The inmate communication services industry is being fundamentally reshaped by the FCC. Potentially more significant than its predecessor initiative, which significantly reduced prison payphone long-distance rates, the recently issued Further Notice of Proposed Rulemaking seeks comment on key drivers of revenue and profit for these prison payphone providers and the prisons themselves.

With the two largest providers of payphone services owned by private equity firms, not usually known for embracing a shrinking profit model, it will be interesting to see how they push their investments to respond – both at the FCC and in the market. One potential bright spot is the increase in call volume achieved post LD rate reduction mentioned below by Commissioner Clyburn. However, with a limited number of payphones per prison facility and call length typically limited to 15 minutes per day, there is a natural cap on the call volume increase that can be hoped for to offset reduced rates and fees. (We do know of one way to provide enhanced access to communications and unlimited calling…)

The Further Notice of Proposed Rulemaking seeks comment on the following:

• Permanent rate caps on local, intrastate and interstate calling
• What level of cap would ensure coverage of the enhanced security requirements of inmate calling
• The elimination of per-call connection fees
• Prohibiting site commissions as a category for all interstate and intrastate services but permitting facilities to recover any legitimate costs of provisioning inmate calling services
• Capping and restricting ancillary fees, such as fees to open and maintain calling card accounts
• Phasing in these changes, with rate caps being effective in 90 days and a 2-year transition away from site commissions.
• Ensuring that inmate calling services are accessible for all Americans, including inmates and families with disabilities.
• Effective methods of enforcing inmate calling rate rules and reviewing their effect.

According to FCC Chairman Tom Wheeler this second rulemaking on prison payphone calls is being undertaken because, “Despite positive steps forward on interstate rates, it is clear that a more comprehensive approach to reform is necessary to address problems that continue to drive up rates. Namely, charges for “ancillary services” for an increasing array of services are on the rise; intrastate rates, which encompass the vast majority of calls from correctional facilities, remain very high in many states; and, most importantly, site commissions – payments required by correctional institutions from ICS providers for the privilege of serving those facilities – continue to be demanded and appear to be the driving force behind increased rates and ancillary fees. There are some positive signs that reform of interstate rates has resulted in reduced rates and increased calling, but absent a comprehensive solution to the problem we will continue to find ourselves in a never ending game of ICS rate whack-a-mole.”

Commissioner Mignon Clyburn stated, “The impact of the first phase of reform of our nation’s inmate calling regime has been tremendous. Our decision shows that doing the right thing can have reverberating benefits. Since February, when the interstate rate caps of $0.21 for debit/prepaid calls and $0.25 for collect calls went into effect, call volumes across state lines have increased nearly 70% in some facilities, and over 300% at one state department of corrections.

These are not just empty statistics. More affordable rates can help bring about increased and regular contact between inmates and their families. Studies show that having meaningful communication beyond prison walls can make a real difference when it comes to maintaining community ties, promoting rehabilitation, and reducing recidivism.”

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Update (4/30/13): The FCC has given its approval for the ABRY purchase of Securus Technologies from Castle Harlan. From the Public Notice:

“Upon review of the record, we find that the transaction is likely to result in certain public interest benefits, including increased capital resources available to Applicants to make service improvements.

In addition, Applicants affirm that they will continue to be bound by existing contract rates for service to customers and that there will be no changes in rates, terms, or conditions of service as a result of the transaction.

Nonetheless, this grant does not approve the current rates, terms, or conditions, and as noted above, the Commission is reviewing those issues in the Inmate Calling NPRM
proceeding.

Accordingly, and subject to the condition stated above, we find that grant of the Applications will serve the public interest, convenience, and necessity.

Pursuant to sections 4(i) and 214 of the Communications Act of 1934, as amended,and sections 0.291 and 0.261 of the Commission’s rules,WCB and IB, under delegated authority, approve the Applications listed herein subject to the condition stated above.”

Update (4/21/13): Some additional deal details  – Abry Partners is acquiring a 66.9% stake in prison phone operator Securus Holdings Inc. from Castle Harlan in a transaction not officially announced by the buyer, but revealed in regulatory filings. The deal could value the target at more than $700 million.

Also taking additional minority stakes in Securus are HarbourVest Partners, Redoak Investments LLC and Mesirow Financial Capital Partners, according to a document from the Arizona Corporation Commission, which oversees licensing for telecommunications in the state.

Dallas-based Securus Holdings, through its operating company, Securus Technologies Inc., is a specialized telecommunications company operating secure telephone and communication services for prisoners in the U.S. and Canada.

To finance the acquisition, Securus is arranging $540 million in debt, which, according to Moody’s Investors Service, includes a $50 million senior secured five-year revolver, a $335 million senior secured seven-year first-lien term loan and a $155 million eight-year senior secured second-lien loan.

