KKR Buys Piece of Birch

In a move that some high-yield players believe will set the tone for a resurgence of competitive local exchange carriers, European buyout firm Kohlberg Kravis & Co. said last week that it plans to invest up to $110 million in high yield CLEC Birch Telecom.

The initial $60 million of the amount will fetch KKR a 35.3% stake, with the remaining $50 million in the form of an option that will increase its holding to 49.1%.

The news was a positive for the company's existing $115 million of debt, which has no official rating from Moody's Investors Service or Standard & Poor's, but carries a 14% coupon.

The cash infusion marks not only a stamp of approval on small, privately held Birch, but also the first time that a buyout firm has made a cash infusion of this size into a CLEC. And it comes at a time when CLECs have generally fallen out of favor with the market.

Last year's darlings in high yield, these re-sellers have lost ground to the cable operators, wireless companies and Internet plays. Birch, which just reported quarterly sales of $10 million, could not be reached for comment.

The announcement also comes on the heels of the Federal Communications Commission requiring that SBC open up its network and allow competitors to provide telecom service, as a provision of its $87 billion acquisition of Ameritech.

Kansas City-based Birch is headquartered in SBC's territory and competes with the telecom giant. And Birch, as well as other smaller re-sellers could, in turn, become a takeover target for Bell Atlantic, as it also seeks to compete in SBC's area.