An Evaluation of the Broadweave/Veracity Merger

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.

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21 Responses to An Evaluation of the Broadweave/Veracity Merger

  1. Harold Bills says:

    Here we are again watching Provo City make mistake after mistake. As I said from day one, Broadweave was not a good choice. They have made no progress and their attempt has lessened the value of the iProvo network. (I told you so…) The concept that Provo Energy would now finance yet another sweetheart deal to a non-competive choice (Veracity) makes me sick. There is serious malfeasance guiding this new idea. How can any city use public funds to finance a private sector entity who is in competition with other companies? This is government at it’s worst.
    It’s the old case of “lie a little”, “cheat a little” and the next thing you know you can’t even tell the difference anymore.
    I say stop the nonsense now and clean this mess up. The city needs to take back control from Broadweave and do what they can to protect the $60+ million dollar expenditure of the peoples money. To take energy reserves and send them Veracity’s way is unthinkable.
    I strongly recommend that the city recruit competent leadership and follow the Spanish Fork example of conservative and careful management. Oh and don’t give me that, “The state law has blocked Provo from doing the Spanish Fork method” baloney. Many legal opinions including Provo’s own legal team have concluded that the state law does not actually apply to what iProvo really is.

    I also suspect that Broadweave has completely exhausted the surety fund since they have likely spent it on much more than bond payments. Based on that, I also suspect that they are at the end of their rope and hence the Veracity merger. They have no other way out.

  2. wraptur says:

    Absolutely LOVE and couldn’t agree more with the last paragraph.

  3. Jesse says:

    Harold: Regardless of the fact that many of us can say “told you so”, the decision has been made and cannot be unmade. The city is stuck figuring out how to make the best of it. I don’t think they have terrible options, but they aren’t the best options either. In either case, they have tough decisions to make. We should do our best to try and mull over those options and make sure that the council is aware of them.

    Also, Broadweave would not be able to use the surety for anything other than bond payments or they would be breaking the contract. That leaves three possibilities: they have been and the city doesn’t know, they have been and the city does know, or they have not been. The first two options are a bit too conspiracy theory for my taste.

  4. Capt. Video says:

    Welcome back Harold:

    I won’t disagree with everything you said but one point I’m not sure I agree with is the suggestion that Broadweave has “lessened the value of the network”.

    Would you like to provide some evidence or support of that claim?

    I would note that Broadweave has removed the bad Thompson and Amino 120 STB’s, replacing them with more costly and working ADB boxes. This has increased the value of the network. Additionally they have upgraded from an unsupported older version of Minerva middleware to the latest version (at considerable cost) again increasing the functionality and value of the network.

    They have upgraded the headend adding a number of regular and HD channels including mpeg4 format channels (getting more future ready) again, increasing the value of the network.

    But most importantly, they have (or will when the Surety runs out in a Feb.?) also paid almost $6,000,000 in bond payments reducing the total debt of the network, which also increases it’s value.

    I believe they have also increased subscribers but I can’t say that for sure. I am sure about the other improvements.

    My personal scorecard would show Provo City ahead should they walk away now. So what would you point to that would show they have devalued the network?

  5. Harold Bills says:

    When I say the network is devalued, I am referring to the current financial situation where Provo is actually considering subsidizing the bond payments since Broadweave has not been able to generate a profit or even pay the bills. Another investment failure will not increase the value of the network regardless of where they spent the money. Investors don’t stand in line for loser opportunities like this.

    Jesse, your comment on using the surety for things other than the bond payment seems to be a different interpretation than the current one of Mayor Billings, who states that it is their money to spend. Mark my words, Provo will never see a dime of the surety money or a payback from the Veracity merger. This is a huge mistake. I’ve been right before…

  6. Capt. Video says:

    I think Provo has already seen the surety money as it was used to pay down their bond debt by millions!

    If Provo got out now would you believe Provo would come out ahead in their Broadweave transaction?

  7. luminous says:

    Provo won’t win by loaning Broadweave more money. They would be better of taking back the network, but letting Broadweave stay on as retail provider and then connecting with Utopia and getting all of the Utopia providers.

    Maybe Provo could rebond the thing in the process to get the payment to a level that their is less ground needed to be made up.

  8. Observer says:

    Can Provo legally do this? They would be directly subsidizing the operation of a single telecommunications provider in their city. I think the only legal way to do this, would be find Broadweave in breach of contract, take the network back, and then sell the network back to the highest bidder in a fair, open, RFP process. This is what they should have done last time, and I’m amazed they didn’t get sued over it. Who knows, maybe Veracity would still be the highest bidder. How has this option not come up? If they don’t do this, everyone who’s been burned or has a grudge against iProvo will cry foul, including Qwest, Comcast, Integra, Xmission, Mstar, etc.