This amount of debt is 1.5 times more than the debt raised when Castle Harlan acquired the company from H.I.G. Capital in 2011. While sources estimated that Castle Harlan paid more than $500 million for Securus in 2011, Abry Partners’ acquisition could value the company at north of $700 million, based on comparable deals.

For instance, EarthLink Inc.’s acquisition of ITC^DeltaCom Inc. in October 2011 was valued at $516 million, 1.6 times the $325 million in debt used to finance the deal.

The next month, American Securities LLC acquired Global Tel*Link Corp., also a provider of telecom services to prisons, in a deal valued at $1 billion, or about 1.5 times the $655 million in debt used to finance the deal, based on data from Moody’s.

Similarly, in December 2011, payment communications company TNS Inc. was taken private by a consortium led by Siris Capital Group LLC in a deal valued at $862 million, 1.3 times the $690 million in debt raised to finance the acquisition, according to data from Macquarie Group Ltd.

According to the document from the Arizona Corporation Commission regarding the sale of Securus to Abry Partners, Moody’s assigned a B2 rating to the revolver and first-lien debt and a Caa2 rating to the second lien loan on Tuesday.

Deutsche Bank AG and BNP Paribas SA will hold a lender call on Thursday morning to launch the $540 million, first- and second-lien financing, Standard & Poor’s Leveraged Commentary and Data reported.

Moody’s also assigned a B3 corporate family rating with stable outlook to the company, citing its “sophisticated, proprietary technology platform and its multiyear contracts with over 2,200 correctional facilities in the U.S. and Canada” and “by improvements in operating margin and cash flow which have been achieved through cost containment and lower bad debt expense.”

Moody’s estimates Securus’ leverage will be 6.6 times following the transaction and that the company’s leverage will remain above 5 times through 2015.

The ratings agency said it could upgrade the ratings if Securus maintains good liquidity and positive free cash flow and grows Ebitda such that leverage is on track to fall below 5 times.

Castle Harlan acquired Securus from H.I.G. Capital in April 2011. Terms of the transaction were not disclosed, but BNP Paribas and GE Capital Markets Inc. arranged a $365 million senior secured loan that the private equity firm used to purchase Securus.

In May 2012, Securus paid a $76.5 million dividend to Castle Harlan and other shareholders, according to S&P.

Miami firm H.I.G. formed Securus in 2004 when it acquired Evercom Systems Inc. and merged it with T-Netix Inc., which H.I.G. took private in the same year for about $70 million, according to regulatory filings.

(Source)

Update (4/17/13):  Public Knowledge, The United Church of Christ Office of Communication, Inc., Free Press, and the Rainbow/PUSH Coalition filed with the FCC to block the purchase of the telephone company Securus by the Hedge Fund ABRY Partners:

“Under the law, no one is entitled to buy a telephone provider unless the FCC finds the transaction will serve ‘the public convenience and necessity.’ The organizations filing the Petition to Deny argue that because the rate charged by Securus are ‘unjust and unreasonable,’ the FCC must block the sale.” (Source)

Update (4/5/13): Buyout firm Castle Harlan Inc. is in talks to sell Securus Technologies Inc., The provider of video and audio communication equipment for U.S. prisons, for about $640 million, said people familiar with the matter.

Castle Harlan is negotiating to sell the company to private-equity firm ABRY Partners LLC, said the people, who asked not to be named because the process is private. Boston- based ABRY, which manages $3.5 billion, is seeking to raise $490 million to help finance the purchase and pay down existing debt, said one of the people.

After the acquisition, Securus’s total debt would be about 5.8 times its earnings before interest, taxes, depreciation and amortization, said one of the people.

New York-based Castle Harlan bought Securus in 2011 for about $440 million, that person said.
(Source)

Original Post:

From recent filings at the FCC and with state regulators, it appears that Castle Harlan has sold Securus Technologies to Abry Partners.

The timing is interesting given that comments were due Monday to the FCC on the Proposed Rule Making finally taking up the Wright Amendment to reduce the cost of interstate inter-exchange inmate calling services (ICS). If such a ruling is adopted, it could potentially reduce the revenues and profitability of ICS providers such as Securus.

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Update (4/18/14) The Wall Street Journal reports that Global Tel*Link Corp., the largest U.S. operator of prison phones, is being shopped by its private-equity owner American Securities, according to people familiar with the matter.

The sale process comes as federal regulators have capped the fees companies like Global Tel*Link can charge for interstate calls to and from inmates and as the government considers limiting charges for calls made within state lines.

The Mobile, Ala., company, known as GTL, has been passed between private-equity firms over the past decade, most recently selling in late 2011 for about $1 billion to New York-based American Securities LLC, which is now looking for a buyer for GTL.

