competing for customers, a win-win for served residents. New providers, however, may be leery of making a deal with Provo after the way that they threw Mstar under the bus. Granted, Mstar wasn’t paying its bills and didn’t have much goodwill to cash in, but they were also bullied into the deal they got. In either scenario, Provo would have several months of lead time to figure out what to do and find a way to make the payments once again.
Provo isn’t necessarily locked into the merger option. If the council still wants to get out of the business, they believe that Veracity is good for the money, and they don’t have qualms about extending some more financing, they can go with the merger. If they want city money to result in a city asset, don’t have heartburn about doing the work to fix iProvo (now that we’ve seen that a private company wasn’t able to), and don’t think this is the last time they’ll be asked to extend their risk, there’s options for taking the network back.
No matter what happens, this should be an example of how difficult it is to try and undo the decision to get into the business of telecommunications. We’ve seen that a private company operating a closed network is not necessarily any more successful than a public entity operating an open network when in an overbuild scenario. We’ve also seen that self-financing means you aren’t really out of the business until the last red cent of the bond has been paid off. Any city thinking about jumping ship would do well to consider that it’s not an easy way out like the Reason Foundation and Utah Taxpayers Association claim it is.