Since the passage of the 1996 Telecommunications Act, it seems rarely a week goes by without the announcement-or rumor-of another blockbuster telecom deal.
The recent flurry of merger and acquisition activity clearly is changing the face of the telecom landscape and prompting debate about where the multibillion dollar deal-making frenzy might be leading the industry.
Many analysts are taking a closer look at who is merging with or buying whom, and why. Cellular-related merger activity drawing the most attention recently includes:
Rumors of a $50 billion-plus mega-merger between AT&T Corp.-SBC Communications Corp., which surfaced in late May on the heels of the completion of SBC’s $16.5 billion acquisition of Baby Bell sibling Pacific Telesis Group. Most analysts believe any potential AT&T-SBC alliance would be doomed by anti-trust issues.
Blackstone Capital Partners Merchant Banking Fund-a financial buyer- announced May 28 it will pay $718 million for an 87-percent interest in prominent rural personal communications services player CommNet Cellular Inc. The deal highlights Wall Street’s once again favorable view of certain telecom stocks.
Price Communications Corp., a strategic buyer, announced in late May its intentions to acquire Palmer Wireless Inc. for $880 million-a deal that would combine two mid-sized cellular players into one larger, more formidable competitor.
Century Telephone Enterprises Inc. made public June 13 its intentions to buy PacifiCorp’s telecom subsidiary, Pacific Telecom Inc., for $2.2 billion, an acquisition that would vault Century into the top 10 cellular carriers.
Meanwhile, Bell Atlantic Corp. appears close to gaining the regulatory approval required to complete its multibillion-dollar acquisition of Nynex Corp. And British Telecommunciations plc’s acquisition of MCI Communications Corp. also is steadily moving forward.
Most analysts agree that the blitz of recent deal-making heralds the beginning of a new, bigger-is-better era in the cellular industry. Capturing increased market share or dominating key industry sectors or niches through takeovers and mergers appears be an increasingly attractive option for companies looking to boost shareholder value while ensuring their survival in an increasingly competitive, increasingly global marketplace.
“We’re going through a phase where, in terms of telecom companies, bigger isn’t everything, it’s the only thing,” said David Roddy, chief telecom analyst at Deloitte & Touche. “During the past five years, people have had the impression that smaller companies could succeed. Now Wall Street, equipment vendors, everyone in the industry is realizing the phone business-wireless as well as wireline-is a big-company business. Financing, globalization, marketing have become increasingly complicated areas where only bigger companies have a real chance to do well. There’s very little room for small companies to be successful in today’s telecom environment.”
“These recent telecom mergers are all about scope and scale,” said Gary Miller, chairman and chief executive officer of the Aragon Consulting Group. “The U.S. market is relatively mature. The real play in all of this [merger activity] is global.”
Miller sees “five distinct forces driving telecom today: Deregulation, globalization, convergence-the melding of the telephone switch with the computer-technology and consolidation.” He credits deregulation in the global marketplace with “sparking explosive growth, especially in Europe and the Pacific Rim countries. We’re really seeing the barriers come down.
“What I think you are going to see going forward into the next decade,” Miller predicted, “is flat-rate, bundled service where a company will offer local, long-distance, wireless and Internet access usage for one flat monthly fee. With all of this merger and acquisition activity, companies today are clearly positioning themselves to be single-source providers.”
“Everyone’s doing a mating dance right now,” said David Freedman, an analyst with Bear, Stearns & Co. “Most people have spoken to other people about merging. But in many of these recent significant transactions, what you’re seeing are financial buyers-like Blackstone-as opposed to strategic buyers. If the AT&T-SBC deal does happen, then I think we’ll see another wave of strategic merger activity similar to some of the alliances that were struck prior to the PCS spectrum auctions between companies like Bell Atlantic and Nynex and AirTouch (Communications Inc.) and U S West (Inc.).”
Financial buyers beginning to snap up cellular properties, Freedman believes, “highlights the fact that these cellular companies are experiencing a crossover to positive, free cash flow.”
Some analysts believe many of the major telco players are waiting to see how the proposed AT&T-SBC deal unfolds before going forward with their own strategic alliance plans. “In terms of ramping up to get a critical mass,” said Freedman, “I don’t see any of the larger players thinking they don’t already have critical mass. But, if the AT&T-SBC deal does happen, that could change.”
If the rumored AT&T-SBC merger does happen-and most analysts, citing huge anti-trust issues, remain skeptical of a deal being approved-both companies would be forced to divest a significant number of their wireless properties, a development that would spark major realignments within the entire industry.
“Everybody’s waiting to see how this competitive environment will shake out,” said Deloitte & Touche analyst Roddy. “I think the big companies are going to survive by being big. The rest of these companies are question marks.”
