RALEIGH … Started two decades ago as a scrappy long-distance reseller and later growing into a purveyor of various telecommunications services, BTI was swallowed Wednesday by a similar-styled competitor.

ITC^DeltaCom (OTC: ITCD) agreed to merge with BTI in a $132 million deal that officials of the two companies say creates the largest competitive local exchange carrier in the Southeast, with expected annual revenue of about $650 million and 50,000 customers in 40 markets.

As part of the deal, New York investment firm Welsh, Carson, Anderson & Stowe will buy $35 million of convertible preferred stock in the new company. The majority owner of BTI, Welsh Carson also bought almost half of ITC’s stock last fall as the company emerged from bankruptcy, and it will own 56 percent of the combined operation.

Following the merger, the company will be known as ITC^DeltaCom and will be based in ITC’s hometown of West Point, Ga., where the company employs about 1,600. It will be headed by ITC Chairman and Chief Executive Larry Williams and Chief Financial Officer Doug Shumate. BTI Chief Operating Officer and CFO Jay Braukman will become COO of the new company, but BTI CEO Joe Cece decided against moving to Georgia and will pursue other opportunities in Raleigh.

“It’s fundamentally a personal and lifestyle decision,” Cece says, noting he has made several career moves and feels at home in Raleigh.

Welsh Carson has the right to appoint four members to the new board of directors, and the rest of the 11-member board will be current ITC directors, according to the companies.

Williams says Raleigh will remain a “strong regional focus” for ITC, but he declines to say how many jobs the city will lose as BTI’s operations are integrated into the company. BTI employs about 800 in Raleigh.

Company officials say they expect to save about $40 million to $60 million annually through consolidation within three years. They note BTI and ITC have 14 sales offices that overlap, and after the merger, they expect to have 40 total offices … up from the 35 ITC now has.

“More than likely, (Raleigh) will be a strong sales office, but they also have operations up there that we don’t, so it likely will be both a sales and operational center,” Williams says. “We want to keep as many people there as possible to do the right things by both companies.”

The BTI brand will remain for now to minimize impact on customers, but it also could eventually disappear, he says.

‘Lot of work’ ahead

Atlanta-based communications analyst Jeff Kagan says he doesn’t expect large job cuts following the merger. The company will need plenty of sales people to compete, although back-office operations will likely be consolidated, he says.

“In the short term, this is a good move, making the two companies stronger,” Kagan says. “In the long term, they still need to address the fundamental shift in the telecom industry toward bundled and integrated services. They’ve still got a lot of work to do.”

Other industry analysts agree that the merged BTI-ITC faces a tough road as BellSouth gains a better foothold in the long-distance market and can package it with local, Internet and wireless services.

“They need to form a strategy and reach out to customers, especially business customers, and let them know why they’re a better option than BellSouth,” says Max Smetannikov, a senior analyst with Current Analysis in Sterling, Va.

Smetannikov says selling points for the merged company include the fact that they are less regulated than BellSouth and can offer more flexible rates and that their combined network provides a larger coverage area across the Southeast.

ITC has a 10-state fiber optic network of almost 10,000 miles and reaches approximately 175 points of presence, and it is a certified competitive local exchange carrier in 11 states, from North Carolina to Texas. BTI has four digital long-distance switches from Florida to New York and 14 local switches across the Southeast, and its fiber network covers approximately 4,400 miles.

Greg Mycio, a competitive telecom analyst with New Paradigm Resources Group in Chicago, says that the regional play created by the merger will be the blueprint for more consolidation among CLECs in the coming year.

“The companies we found worked the best and lasted the longest are the ones that aren’t too, too small or too, too big, and ITC … together with BTI … fits that description,” he says.

ITC’s emergence from bankruptcy in November wiped $515 million in debt from the company’s books, allowing it to compete more effectively. But Mycio says ITC has always had a strong management team, sound operations and a solid marketing strategy, which will be much more important factors to the combined company’s future success.

Loading on debt

ITC plans to issue 7 million shares of stock to BTI investors and warrants to purchase another 3 million shares at $8.50 each. ITC also will assume $112 million in BTI debt, of which $85.7 million is secured, Shumate says.

All but about $30 million of that debt will take a secondary position to ITC’s current bondholders, he says, noting much of it matures after ITC’s debt in 2006. The company, which had about $196 million in long-term debt at the end of March, received approval from the banks that control its credit line to proceed with the merger and take on more debt, he says.

Shumate declines to provide many specific numbers, pending the filing of information with the Securities and Exchange Commission, but he did note that BTI had “not a substantial amount of cash on hand” at the time of the merger.

Welsh Carson’s investment will help ease any cash flow problems that could result from BTI’s lack of liquidity, he says, adding that the investment firm may purchase another $10 million in convertible preferred stock within 15 months of the merger.

ITC’s stock shot up on news of the merger, closing at $4.25 a share, a 46 percent increase over Tuesday’s price.

BTI: www.bti.com

ITC^DeltaCom: www.itcdeltacom.com