AT&T Corp. last week announced plans to buy Vanguard Cellular Systems Inc., ending months of speculation about who might acquire the independent cellular operator.
Vanguard has been rumored widely to be an acquisition target, fueled by a decision it made earlier this year to sell its non-core cellular assets in the South. It was thought the more compact footprint would make it easier for an acquiring company to fold Vanguard’s markets into its operation.
The company last week closed on the sale of markets it owned in Florida and earlier closed the sale of its South Carolina markets.
A Toronto Dominion report dated Sept. 15 quoted Dow Jones News Service as saying that Price Communications Corp. would be willing to purchase Vanguard for $25 to $27 per share.
The stock and cash deal between AT&T and Vanguard is valued at $23 per share for a total price of $1.5 billion, including $600 million in debt. Terms of the agreement call for each share of Vanguard to be exchanged at each shareholder’s option for either $23 cash or .39 of an AT&T share. The transaction will be limited to 50 percent cash and 50 percent stock, said the companies.
“I thought they could have gotten more,” said Christopher Larsen, a financial analyst at Prudential Securities in New York. “They were trading between $24 and $25 in August, and I thought they could have gotten between $27 and $31 per share.
“But the market has corrected since then, and the ability to get high yields has decreased,” continued Larsen.
Robert Price, president of Price Communications, said his company expressed an interest in purchasing Vanguard to the carrier’s adviser Wasserstein Perella & Co., but did not make a bid for the company. A condition of any merger, said Price, would have had to include a reduction in Vanguard’s corporate overhead. Price also said he would not have bought Vanguard’s paging interests.
Analysts believe AT&T eventually will sell Vanguard’s paging interests, but officials at AT&T say it is too soon to speculate.
The merger is thought to help AT&T fill in holes in its northeast coverage area, but the companies have several markets in common and will have to divest some properties to come under spectrum-cap rules before seeking final approval from the Federal Communications Commission.
Vanguard’s coverage area includes three clusters: a mid-Atlantic cluster that covers parts of Pennsylvania, New York and New Jersey; a West Virginia cluster, and a New England cluster that includes portions of Maine. The most serious of the overlaps between the two companies occur in Pennsylvania, West Virginia and Ohio where Vanguard owns cellular licenses and AT&T owns A-block personal communications services licenses.
“The fit makes sense because AT&T gets a network overnight,” said Larsen of Prudential. “They didn’t need the spectrum there because they already had it, but they didn’t have a network.
“Buying Vanguard gives them an instant network, customer base and employees,” continued Larsen, “And it removes a competitor.”
The deal also fills in second-tier markets where many of AT&T’s customers roam, which is key to the Digital One Rate pricing plan the company implemented this spring that eliminates roaming and long-distance charges. Larsen estimated Vanguard would have brought in $56 million in roaming revenues next year, half of which would have come from AT&T customers.
“Vanguard is an example of the kind of aggressive investment you can expect in wireless” from AT&T in the future, said Dan Hesse, president and CEO of AT&T Wireless Services Inc.
The transaction also may signal a trend that pure-play wireless carriers may be becoming an endangered species.
Stephen Leeolou, president and chief executive officer of Vanguard and one of its founders, said while independence was one of Vanguard’s most cherished possessions, a trend toward bundling wireless with other services at low rates makes it difficult for independent carriers to compete.
“The economics work best for operators that own the networks over which these key services are provided,” he said. “A company such as Vanguard that only owns the network to support the cellular portion of the mix (can expect) disappointing … financial results, although we could continue to add customers.
“This situation has created a new level of financial risk,” said Leeolou. “Size does matter.”
The companies expect the merger to close in early 1999 after receiving regulatory approval from the Department of Justice and the Federal Communications Commission. But, unlike other recent merger announcements, such as SBC Communications Inc./Ameritech Corp. and Bell Atlantic Corp./GTE Corp., telecommunications policy makers do not see the AT&T/Vanguard marriage as a huge threat to competition.
RCR Washington reporter Heather Forsgren Weaver contributed to this report.
