Maybe you’ve heard the one about the fast-rising Portland company that got snapped up in a “loan-to-own” deal that’s becoming increasingly commonplace as the vultures circle. Maybe you read it last week in this blog, under the category of bad news.
Dudley Slater, CEO of Integra Telecom (one of Oregon’s most successful private companies over the past decade, 700 jobs statewide), took exception to my characterization of his company’s efforts to restructure its debt. In his view, the deal is good news because it cuts Integra’s debt in half and sets a course for growth. But rather than paraphrase his perspective, allow me to print an excerpt from our hour-long conversation Tuesday morning at Integra’s corporate headquarters in Northeast Portland, edited for clarity and brevity.
OB: OK, tell me why this is good news.
Dudley Slater: The reason why this is good news is really pretty simple. This company generates a lot of cash profits, and we look to invest those profits in a couple of areas. We are obligated to cover our debt service. We very much like to grow our market share by investing in our network and hiring new employees. We spend $220 million across those three areas, a lot more if you include payroll, probably $350 million-$360 million, investing in the network, hiring employees and paying off debt. The amount that we are required to spend on debt service just got slashed by an enormous amount. Our debt went from $1.3 billion to $600 million, so the portion of the pie that has been consumed by debt service just got reduced dramatically. So this is great news for employees and people who like to sell us stuff that we put into our network. We are probably one of the biggest infrastructure investors in the state of Oregon and now we have a war chest to increase those investments.
OB: And now a private equity firm is about the take ownership of the company.
DS: As far as private equity goes, I don’t correlate private equity with adverse impact on companies. This company has always been funded by private equity, and as for Tennenbaum [Capital Partners LLC], this is the third time they have invested in this company. We have known Tennenbaum for years. They first invested in 2004 because they like our model. They like that we’re building this network across 11 states and that we offer a unique approach for the marketplace. They’ve been invested in our business model for over five years, and this is really just a continuation of that.
OB: Correct me if I’m wrong, but doesn’t Tennenbaum specialize in companies that are troubled?
DS: No. I don’t think that’s right, at least not in my experience. I’ve been directly involved in three investments Tennenbaum has made in Integra. I would describe their niche as a value investor that looks for higher yield securities, typically with a debt component, and companies that they believe in. I don’t think of them at all as a distressed company investor. If you look at our financial profile over the five years that Tennenbaum has been investing in us, I think it’s very far from a distressed story. We have grown dramatically, from five years ago when we generated about $100 million in revenue, whereas now we are over $650 million.
OB: Wouldn't the term vulture investor apply to Tennenbaum? Maybe it’s a derogatory term, but doesn't it apply to this situation? Wasn't this a loan-to-own deal?
DS: Well, again, this is the third time we have worked with Tennenbaum, and two out of those three times that was not the case. In this situation, yes, they are converting their debt into a significant equity stake. You can describe that as loan to own, that’s a perfectly fair description. But I would point out that the reason this is happening is we are in the worst recession since the Great Depression, and it’s becoming very common for companies that have been high-growth companies to have to restructure their debt.
OB: The quote in the Wall Street Journal that seemed alarmist was when you said you didn’t have any options.
DS: That was related to the restructuring work that we just completed, and that’s right. We did not have any options. We needed to restructure the debt to make covenants. In a more normal economy you would have the opportunity to consider refinancing your debt or raising new equity. In this climate that was not available. We had to relieve our debt burden, and the quid pro quo is you’re giving ownership to those parties who previously held that debt.
OB: What about the number of jobs at Integra? Has it stayed steady over the past year in Oregon?
DS: Yeah, we have not done any forced layoffs and we don’t intend to. We’ve expanded our sales force and we’ve invested as much or more this year than we’ve ever spent. We are going to invest over $100 million in our network. Our plans are to do more of that. (End of excerpted interview.)
Integra has done nothing but grow since it launched in 1996 following the breakup of the Ma Bell monopoly. It doubled its size in 2006 by buying Electric Lightwave and doubled it again in 2007 by buying Eschelon for $700 million. One of every five businesses in Portland is an Integra customer today. Unfortunately, far too many of them have been cutting back or disappearing. That has slowed Integra's rise and made those two big purchases harder to swallow.
Did Integra bite off more than it could chew when the economy was hot and credit was plentiful?
Slater says no. “In a relatively early stage industry such as ours, it’s common to have a period of consolidation. Look at the wireless industry. Ten years ago there were dozens of wireless providers. Today there are really only three: ATT, Verizon and Sprint. It’s the same in our industry. That consolidation is normal in a business with a significant network investment. Because Integra has demonstrated that it has a unique service model that is also very profitable, we are the ones who have emerged in the western United States. We have now created the largest alternative telecom provider in the western United States, and it’s all headquartered here in Oregon.”
Can't argue with that. But are the new owners pushing for cost cutting?
Quite the contrary, Slater says: “Cost-cutting will save you a dollar today but you will never be able to grow the business if you are taking your employees out of the business. We need our employees to grow the business. We would be crazy to cut costs now. This industry was a monopoly not long ago, and there’s still plenty of room to grow.”
Again, can’t argue with that. Regardless of who owns Integra and how they came to own it, the business is making money and employing hundreds of people locally, and the CEO is on the record saying there will be no job cuts. If only that were the rule in Oregon rather than the exception.