Facing steep debt obligations and steadily declining revenue, telecom reseller Primus Telecommunications Canada Inc. has won court protection from its creditors and is seeking approval of a plan to sell its business to U.S. telecom provider Birch Communications Inc.
A judge of the Ontario Superior Court in Toronto granted Primus protection under the Companies' Creditors Arrangement Act (CCAA) on Tuesday and the company, which also operates in the United States, has filed a petition to have the Canadian court proceeding recognized in the U.S. Bankruptcy Court in Delaware.
With more than 200,000 residential customers and 23,000 small and medium-sized business clients, Toronto-based Primus is one of the largest alternative telecom operators in Canada (it also has about 27,000 residential customers in the United States and Puerto Rico).
Primus resells telecom services, such as voice calling and Internet, that it buys on a wholesale basis from major incumbents, including BCE Inc., Allstream Inc. and Telus Corp. Although Canada's Internet and telephone market is dominated by the incumbents, there are hundreds of alternative players that buy access to those networks as a result of a regulatory regime established in the 1990s.
According to court filings, Primus's sales over the past four years have slumped as customers have cancelled legacy products, such as home phone and long-distance calling, and Primus has been unable to make up the difference with higher-speed Internet services that it could earn a higher profit margin on.
News of Primus's financial difficulties comes at a crucial point for telecom resellers, which are engaged in a public relations war with Montreal-based BCE over a regulatory ruling from last year that would allow the alternative players to access BCE's highest-speed fibre-to-home Internet services. BCE is appealing that ruling to the federal cabinet and says it will have to curtail investment in some rural communities if the decision stands.
"Primus, historically, had a strong revenue base of long-distance and traditional local line revenue. It's no surprise to anybody that there is structural change going on in the industry. … Everyone's using mobile," Primus chief executive officer Michael Nowlan said in an interview. "The marketplace – and I do believe the marketplace as a whole – will have great interest in getting competitive access to fibre [Internet] services."
Mr. Nowlan said Primus could not succeed in the market with its current capital structure and decided to seek a buyer. It signed an agreement with Atlanta-based Birch Communications on Monday and the transaction has the approval of Primus's board. It will be seeking the court's approval of the arrangement over the next three to four weeks.
Court documents indicate the "base purchase price" is $44-million, subject to a number of not-yet disclosed adjustments. Primus's first-ranking creditors are expected to "suffer a shortfall in recovering on their debt," according to the filings.
"It's exciting, I believe, for the competitive landscape in Canada," Mr. Nowlan said. "Birch is a great, experienced partner, and they'll be bringing a degree of dynamism to our marketplace."
He said the agreement and the CCAA process will allow the company to continue serving clients and keep its employees – 502 in Canada and 28 in the U.S. – at work while the sale is finalized. "The [court procedures] are just, quite frankly, steps necessary to effect the transaction."
The deal will require regulatory approvals, but Primus has already been under foreign ownership for more than two years. U.S. private equity firm York Capital Management acquired the company in 2013 for $129-million (U.S.).
Primus's revenue has fallen to $166-million (Canadian) in 2015 from $229-million in 2012. Sales at Primus's Canadian residential business, which accounted for more than half of the company's revenue in 2015, have declined by an average of 9 per cent a year, according to the filings.
The company had a loss of $830,000 in 2014 and expects to record a loss of $13-million in 2015. Earnings before interest, taxes, depreciation and amortization (EBITDA) declined to an expected $10-million in 2015 from $41-million in 2012.
Primus had assets worth $145-million and liabilities of $101-million as of Nov. 30. It has been unable to maintain certain debt-to-EBITDA ratios that are required under its secured loans since late 2014. It has been under default on those obligations since then and has operated under forbearance agreements with its major lenders. (EBITDA is earnings before interest, taxes, depreciation and amortization.)
Working with a syndicate of its major secured lenders, which agreed to support a sale process with a view to selling the company as a going concern, Primus began actively looking for a buyer in September. It had interest from six potential acquirers, according to the court filings.