The last two companies on the former iProvo fiber network announced Tuesday that they're merging, and they're asking the city for a break on monthly payments.
Broadweave Networks and Veracity Communications will form Veracity Networks if the Provo Municipal Council will approve a 30-percent reduction of their monthly payment for the publicly built network over the next 18 months.
In a work session Tuesday evening, the council had cautious optimism for the proposed merger, even with the $1.5 million short-term loan the companies will need from city coffers.
Broadweave and Veracity are asking that Provo reduce the payments for the network by $82,000 a month, from $277,000 to $195,000. The payments would then revert to the original amount for two years, then go to $302,000 a month for the next seven years, leaving the city with more money than the original terms of the $40.6 million network sale.
Provo still will eventually get all of its money, but in the meantime, the city has to make good on the complete $277,000 monthly payment.
Broadweave bought the network last year under a deal structured to allow them to pay Provo city. The city, still responsible for the bond used to build the system, would then pass the money through to pay the bond. But Broadweave has made its payments exclusively through its $6 million reserve rather than with revenues, prompting a concerned Municipal Council to recently seek a contingency plan in the event that the company fails and the city has to take control.
Mayor Lewis Billings, who conceived the idea for the network and has championed iProvo throughout the years, said the city could use money from the energy department's reserve fund to cover the loan payments, and it's actually a good financial move. That money, $820,000 in this fiscal year, is sitting in a state fund earning 1-percent interest. Veracity Networks would be paying about 5.2-percent interest.
"Being able to earn 5 percent instead of 1 percent is something the director is very excited about," Billings said.
Council members expressed no opposition to the plan, but they had plenty of questions, most focused on money.
"Why not get a loan from somewhere else?" Councilman Steve Turley asked. "Why come knocking in the city's door?"
Broadweave CEO David Moon said they had been trying for quite a while to find other sources of funding, but investors were leery because of the bad economy and because of how much debt Broadweave had.
Turley also questioned where the $82,000 would go in helping the company, and if Provo taxpayers, who will be picking up the tab if the debt restructuring is approved, will get a return on their money.
"You've also talked about growth outside of Provo, and so I've got a concern that Provo tax dollars are helping Veracity networks grow outside of Provo, and yet we're only collateralized by growth inside of Provo," he said.
iProvo, however, is the only network not turning a profit, Moon said, so while those networks might be subsidizing iProvo, iProvo's debt payments will not go to subsidize them.
Veracity CEO Drew Peterson repeatedly stressed his company's clear debt sheets and good cash flow and assured the council he entered into this move because of the growth opportunities it provided, not because Veracity was hurting.
"We wouldn't be entering into this if we didn't see a large window and a clear path to get us where we want to be," Peterson said.
The council decided unanimously to delay a decision on the restructuring until its Sept. 1 meeting.
Back on speaking terms
While the new company should see improved revenue from eliminating redundancies and increasing its customer base, it won't happen right away.
"It takes a little bit of time to realize those economies of scale," said Broadweave CEO David Moon.
The two companies attempted to merge a year ago, but the effort failed, in large part because of a culture clash.
"Myself and some of our executive team didn't see eye-to-eye with the [Broadweave] management team," said Veracity CEO Drew Peterson, who will lead the merged company.
That Broadweave team -- including CEO and founder Steve Christensen -- was ousted in March. With increased efforts to improve customer service, the two companies got back on speaking terms.
The combined company would have nearly 100 employees, more than 20,000 customers and, while centered largely on the iProvo network, would stretch from Mesquite, Nev., and St. George to Logan.
"We don't anticipate a lot of layoffs," Peterson said. "It's possible there could be some reductions."
Both Peterson and Moon said customers should not see any immediate changes to their service or fees.
The players in the iProvo proposal
iProvo
The $40.6 million fiber-optic network has a colored six-year history, from a fight over whether it should be built in the first place to a stream of failed service providers. At one point, Provo city was losing nearly $2 million a year as service providers were unable to make payments to the city. Quality issues also have plagued the network, from clunky video services to a phone network that regularly didn't work.
The system has seen improvements over the past year including hardware upgrades for phone and video. The customer service system also has been upgraded, and a sporadic billing system initially used by Broadweave appears to have most of the kinks worked out.
Broadweave
The company was touted by Mayor Lewis Billings when it was chosen as the buyer of the iProvo network, despite its relatively small size. It got off to a rough start in 2008 when venture capital firm Sorenson Capital backed out before the sale was final and a merger with Veracity failed. While the company stepped up to fix a major phone problem, it struggled through a new billing system and has had to make payments to the city through reserves instead of revenue. It focuses mostly on residential customers.
Veracity
Veracity is one of the consistent success stories on the iProvo network. With mostly business customers that come with high profit margins, the company brings additional cash flow to the merger. It also has customers across the state, including the Alpine School District.
Provo
After losing millions on the iProvo network, the city sold to Broadweave for $40.6 million. The structure of the deal was highly criticized, however. The city is still responsible for the bond payments, making it ultimately responsible for the network if a company goes belly up. That has caused concern among council members, who are building in a contingency plan. Mayor Lewis Billings has been a steadfast supporter of the network and the sale, and therefore the target of much criticism. Provo will maintain an "observer seat" on Veracity Networks if the merger goes through.
Posted in Provo on Wednesday, August 19, 2009 12:25 am Updated: 1:39 pm. | Tags: Provo, Broadweave, Iprovo
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