It isn’t clear whether regulatory matters were behind the latest private-equity owner’s decision to shop GTL. The company’s chief competitor, Securus Technologies Inc., has also been passed between private-equity firms and last year sold for about $700 million, a price that helped seller Castle Harlan Inc. roughly double its two-year investment, according to a person familiar with that deal.

GTL and Securus have come under scrutiny in recent years for the rates they charge for inmate calls.

(When Securus was being sold in 2013, we predicted that the pressure at the FCC to reduce prison calling rates likely meant reduced profitability for the dominant prison inmate telecommunications service providers Securus and Global Tel*Link…)

Update (12/19/11) American Securities LLC today announced that, in partnership with the company management, it has completed the acquisition of Global Tel*Link (GTL), a leading provider of communications solutions for the corrections industry, from Veritas Capital. Terms of the transaction were not disclosed. Equity was provided from funds managed by American Securities and from management.

“Since its entrance into the inmate telephone industry, Global Tel*Link has been a leading innovator of correctional communications. We are excited about working with Brian Oliver and his team as they continually upgrade GTL’s technology and products to meet the increasing demands of correctional facilities for state-of-the-art telecommunications systems,” said Paul Rossetti, a managing director of American Securities. “Global Tel*Link is the type of investment American Securities looks for: a market-leading company that is well-positioned for continued growth and has a strong management team in place.”

Global Tel*Link is a provider of sophisticated inmate telecommunications services with a leading share of inmates nationwide including 14 of the 20 largest state contracts. Global Tel*Link’s distinctive product line provides facilities with a convenient and secure phone system which requires less administrative supervision and at the same time decreases inmate phone-use fraud. GTL’s products, including LazerPhone® and LazerVoice®, are designed for use in any size facility.

Brian Oliver, GTL’s Chief Executive Officer, said, “We are very enthusiastic about the future of our business. At GTL, we recognize the importance of integrity to our customers, employees and business associates, and everyone works hard to assure that our customers have a satisfying and rewarding experience with us. We look forward to working with American Securities as we develop our long-term growth strategy and continue to build our business.”

Update (11/30/11) Standard & Poor’s Ratings Services said today that its ratings and outlook on Mobile, Ala.-based prison phone provider Global Tel*LinkCorp. (B/Stable/–) are not affected by the increase in the company’s proposed term loan to $635 million from $605 million. The ‘B’ issue-level rating and ‘3’ recovery rating on the term loan and $50 million revolving credit facility remain unchanged. The company intends to use the proceeds from this term loan, along with $389 million of common equity, to fund the buyout of the company’s owners Veritas Capital and Goldman Sachs Direct and its affiliates by American Securities LLC. Pro forma for the transaction and including our adjustments for operating leases, we expect leverage to increase to about 6.2x for the 12 months ended Sept. 30, 2011 from the current 5.3x, which is still within the parameters of the current rating. We expect adjusted leverage to improve to around 5.0x by the end of 2012 following a full year’s contribution from inmate telephone service provider Value-Added Communications (VAC) (acquired in August 2011) and from achievement of some additional cost savings throughout 2012. We also expect leverage to further improve to the high- to mid-4x area thereafter with the full-year benefits of synergies achieved in 2012, which we have conservatively assumed will be about $10 million, or roughly 50% of those targeted but not yet realized. The ‘B’ corporate credit rating and stable outlook on the company remain unchanged.

Update (11/21/11) From the New York State Public Service Commission: PROPOSED TRANSACTION FINANCING
Pursuant to a Stock Purchase Agreement dated October 28, 2011, ASP GTL will purchase all of the stock of GTEL Acquisition Corp. As a result, GTEL Acquisition Corp. will become a wholly-owned subsidiary of ASP GTL, and ASP GTL will acquire control of GTL and its wholly-owned subsidiaries VAC and PCS. Pre- transaction and post-transaction corporate structure charts are shown in Attachment A.

To finance the stock purchase, GTL will enter into a term credit facility of up to $605 million (6-year maturity from the transaction closing date) and a revolving credit facility of$50 million (5- year maturity from the transaction closing date). GTL will retire approximately $558 million of debt (secured by substantially all of the assets and property of GTEL Holdings, Inc., and its subsidiaries, including the Service Providers) at the time of closing. Additional credit, not to exceed $145 million, may be obtained post-closing by GTL. The petitioners therefore request Commission approval to incur aggregate debt of up to $800 million, which will be (a) secured by substantially all of the assets and property of GTEL Holdings, Inc., and its subsidiaries, including the Service Providers and any additional subsidiaries acquired from time to time, including but not limited to a perfected first-priority pledge of all the equity interests of such subsidiaries, including the Service Providers and any additional subsidiaries acquired from time to time; and (b) guaranteed by GTEL Holdings, Inc., and its subsidiaries, including the Service Providers and any additional subsidiaries acquired from time to time.

