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Airvana Rides The Growth Of Smart Phones—Dow Jones
May, 3 2011

By Private Equity Analyst

Limited partners: Guard your Blackberrys so you can keep yourselves organized, but thank smart phones for the returns.

Only a year after being taken private, AIRVANA Network Solutions Inc., a maker of software for 3G CDMA networks, is already funneling some hefty returns to investors. The company has rallied up enough cash flow to complete two dividend recapitalizations that returned almost three times invested capital to its backers, including majority stakeholder SAC Private Capital Group; ZM Capital, the private equity fund of ZelnickMedia Corp.; GSO Capital Partners LP; Cerberus Capital Management LP; and Sankaty Advisors LLC. That group took the company private in April 2010 for $540 million, including $136 million of equity.

It wasn't all that easy. The company, which primarily makes network infrastructure software that enables data communications over CDMA networks, was making just short of $100 million in annual earnings before interest, taxes, depreciation and amortization at the end of 2009.

But AIRVANA also had a femtocell business, which makes base stations that provide coverage at home, and this was losing around $60 million in Ebitda annually. On top of that, AIRVANA's only customer, Nortel Networks Corp., which was providing equipment to Verizon Wireless, was in bankruptcy protection. And while demand for 3G was steady, investors had to keep in the back of their minds that 4G was coming.

"All that complexity took us a year to figure out," said Frank Baker, co-founder of Siris Capital Group, the successor of SAC. "It wasn't rocket science, but it took us a while to take it in and get comfortable with it."

The investors siphoned off the femtocell business into a separate subsidiary and put $30 million on its balance sheet, and by the time the deal closed, Ericsson had bought Nortel's CDMA assets. Given AIRVANA's footprint in roughly 25% of Verizon's CDMA networks and 40% of Sprint's, investors developed a set of projections that tallied a 25% internal rate of return for AIRVANA, "come hell or high water," Baker recalled.

What investors didn't foresee was the explosion of smart phones on Verizon's network. At the time of the deal, there was no other device quite like the iPhone consuming 600 to 1,000 megabytes of data each month, and investors didn't bank on the device breaking its exclusivity with AT&T Inc. But toward the end of 2009 and into 2010, Motorola's Droid and its subsequent versions were released, flooding Verizon with around 10 million smart phones. Then the iPhone, and later the iPad 2, came to Verizon. Investors had foreseen the company doing $110 million in Ebitda in 2010, but it brought in closer to $220 million.

By last August, AIRVANA had enough cash flow to refinance its expensive debt and make a $204 million distribution. Its second payout came in April, of another $172 million. Siris predicts it will eventually net a final return north of five times from the investment. After both recaps, the company, pro forma, is still levered at less than two-times Ebitda.

"A gradual progression was something we thought was possible, but what we had no analog for was that it would happen overnight," said Andrew Vogel, partner at Zelnick Media. "Sitting there at the time of the investment decision, such results, so quickly, were not even a twinkle in anyone's eye."

AIRVANA Network Solutions Inc.

The Investors
Partners of Siris Capital had been at Ripplewood Holdings with ZelnickMedia Partner Andrew Vogel when Ripplewood made a series of investments with ZM. AIRVANA Chairman Merle Gilmore had also been an industrial partner at Ripplewood with Siris co-founder Frank Baker for a dozen years or so. Siris, formerly the private capital group of SAC Capital Advisors LP, is raising $400 million for a debut buyout fund as it seeks to spin out and become an independent firm.

The (Final) Exit
With 4G on the horizon, investors predict that growth for AIRVANA will start to flatten in 2013. But they note that 3G will not be going away; AIRVANA will still have a legacy business in maintenance and upgrades even after 4G becomes prevalent. Nonetheless, the growth curve will put into perspective a time frame for the eventual sale.