After a failed attempt at merger around a year ago, Veracity and Broadweave have decided to give a merger a second shot. The new company will be named Veracity Networks with Veracity’s Drew Peterson as CEO. Broadweave CEO Dave Moon will remain on the board.
So what’s the new company’s first step? To go to Provo’s city council to ask for a “restructuring” of the bond debt to lower payments by $82K per month for 18 months. I’m not sure how exactly that will work out without the city basically floating the difference during that time frame (an action surely to come under fire from both incumbent providers), but I’m hoping Broadweave will take a new tack with being a bit more open as to what the heck they’re doing. After all, a significant amount of public money is still on the line and if they ask Provo to dip into the till to keep things going, citizens deserve to know what they’re getting for what may be an interest-free loan.
Broadweave was gracious enough to invite me down to their offices to inform me personally. After the sharp criticisms I’ve had for the company, I was surprised they extended the olive branch. I suppose that’s one of the many positive side effects of an almost total refresh of company management. All the same, the visit was very cordial and felt very much like a press release event rather than a heart-to-heart. (I’m still sure that my picture is on more than a few dartboards around the office.)
I see the merger as a bit of a mixed bag. Veracity brings a lot to the table including large corporate customers, experience competing against and working with incumbents (they offer services on Qwest’s network), a stable cash flow, and significant technical experience. They also bring potential access to UTOPIA for Broadweave via their existing contracts.
On the other hand, asking for another hand-out from the city instead of making it on their own will likely rankle a city council that thought they’d managed to wash their hands of the deal. If the council doesn’t go along, it begs the question as to where additional funding will be found from. Not knowing what Veracity’s available cash flow is, it’s hard to tell if that side of the equation would be able to staunch the flow of money from the surety enough to allow Broadweave/Veracity to sign up more customers. At the very least, this makes iProvo even more of an election issue than it was before for all sitting council members as well as the mayor.
For the time being, I’m content to watch from a distance and see what happens. My opinion of Broadweave hasn’t yet been changed, but I’ll willing to give them a second chance and benefit of a doubt.
I need to drill down into the details a little more before expressing an informed opinion but I can say a few things.
1: It appears the $1.5 million the city is being asked to loan the new company would likely come from the Energy Dept. Reserves.
2: It appears it would be a loan at 5.2% interest to be paid back in about 10 years. The loan would likely be unsecured?
3: Veracity is a VERY well run, financially conservative company with well over 15 years of success behind them. I would dare say Vercaity is the best run and most stable company iProvo has ever had as a service provider.
IF Veracity actually has any real skin in the game (at this point we don’t know this), I would have a high level of confidence they would be successful. Veracity would not risk their money unless they saw a clear path to success. My personal experience with them was they are smart people with high integrity.
To Broadweave’s credit, they have made a number of costly upgrades to the network under their ownership, they have added some 20-30 new channels to the video (including may HD channels), upgraded the Minerva middleware to offer more features and changed out the Thompson and Amino 120 set top boxes that were a problem, replacing them with good ADB boxes. I’m a happy Broadweave customer.
I have full confidence that the new combined management is more than capable of running the company successfully. I think it’s a very hard sell, however, to ask Provo City to spot them a cool $1.5M low-interest loan in the midst of their own budget difficulties. It’s not just that the city is hard-up for money, but that this has become such a political hot potato that I’m sure members of the council (especially those running for re-election) would rather wash their hands of the matter.
I think it would behoove both Broadweave and Veracity to open the books to city council members as part of their plea and make a very strong case as to why they cannot find external financing to do what they are asking.
I keep wondering if this is similar to what we are seeing in the real estate market?
Provo is the bank.
Broadweave is the homeowner. (The home was purchased by the homeowner but actually the bank still owns it until it’s paid off.)
The home owner is having a difficult period and go to the bank and asks them to renegotiate the mortgage. Giving them lower payments they can afford.
As the bank are you better off evicting them or working with them?
That analogy is appropriate, but the homeowner is also marrying Donald Trump. (Slight exaggeration, but you get the point.) The bank has no incentive to negotiate if the homeowner can make it on their own.
lol…yes, Veracity could be The Donald. It is a very well run company that likely CAN get the loan Broadweave can’t.
But I suspect Veracity may not be willing to make the deal if they are placing their money at risk?
So to follow the analogy…the Donald may only be willing to get married IF the bank (Provo) is willing to refinance.
Leaving Provo in the position of deciding if they want to foreclose or refinance.
I would like to point out that we have not heard that Broadweave will be unable to make payments without this deal, but IF that is what they are telling the City (in private) you can see the position the City is in and why allowing the contract change may be attractive.
$80,000.00/month is a lot of money to make up. Donald Trump would be the first to tell you that’s not a good investment (for Veracity). He would stay away from this with a ten-foot pole. Knowing Veracity as a private & conservative company, I doubt that they have an extra $80G/month in revenue that they are just looking for a place to invest in.
The questions the city council and provo citizens need to ask themselves are:
1. If Veracity and Broadweave don’t merge, what will happen next with Broadweave?
2. Can Provo city (I’m not talking polititians re-election ability, I’m talking the taxpaying citizens and the bureaucrats managing the city) deal with the possible scenarios?