Update (11/9/11) From the FCC Website: APPLICATION FILED FOR THE TRANSFER OF CONTROL OF GLOBAL TEL*LINK CORPORATION, DSI-ITI, LLC,
PUBLIC COMMUNICATIONS SERVICES, INC., VALUE ADDED COMMUNICATIONS, INC., AND CONVERSANT TECHNOLOGIES, INC. TO ASP GTEL HOLDCO, LLC

On October 28, 2011, ASP GTEL Holdco, LLC (ASP GTL), Global Tel*Link Corporation (GTL), DSI-ITI, LLC (DSI-ITI), Public Communications Services, Inc. (PCS), Value-Added Communications, Inc. (VAC), and Conversant Technologies, Inc. (CTI) (GTL, DSI-ITI, PCS, VAC, and CTI collectively, the Acquired Entities) (ASP GTL and the Acquired Entities collectively, Applicants) filed an application pursuant to section 63.03 of the Commission’s rules to transfer ultimate control of the Acquired Entities to ASP GTL.

DSI-ITI, PCS, VAC, and CTI are wholly owned subsidiaries of GTL. Applicants state that each entity has authority to provide interstate services in multiple states and specializes in the provision of inmate calling services to correctional facilities. GTL is a wholly owned subsidiary of GTEL Holdings, Inc., which is, in turn, a wholly owned subsidiary of GTEL Acquisition Corp. GTEL Acquisition Corp. is wholly owned by GTEL Holding, LLC, the ultimate parent company of the Acquired Entities. All entities are U.S.-based. ASP GTL, a Delaware limited liability company, is not, itself, a telecommunications provider. Applicants state that ASP GTEL Investco, LLC (ASP Investco), a Delaware limited liability company, will own 90 percent or more of ASP GTL. American Securities Partners VI, L.P. (ASP VI), a Delaware limited partnership, will own 95.7 percent of ASP Investco. ASP Investco and ASP IV are private equity entities. The general partner of ASP VI is American Securities Associates VI, LLC (ASA VI), a Delaware limited liability company, that will own 1 percent of ASP VI. The following individuals, all U.S. citizens, hold a 10 percent or greater (but less than 50 percent) ownership interest in ASA VI: Michael G. Fisch, Paul Rossetti, David Horing, and Matthew LeBaron. Applicants state that neither ASP GTL nor any of its 10 percent or greater direct or indirect owners hold interests in any other telecommunications entity.

Pursuant to the terms of the proposed transaction, GTEL Holding, LLC will transfer control of GTEL Acquisition Corp., GTEL Holdings, Inc., GTL, DSI-ITI, PCS, VAC, and CTI to ASP GTL. As a result, GTEL Acquisition Corp. will become a wholly owned subsidiary of ASP GTL, which will own 100 percent of the stock of GTEL Acquisition Corp. and which will result in ASP GTL acquiring ultimate control of GTL and its wholly owned subsidiaries. Applicants assert that the proposed transaction is entitled to presumptive streamlined treatment under section 63.03(b)(2)(i) of the Commission’s rules and that a grant of the application will serve the public interest, convenience, and necessity.

Update (11/4/11): The latest word in the industry is that this is a done deal, though not formally announced yet. And the price is closer to $1B. It should be interesting to see if this is in fact the case and what it means for the current management and operations of Global Tel*Link

There’s gold in them thar prisons.

A Mobile, Ala., private equity company is about to announce a deal to purchase the largest prison phone system in the US, a source close to the situation told The Post, making it one of the few leveraged loan deals to succeed in an almost frozen sector of the finance world.

Terms of the deal could not be determined, but Veritas Capital, another PE firm, and Goldman Sachs, which own the prison phone company called Global Tel Link, were asking $800 million for the operation.

American Securities Capital is expected to announce in a matter of days that it is buying GTL, sources said.

If Veritas and Goldman are able to fetch anywhere close to their asking price, they would pocket a profit of about 450 percent after owning GTL for less than three years, according to The Daily Deal.

GTL provides all prison phone service in Connecticut and New Jersey state prisons, and in Nassau County jails.

Inmates make collect calls, and the people who accept the charges pay GTL, mostly through pre-paid phone cards.

GTL operates monopolies and charges higher-than-normal calling card rates — which could be one reason it was able to attract bank financing while other prospective deals are withering on the vine.

Some have accused GTL and its rivals of price-gouging.

GTL in Connecticut charges $3.95 plus 89 cents a minute for interstate calls, according to Paul Wright, executive director of the Human Rights Defense Center.

Among the many complaints Wright said he hears is GTL and its smaller competitors require people to pay $4.50 to get $25 or $50 pre-paid cards before they can accept collect calls from prisoners, and GTL does not rebate unused dollars.

Goldman declined comment. American Securities and Veritas did not return calls.

Source

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