Xplornet Communications Inc. plans to deliver broadband Internet service with download speeds of 25 megabits per second (Mbps) to 100 per cent of rural Canadians by July 2017.
Rural Internet provider Xplornet Communications Inc. is expanding its reach with new satellite services and cleaning up its balance sheet, steps that could set the New Brunswick-based company up for either an initial public offering or sale to a private equity investor.
Xplornet has borrowed heavily to build a network that serves more than 300,000 customers across the country, making it Canada's eighth-largest Internet provider, ahead of players such as SaskTel and Manitoba Telecom Services Inc. Over the next year, Xplornet plans to bolster its high-speed Internet offerings by adding new capacity from two new satellites as well as upgrading the technology on its network of wireless towers that cover rural homes and businesses.
To pay for expansion and retire certain existing debt that pays 13-per-cent interest and matures next year, Xplornet is in talks with lenders on a $335-million (U.S.) package of loans that sources say are expected to carry interest of 7.5 per cent. Moody's put out its first report on Xplornet on Tuesday, awarding a non-investment-grade B3 rating.
Investment bankers working with the company say once the debt financing is in place, the company plans to run a dual track process to raise additional capital by either going public or selling all or part of the company to a private equity investor. In July, Bloomberg reported that at least three U.S. private-equity firms are circling the company. An IPO or private equity investment is expected to value Xplornet at more than $1-billion.
The company's new financing includes a $50-million revolving credit facility as well as $285-million in medium-term notes, which can be repaid prior to maturity with minimal penalties – a structure that could make the company more attractive to potential acquirers.
Xplornet spokesman Morten Paulsen declined to comment on Friday.
"Xplornet is at a relatively early stage of its development and its growth trajectory and finances reflect that," Moody's analyst Bill Wolfe said in an interview. "So I think it's at an inflection point in its history where – both from a technology and service-offering perspective and from a financing perspective – it's ready to take that next step."
The 12-year-old company has incurred significant debt while investing in infrastructure, spectrum licences and expensive leases for satellite capacity, and Moody's says its "aggressive" ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) stands at almost eight times.
But Mr. Wolfe projects that "rapid growth" over the next few years could reduce that to about 6.5 times by the end of 2017. That kind of decrease in leverage suggests the company is raising its EBITDA in the range of more than 20 per cent a year. In contrast, Canada's well established telecom giants are reporting growth in the low-single digits.
In a more detailed report published Thursday, Mr. Wolfe argues there are about 3.2 million homes in Canada that don't subscribe to high-speed Internet service (based on CMHC and CRTC figures), giving Xplornet a large market to tap into. He said the company estimates that it has a handful of small competitors with a total of between 400,000 and 500,000 customers.
Rural customers' primary frustrations with Xplornet have been slow speeds, bandwidth restrictions and high prices. The company hopes to address speed and capacity concerns and offer better value with the addition of two new satellites and upgrades of wireless towers to LTE (or fourth-generation) technology. It has pledged to offer download speeds of up to 25 megabits per second anywhere in Canada by July, 2017.
Mr. Wolfe cautioned that Xplornet is cash-flow negative – due to its heavy capital investment program and low average revenue per user – but said it could turn positive in 2018 as spending requirements lessen and "the network reaches critical mass." And as the company's subscriber base grows, he said, its fixed cost-base should lead to growth in profit margins.
Xplornet has also conserved cash resources through the use of "payment in kind" (PIK) financing, that has allowed it to make some of its high-interest debt payments by issuing additional debt. While that has been helpful in early-stage development, it has led to increased debt leverage and Mr. Wolfe said the company will eventually want to make a transition away from that capital structure.
Xplornet also owns wireless spectrum licence assets that could be valuable. In May, the company completed a spectrum swap with Telus Corp., trading 89 licences designated for use with mobile devices for 119 licences for airwaves earmarked for providing fixed wireless Internet service (which Xplornet uses in rural areas). The two companies did not disclose detailed terms of the transaction, but in a quarterly report, Telus said the deal also included a payment to Xplornet.
Andrew Willis