Bruce Telecom Sale
January 28, 2014
Mike Sterling for Canadian Community News
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The sale of Bruce Telecom by Kincardine has generated a lot of controversy and some letters to the editor that criticize the Mayor and Council. I think the criticism is unjustified.
I take a different view. I think Kincardine did the right thing. The reasons are:
1. The Internet has changed the game altogether and Bruce Telecom would struggle to keep up. The volume and therefore the revenue is just not there for small providers in fixed geographic areas. In order to compete they need a broad base of customers and lots of R&D backed by investment capital.
2. Bruce Telecom is a small and highly respected local business with dedicated employees. They will have job opportunities with the much larger EastLink. Furthermore, customers can transition with confidence over time.
3. Every day there are deals in the industry that combine small companies with larger ones. Bruce Telecom is not a unique provider, so they were a target for acquisition because of a known customer base and service area. The amount of the purchase had to be reasonable or it would not have taken place.
In a high technology business with a relatively small gross (estimated at about $18,400,000 in 2013), there must be an investment of about 25% or $4,600,000 of the gross in Research and Development.
Also, if you read the projections for 2013 (I don't know about 2014), they show a amortization of $3,023,000. This is debt service of about 16.4%. That money flies away.
In venture backed companies in the high tech business of comparable size, an investment of about $25,000,000 with NO debt service would be appropriate and still marginal for a company the size of Bruce Telecom. At present they could not attract venture capital.
This says nothing about infrastructure equipment that they must constantly be upgrading.
Here is the bottom line. Bruce Telecom was competing in a high technology business with giants. Being bought out by EastLink at a multiple of the gross yearly sales is a good deal. They sold for $26,500,000, which is about 1.4 times the projected gross.
What is the alternative? Slow failure was on the horizon.
So why would EastLink buy? They bought because they have purchased a trained and dedicated staff and a loyal customer base that they can rapidly expand and service. They don't have to compete in the area quite so hard as they had to do in the past.
They don't have to find and move lots of people to Bruce County. They can share facilities and things like training and new product development.
There is a lot known about the dynamics of companies the size of Bruce Telecom in the target industry. Bruce Telecom was on the difficult side of survival.
The technology is just exploding and it's very, very expensive to keep up with the giants. Costs and development have to be spread over a large base to make them affordable. So, the cost of R&D goes down as a percentage of gross because it is spread over an ever larger base.
My hat is off to the Mayor and Council for making a tough, but good decision. Congratulations to EastLink for buying a good company with good people and a long history of dedicated service. Let's see if you can lead the County into the future. Keeping up is crucial to business and education. The Internet leads to the future.
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Tuesday, January 28, 2014