3. Is it worth loaning another 1.5M to avoid those scenarios?
Now that we know Broadweave is losing $80G/month, and Provo city lost all but a couple of the original IProvo employees, I’m all for the merger because I think it will benefit the citizens the best out of what I see as the possible scenarios. You’ve got to adapt to the situation to stay alive in the business world, maybe the Provo City Council will see this as an oportunity to “adapt to survive”.
Hopefully they are thinking about what the Provo City Citizens want, and not try to fulfill their personal agenda.
Merger is a generous way of framing this.
skoop: You’re right, that’s a lot of money. What we don’t know, however, is if the $82K/mo is losses after the merger or Broadweave’s isolated losses. I think it will be critically important for the city council to know what the losses are for Broadweave alone and with the combined company so that they can make an informed choice.
That would also answer the question as to how much skin Veracity has in the game. I understand Veracity needs to see positive cash flow post-merger to finance new customer hookups, but they also need to be plowing some of their own revenues into the bond payment and be willing to first seek private capital to finance the acquisition. Asking the city to extend additional financing should be an option of last resort if private companies aren’t willing to lend the money. This is one of the reasons I didn’t think the city should self-finance; now they could potentially be strung along for years.
The “read between the lines” message is that this merger is Broadweave’s last chance (or it had better be) to avoid defaulting on their obligations to the city and handing the network back to them. That message, for better or worse, intentional or not, plays on the city council’s fear that they get the network back and have no providers on it. I don’t think it unreasonable for city council members to not want to “give a mouse a cookie”, so to speak, and go through this same process again in a year or two if things don’t pan out.
I don’t mean that as a slam against Veracity (I think they do a great job at what they do and have very capable leadership), but it is still going to be a challenge to turn the ship around. The council has to balance out the near-term damage of getting the network back with the long-term possible damage of “renegotiating” every 18-24 months until they have practically paid for the network themselves yet do not own it.
I don’t think the loss of employees is a problem. There is no shortage of former or current UTOPIA, iProvo or Broadweave employees to continue running the operation.
But iProvo has (foolishly?) given up it’s NCTC membership and no longer has any content licenses (ESPN, HBO, Disney, etc.).
More importantly, I don’t believe the Provo politicians have the stomach for the losses while they work out of the hole the network is in.
does the loss of NCTC mean anything when Broadweave gets content from Avail?
Avail and NCTC do different things.
NCTC is about content licensing at the lowest cost. Without an NCTC membership you pay more for content and it’s harder to get contracts for content (read takes longer).
Avail is more the delivery company. They are a middleman and typically increase the cost in the long run.
But as you say, Broadweave has contracts with Avail. Provo has contracts with no-one.
Just take a look a how long it’s taking UTOPIA to get their video deployed. Provo might be starting completely over and it could take some time. Perhaps a few months? They will NOT automatically take over Broadweaves contracts if that relationship ends poorly or even if it ends good.
I believe NCTC is the Holy Grail in content licensing. In fairness, in many cases Avail can lower upfront capital costs but you usually pay more in the long run.
If Provo says no to their refinancing and they end up defaulting the network back to Provo is it possible they would be able to stay on as a provider to prevent customer disruption? Or would this be a situation where all the customers would be dumped and have to ether sign with a new provider or switch to Qwest/Comcast?
I’ll jump in with an OPINION.
Let’s remember that if they refuse the current deal that does not automatically lead to any type of default by Broadweave…and I’m not suggesting that refusing the current deal is a good idea for Provo City. I have already stated I don’t think they have the political steady nerves required to take the financial losses that would be there for some time.
But if the network were to go back to Provo I suspect it would not be a sudden or quick transfer. (Shame on Provo if it is!) The Council was already talking about making contingency plans for that possibility.
So with a contingency plan and some notice there could be a somewhat smooth transition. One question would be if Provo just found a new service provider (easier) following the old model or if Provo challenged the existing Utah statue and became the owner/operator and service provider (more profitable).
While still waiting for more details on the deal, I’m inclined to believe Provo is not ready to change paths and should take the deal.
One question would be if anyone can operate the network profitability under the current sale price. I believe Broadweave paid too much for the network, more than it was worth. In part for political reasons to make it appear Provo sold the network for what they paid for it. Most cable network sales are based upon a multiple of operating cash flow, not what construction costs were.
Has the network been sold for what it was worth (Yes, Provo taking a loss!) Broadweave might not need to make a new deal now. One day those buzzards will come home to roost and Provo will be forced to take their loss. Currently Broadweave’s investors have been taking the loss that should be Provo City’s.
I honestly don’t know which way I lean on this one yet.
On the one hand, I see that Provo may decide that this deal is the best deal for the city. Veracity can transition all Provo customers to the fiber network to cut significant costs off of their bottom line as well as sell upgraded services that their fiber will allow for. I think they’ll be good for the payments under their proposal. It also lets the city still be out of the business, something that I think the council universally wants.
On the other hand, getting the network back is not the worst thing that can happen. Broadweave could still continue as a provider on the network at that point (provided that Provo doesn’t have any hard feelings toward them). They can also very easily add more providers by activating their interconnection with UTOPIA and bringing in Prime Time, Xmission, FuzeCore, etc. They’d have a few months worth of notice that the network is coming back, so there is plenty of time to make that happen.
I see good from either possibility, but I still don’t like that Provo is being asked to continue to play banker, a role they never should have taken on in the first place. This situation is the natural consequence to that. I hope the UTOPIA cities are paying attention if they get any urges to try and get out from underneath it as such a plan still isn’t a bed of roses.