The larger players in the paging industry have bellied up to the consolidation table and, with fork and knife in hand, are poised to dig in.
Still digesting its acquisition of ProNet Inc., Metrocall Inc. said its next serving will be the Advanced Messaging Division of AT&T Wireless Services Inc. Should the deal go through, Metrocall will buy AT&T Corp.’s paging unit for about $205 million-$110 million in cash and about $95 million in convertible preferred stock.
But Metrocall’s acquisition of AT&T is just the first course.
“I expect it to get more active than it has been,” said Jeanine Oburchay, associate director at Bear Stearns & Co. Inc. “I’ve seen historical waves of consolidation before, such as in 1995 … I think this year will be a year like that, but this time consolidation will be more for good reasons like deleveraging, or generating positive cash flow.”
Also waiting to dine is Arch Communications Group Inc., which has disclosed talks to buy bankrupt MobileMedia Communications Corp. Another known consolidator, privately owned TSR Wireless L.L.C., has stated it likely will pick up another company by year’s end.
“I think everybody is awaiting some continued consolidation, and I think that’s positive,” she said. “I don’t know of anything that wouldn’t surprise me right now. There are just so many possible combinations.”
Good price
Most consider the Metrocall/AT&T combination a good one, especially Metrocall.
“This is the most attractive large paging deal of the century,” said Steve Jacoby, Metrocall chief operating officer.
Here’s why: Metrocall gains additional footprint in several needed markets, a narrowband personal communications license, a powerful distribution and marketing partner and a reduced debt load, all for a price many consider a bargain.
“It looks like a great deal for Metrocall. They got a great price for it,” Oburchay said.
While AT&T never formally set an asking price, estimates ran as high as $450 million, a price many considered high.
“There were few who validated that number,” Oburchay said. “AT&T was not a property that was badly needed. Metrocall bought it because it got a good distribution agreement and a good price. But it’s not like AT&T had a nationwide network, or NPCS infrastructure or good profit margins or anything.”
“We’re number 2”
The Advanced Messaging Division gives Metrocall 1.2 million subscribers, which added to Metrocall’s base makes for a combined total of 5.3 million subscribers, firmly entrenching Metrocall as the nation’s second-largest paging carrier. Also, Metrocall wanted to expand coverage in the West and Northwest for some time, and the deal gives it a presence in seven states-Washington, Oregon, Utah, Minnesota, Missouri, Kansas and Oklahoma.
Also, Metrocall was planning a West Coast administrative center, and AT&T’s existing Seattle facility saves Metrocall the trouble and cost of building its own.
Alpha base grows
More important than the number of customers gained in the deal is the type. Twenty-three percent of AT&T subscribers are alphanumeric customers, compared with Metrocall’s 10.5 percent. Although it had no national presence, AT&T’s sales force was able to peddle high-end services to national accounts, most of which consist of 100-plus unit agreements.
It is precisely AT&T’s ability to target the higher-paying customer that makes the distribution agreement so sweet to Metrocall. The exclusive, 5-year national distribution agreement will have AT&T selling Metrocall paging services in AT&T’s 600 direct retail stores, adding to Metrocall’s existing 14-tier distribution system. The possibility of Metrocall’s paging service bundled with AT&T’s Wireless’ cellular, PCS services and long-distance services could give Metrocall added clout.
Should AT&T acquire a new paging operation, Metrocall will hold right of first refusal and the companies signed a 5-year noncompete clause. The companies also spelled out a 12-month brand transition plan to educate consumers that AT&T is now a Metrocall company and eventually make Metrocall the dominant brand name.
“A brand name like AT&T and its marketing power will be good for Metrocall,” Oburchay said.
NPCS on the cheap
Metrocall also picks up a nationwide 50/50 kHz narrowband personal communications services license on the cheap.
“We are very very pleased at the price we paid for the license, which obviously was well below” the market value, said William Collins III, Metrocall president and chief executive officer.
AT&T paid $80 million for that license at the original Federal Communications Commission auction in 1994. Metrocall paid about $30 million for it.
“In retrospect, Metrocall’s decision not to pursue NPCS licenses in the FCC’s original auctions has boded well for the company,” read a report by Toronto Dominion Securities.
“This network development will reduce the long-term cost of message delivery through frequency reuse and provide the spectrum capacity to allow Metrocall to experiment with new-data intensive applications,” Collins said, alluding to a possible future 1.5-way guaranteed messaging service. He said the company would announce strategic partnerships later this year that would detail its NPCS buildout strategy.
Debt load drops
Finally, the merger is expected to save Metrocall $8.3 million and result it a deleveraging from 5.3 times cash flow to 5.1. Because AT&T sold nationwide service, yet had no nationwide network, the company spent some $30 million a year reselling other carriers’ services, which affected profit margins.
Metrocall hopes to recoup about one-third of that amount-through natural churn and attrition-to its own platform, and thus see its debt load drop further. As an added bonus, Metrocall also will own the phone numbers AT&T assigned its customers.
Financially, Metrocall will pay AT&T $110 million in cash and issue about $95 million in series C convertible preferred stock to AT&T payable semi-annually at 8 percent of stated value, convertible into Metrocall common stock beginning five years after issuance and maturing after 12 years. If expected revenues or EBITDA of the acquired assets differ by more than 10 percent of the specified range, the purchase price and amount of stock will be adjusted based on a predetermined procedure.
Future plans
As far as future consolidation goes, Collins said he does not expect any further acquisitions until Metrocall completes its integration of AT&T paging.
“We have been very active consolidators and successful integrators of the industry,” Collins said. “For now our plate is full with AT&T, but that is not to say we wouldn’t continue to look at things as they become available.”
Tom Matthews, senior vice president of business development and integration, said it usually takes about six months to fully integrate a company, and hopes by the time the AT&T deal is closed-hoped for Sept. 30-the ProNet integration will be complete.
“With significant experience in integrating its prior acquisitions … we foresee a smooth integration,” said Toronto Dominion.
