REANET sale to net Empire $10 million

REANET sale to net Empire $10 million

Sept. 9, 2000

By Janelle Holden
Journal Staff Writer

Empire Electric’s 14,000 members could share in the expected profits from a telecommunications deal made this week.

Empire Electric and La Plata Electric associations accepted an offer of more than $20 million from TCOM Ventures to purchase most of their stock in REANET, a Durango-based telecommunications company, on Wednesday.

The two electric cooperatives have hired accountants to conduct a study of TCOM’s financial viability and business plan for REANET before completing the transaction. TCOM is an integrated communications provider based in Englewood.

Empire Electric is a non-profit rural electric cooperative, and is required by law to derive at least 85 percent of its income from its members.

Neal Stephens, general manager of Empire, said that the $10,131,000 offered for Empire’s share of the stock would put them over the 15 percent of allowed non-member income.

As a result, Empire will likely have to pay income taxes, but Stephens said that any profit from the sale will be shown on the books as a non-operating margin and will be allocated to Empire’s members.

"Any time that we can make any money on these ventures, it should go right back to the membership," said Stephens.

The Empire and La Plata cooperatives originally purchased REANET in 1997 for $709,125 to jump-start high technology in the Four Corners area. The cooperatives also jointly guaranteed REANET a $15 million line of credit. REANET has been working to construct an optical fiber-optics infrastructure between rural communities to provide high-speed telecommunications.

Since then, REANET has expanded outside the rural electric cooperative’s ability to solely finance the corporation, said Stephens.

But if TCOM doesn’t pass the accountant’s test, the cooperatives may have to look elsewhere. Financial statements show that the company has lost 97 percent of its value over the past year.

Last fall, the company’s stock dropped from $12.125 to 39 cents a share, and although revenues for September through March 31 rose 42 percent to $565,000, the company lost $18.2 million in the same amount of time, according to a Yahoo! website.

"It isn’t a done deal yet," admitted Stephens.

Before TCOM Ventures approached them, REANET had been seeking other ways of financing such as venture capital to keep their business plan solvent. Stephens said this would continue if the sale does not go through.

"We have to be able to finance the REANET business plan. And if another telecom company came in with the same offer, I think our board would pursue that in a heartbeat," he said.

Currently, Empire owns 10,275,000 shares of REANET stock. Ventures wants to purchase 8,631,000 shares of Empire’s stock, leaving Empire with 1,644,000 shares. The over $10 million offered for this stock will be paid with a combination of cash, financing, and stock. TCOM has agreed to pay $5,131,000 cash at closing, along with a $4 million promissory note paid over two years with interest, and $1 million in TCOM Ventures stock.

In addition, TCOM has promised to assume or remove Empire’s $7.5 million loan guarantee. If the transaction closes, LPEA and Empire will remain equity partners in REANET and will continue to hold board seats.

"This is brand-new for Empire," said Stephens. "We’ve never been involved in something of this magnitude."

The members may have a voice in whether the sale can be completed. Stephens said that Empire’s attorneys are studying the by-laws to see whether the sale needs to be ratified by two-thirds of the cooperative’s members.

Friends of La Plata Electric Association, a watchdog group, has charged that La Plata does not have the authority to sell shares without the membership’s approval.

"The by-laws say personal-property assets held for resale must be submitted to the membership for a two-thirds vote," William Bontrager told the Durango Herald on Friday. Bontrager, a member of Friends of LPEA, said because LPEA owns stock in REANET, REANET is a personal-property asset that can’t be sold except in a public-auction bidding process.