AT&T Corp. admitted it might sell its Wireless Messaging Division-without actually confirming that the paging unit is indeed up for sale-after rumors surfaced that the paging network was on the auction block.
“We are being very aggressive at looking at our portfolio to make sure all our businesses are aligned with our strategy,” said Ruthlyn Newell, AT&T corporate spokeswoman. “We are exploring our options in terms of our messaging business … which could result in a sale.”
Newell would not comment on a price or possible buyers for the paging business, which AT&T acquired in 1992 as part of the McCaw Cellular Communications Inc. deal, but reports have surfaced that the price tag may be as much as $450 million or as low as $240 million.
AT&T’s paging operations placed 10th on the RCR Top 20 Paging Carriers list, with 1.2 million subscribers. The company holds licenses in several regional markets, the largest of which are Seattle, Minneapolis and Denver. But the company holds no national licenses and nobody in any position to buy the unit really needs AT&T’s regional licenses to fill out their footprint.
“Nobody needs AT&T paging today,” said Jeanine Oburchay, paging industry analyst at Bear, Stearns & Co. With no nationwide license and no overwhelming dominance in any particular market, one might wonder just what AT&T’s paging business could possibly be worth.
As such, a price tag potentially as high as $450 million-almost double what Metrocall Inc. paid to acquire ProNet Inc., which had a similar number of units in service-might at first seem a little steep. But only at first.
“The difficulty is not going to be in the price,” Oburchay said. “If it throws off enough cash to make it worthwhile, anybody might be interested.”
Acquisitions from now on, she said, no longer will be about buying licenses or subscribers, unless they’re a “perfect fit” scenario like Metrocall and ProNet. Instead, they will be about buying cash flow. AT&T, she said, has good cash flow potential and for this reason, the $450 million price tag doesn’t seem too far off the mark.
In other words, if the addition of AT&T’s subscribers added enough cash flow to boost an existing paging carrier’s earnings before interest, taxes, depreciation and amortization (EBITDA), the asking price may be worth it. But purchasing AT&T’s paging unit, Oburchay explained, would have to be a debt-reducing move rather than one that would create debt.
“I don’t know anybody who would buy them unless the deal is unleveraged,” she said. “So their debt ratio would have to come down. It’s got to be a debt-leveraging acquisition or it’s not going to have a lot of takers.”
According to Oburchay, companies in a position to pay the asking price that would benefit from such a paging network include Metrocall Inc., Paging Network Inc. and Arch Communications Group Inc.
PageNet would not comment on its intentions, if any, regarding such a purchase, except to say that the company looks at any acquisition opportunity on an ongoing basis. Metrocall was unavailable for comment at press time.
Bob Lugee, Arch’s vice president of investor relations, said that Arch also does not comment on matters regarding merger or acquisition possibilities as a matter of corporate policy, but did say a sale could have some interesting ramifications to the paging industry as a whole.
“It’s attractive for anyone,” he said. “They have an asset generating a certain amount of cash flow … That would be of interest when acquiring 1.2 million units in service. The question is, what amount would another company be willing to pay to acquire those units and cash flow?”
One interesting outcome of this most recent paging industry development is that the mainstream press has used the sale talk to again define the paging industry as a dying one, suffering from the advent of personal communications services phones with short messaging service. This is an argument that began when the cellular phone first was introduced and continues to pop up sporadically in reference to PCS.
“I thought we were over this,” Oburchay said. “I’m kind of surprised, except that it makes for an interesting story. That AT&T is focusing more on its core businesses and was never really interested in paging is not as interesting.”
In fact, the paging unit would be only the latest in a series of ballast-shedding efforts by AT&T. The company has been looking to trim the fat since C. Michael Armstrong came on as chairman in October, having already announced the ditching of its credit card Universal Card Services and AT&T Solutions Customer Care contract customer-service units.
This would not be the first paging-related upheaval by the company either. Earlier this year, AT&T opted to pull all plans to implement the personal Air Communications Technology advanced paging protocol for two-way messaging under development by several vendors.
Analysts said they consider AT&T selling its paging business less an example of a weakening paging industry and more a normal shift in an industry that is moving toward greater consolidation. They said that unless AT&T is willing to fork over the cash to acquire and build a nationwide network, the company will never be able to play in a game that is moving steadily toward an oligopoly. Quite simply, AT&T is unwilling to play that game.
Yet the company’s apparent intention to sell the paging unit has renewed the debate of the paging industry’s future. One could argue that it was AT&T itself that led reporters to the conclusion that PCS will take over paging. After all, if the company is retaining its PCS unit and getting rid of the paging one, then touting PCS as the death of paging becomes a very self-serving statement.
Regardless, industry insiders almost unanimously agree that such cataclysmic predictions are nothing more than sheer fantasy. All numbers point to paging continuing to grow in the future. For the past five years, the paging industry saw compound annual growth of 28 percent, Oburchay said. She expects to see growth continue into the future at a lower, but still admirable, 15 percent to 20 percent rate.
“When paging continues to grow at a 20 percent level, it means people want pagers,” Oburchay said. “People forget that 15 percent is not a slouch industry. That’s nothing to sneeze at. If you can get 15 percent (growth) and continue to generate free cash flow, that’s a pretty good story.”