  9. Harold Bills says:

    Yes Capt. Video, you are correct that the bond payments have been paid, but it was on the backs of some very unwise Provo investors. This won’t last. The best Provo city can get from this scenario is not even break even. While Provo City has no ownership or control, they get the financial liability and negative credit impact of the bond. Provo city also gets to deal with all the fiber in Energy department conduits and associated costs. Of course there is always the spectre hanging over the city financials that Broadweave or Broadnext will fail and send the city into a financial tailspin.
    It would be better if the city took direct control as others here have stated. At least they would have some control of their financial destiny.
    Veracity has already bumped up against the city financially and the city has not done well in the past.

  10. Capt. Video says:

    I would argue that the loss to the “unwise Provo investors” you mention, has been a gain to Provo City.

    As a result of that gain (and the others I mentioned previously) currently Provo City is in a better position than they were before the Broadweave transaction.

    Meaning if Provo took back the network now, they would be ahead. In a better position than they were before Broadweave made the network improvements and paid the bond payments they have made?

    Without looking at the proposed new transaction, I’m trying to determine how you see the existing situation.

    So I ask again, “If Provo got out NOW, would you believe Provo would come out ahead in their Broadweave transaction?”

    Yes or No? Why?

    While I want to see what Harold thinks on this, I invite all to provide their answer to this question.

  11. Anon says:

    The main way in which they come out behind is the confidence and goodwill of customers and partners. I don’t know how to quantify those costs, but they are very real. If subscribers decide that the back and forth of who provides their services and the associated hiccups are too much, they may defect to Comcast or Quest. The more frequently the transitioning occurs, the more upset customers are going to get. Similarly, providers may be more reluctant to partner with iProvo again after the way the Broadweave sale was handled. All of these things have a very real cost associated with them that affect the value of the network, but they’re difficult to quantify. Does the city come out ahead or behind? I don’t know, and only future operating revenue can definitively answer the question (in my opinion).

  12. Capt. Video says:

    I think you are correct that customer good will and confidence are effected by any change, and are important…and are hard to measure. One measure of customer satisfaction overall might be the total subscriber number? I would assume a loss of customers to Comcast/Qwest would show in the subscriber numbers to some degree?

    That goodwill of course goes both ways as Broadweave’s change out of problem set top boxes that would freeze, or upgrade of the Minerva middleware to add features, fix problems or their addition of channels likely gained some goodwill?

    I would also think that the network would have to lose a really, really large number of subs to offset a few million dollars paid on the bond.

    But I do agree that there is some cost in goodwill with each change. Since Mstar was not paying it’s bills, I think those subscribers would have been changed with or without the Broadweave deal?

  13. Capt. Video says:

    No other opinions on “If Provo got out NOW, would you believe Provo would come out ahead in their Broadweave transaction?” ???

    I think I’ve made a good case that they would be better off now than they were before? (see above)

    Mr. Bills, you want to correct me and enlighten us on this or do you agree?

  14. Jesse says:

    It’s hard to tell if they are ahead or not. Provo had to pull out additional money to make the loan to Broadweave, so they might not even be even on the bond balance. Broadweave upgraded some of the infrastructure, but the admittedly bad customer service experience in the early days, the billing snafus, program guide issues… it takes a lot of time to shake that off. Provo also has a poor reputation with how they threw the previous service providers under the bus. If they get the network back, they’ll want to add more service providers. How can they realistically attract them after having shown a willingness to pull the rug out from under them?

    I don’t think Provo is in a better position today than before they made the sale, both in tangible and intangible ways.

  15. Capt. Video says:

    I’m not sure it’s “pulling the rug out from under you” if you have not been paying your transport fees and owe the city over a million dollars?

  16. luminous says:

    Mstar wasn’t the only ISP that had the rug pulled out from under it. Tho I admit in Mstar’s case the city was more then justified to engage in rug pulling.

  17. Jesse says:

    It’s a lot more than Mstar. Like Nuvont and Veracity, both of whom were providing service on the network. And let’s not forget XMission, Emery Telecom, and FiberNet who were negotiating in good faith to become providers in the network and spent a lot of time and effort in that pursuit. They were justified in give Mstar the heave-ho, but did the other providers deserve that kind of treatment? And will those providers as well as others forget what happened not even 18 months ago? I think not.

  18. Capt. Video says:

    I guess I was thinking that NuVont and Veracity continued to operate on the network and there were no others on the network…but you have a fair point.

    Of course I would agree with Harold on this one by saying IF Provo got the network back they should operate it themselves without service providers (more profitable).

    There is little evidence that more service providers means more subs. In fact it may cause confusion in the market place. Broadweave increased the sub numbers when they had the network more to themselves.

    Does more providers mean more customers or do you just spread the same number of customers over more providers?

    Hard to say for sure. I think I can say, it’s very likely that Provo would have a higher profit margin (make more money) by being the only provider. They already have in place much of what is needed via the power company (customer service, billing, etc.) and as Harold mentioned they have had some legal opinions saying they could overturn the current legislation.

    Just that fact that the opponents of iProvo and UTOPIA wanted to force them to use service providers should tell you it’s worse. Would Qwest & AT&T propose this requirement if it helped the cities? Think about it! (I know some study said different, but that’s not real world, just a guess under one set of conditions. Can you show me anywhere where it’s actually working under conditions similar to Provo/UTOPIA (i.e. well established powerful incumbent, etc.?)

    But I’m not proposing Provo let Broadweave default and take over. I’m still reviewing the situation up to this point before I move to what I think should happen next.

  19. Jesse says:

    Any confusion that exists in the marketplace is because of blunders by the network owner and/or service provider. When was the last time you saw a competing DSL provider say “powered by Qwest” in their sales pitch? You don’t sell customers on your vendor, you sell them on your service.

    I think the slow take rates has more to do with customer inertia than anything else. MDUs hit their take rate plateau much faster (at 50%+) because of the constant influx of new residents. Based on the last public numbers, I’m sure Provo still has a lot of customers to be tapped; they just need someone in there with the resources to get them.

  20. Capt. Video says:

    I’ll start by saying I suspect that sooner or later, the iProvo network will likely be taken back over by the City.

    I hope that never happens, I’ve always said that Broadweave (now Veracity Networks going forward) has a chance of being successful and I hope they are. Broadweave has done some very good things during their ownership/management of the network. I’ve pointed those out in previous posts. But I’ve always said they do not have an easy path to success and it will be difficult for them to overcome the formidable obstacles that stand in their way.

    With that said, I support Provo accepting the changes requested by Broadweave & Veracity.

    Currently Broadweave is paying the bond payment. I have often said that if/when the city get the network back, they will be ahead because during the time Broadweave had the network, that have not only paid the bond, lowering the total debt of the city, but have also upgraded and improved the network.

    So now Veracity is saying we are not willing to continue to pay the full amount of the bond payment, but we are willing to pay 70% of the bond payment. Asking Provo City to pay the other 30%.

    While Veracity says the 30% payment by Provo ($82K a month for 18 months) is just a loan and will be paid back with interest, let’s assume a worse case scenario where Veracity does not pay that money back.

    Over that 18 months Veracity will still have paid $3.5 million toward the bond pay-off.

    So, if Veracity DOES pay back the loan, Provo is ahead. If Veracity DOES NOT pay back the loan (the loan appears to be totally unsecured), Provo has paid $1.5 million toward the pay off of the bond and during that same time period, Veracity has paid $3.5 million toward the pay off of the Provo bond. Seems like Provo still comes out ahead.

    I’m for giving Broadweave (Veracity) more time. If they are able to gain the subscribers to be successful, that’s great, everyone is happy. If they are not and the network eventually returns to Provo City, Provo can operate it until they find another buyer or make it successful, but the total debt they owe will be less as some of that debt has been paid by Broadweave/Veracity.

    As A Broadweave customer, I wish them well and hope they are successful. As a Provo citizen I expect the network might be coming back to the city but am sure willing to allow Broadweave or Veracity to make some or all of my payments for as long as they are willing and able to do so.

    If Provo does not allow the merger to go forward. if Broadweave defaults and returns the network to Provo, rather than making an $82k monthly payment, they will be making the full $277,505 monthly payment. Unless the network is generating $195,505 (plus operating costs) in revenue each month, It appears Provo is better of working with Broadweave & Veracity.

    It also seems Provo does not have the “stones” needed to operate the network. They are almost panicked by fear at the mention of getting the network back. Until they get over that, they are not ready to get the network back. But they should try to deal with that fear as there is a good chance that sooner or later, they will get the network back.

    Until then, let’s all get behind Broadweave/Veracity and hope they can do the difficult task of turning this network around. If they fail, Provo should thank them for trying, thank them for paying some of the bond and move on.

  21. Jesse says:

    Something I would note is that prior to the sale, Provo was making payments on the bond about equal to what Veracity is asking to make. Getting the network back is, for the next 18 months, a financial wash with accepting Veracity’s offer. They don’t come out ahead at all financially until Veracity starts paying more than that.

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