The echoes of MCI WorldCom Inc.’s proposed acquisition of SkyTel Communications Inc. continue to ring loudly throughout the industry, as two other paging companies found themselves linked to telecom carriers last week.
In one case, rumors have surfaced that BellSouth Corp. is mulling an acquisition of Paging Network Inc. In the second and more concrete case, Sprint Corp. entered into a five-year resale relationship with PageMart Wireless Inc.
The deal between MCI WorldCom and SkyTel has drawn greater attention to the messaging industry, to the point where any agreement or rumored deal between a paging carrier and a telecom carrier now will be more closely scrutinized.
An early April report by Donaldson, Lufkin & Jenrette Securities Corp. predicted any deal between MCI WorldCom and SkyTel “would be a monumental event for the paging industry in not only validating the viability of the business but also perhaps in pointing out a competitive necessity for bundling messaging with other telecom services in the future.”
This indeed seems to be the case. Since the MCI WorldCom/SkyTel announcement, almost every large paging carrier is rumored to be a target of some other telecom player, be it a telco, Internet service provider or wireless company.
Almost universally scoffed and dismissed when first leaked, MCI WorldCom’s intended acquisition of SkyTel now is seen as the beginning of a pattern and not a fluke.
“We don’t see any one-time events in this business,” said Jeanine Oburchay, associate managing director at Bear Stearns & Co. “MCI started the trend and made other paging carriers attractive to other companies.”
Speculation that companies like BellSouth and AT&T Corp. may be in the market for a paging company is a marked change in thinking from just two years ago, when every telecom carrier in the country seemed intent on ridding itself of paging assets. Both BellSouth and AT&T once owned paging operations, which they have since sold. BellSouth originally owned MobileComm, selling it to MobileMedia in January 1996. MobileMedia has since been acquired by Arch Communications Group. AT&T just last year sold its paging assets to Metrocall Inc.
Now, popular opinion has shifted to the view that bundled messaging is necessary to be a player in the telecom business.
“People are recognizing that there is value in messaging and are trying to figure out ways to address the market,” said Darryl Sterling, wireless messaging analyst with the Yankee Group.
He said telcos jettisoned their paging interests in years past because the rapidly growing industry began getting out of their control. Low average revenues per unit and out-of-control subscriber additions became too difficult to manage in the face of other needs, like wireless voice and landline services.
But times have changed, Sterling said. Data traffic is quickly overtaking voice traffic on both wireline and wireless networks, highlighting the need to participate in the industry. However, telcos like Sprint and BellSouth “have no idea how to manage data,” Sterling said.
Buying a paging company with a management team experienced in messaging networks is one way to solve the problem. MCI WorldCom stated it is primarily interested in SkyTel’s management team, which has a proven success record in building and selling the first two-way paging network in the country. Analysts expect SkyTel’s team to manage any other wireless data acquisitions MCI WorldCom makes.
Telecom carriers also are interested in the current low per-unit price paging companies carry. With paging stock prices as low as they are, it doesn’t take much to offer paging shareholders a premium for their stock, although paging stocks have been on the rise since the MCI WorldCom/SkyTel announcement. Customers acquired on the cheap give telcos an inexpensive foot in the door to market bundled services in new homes.
These factors play a central role to the speculation of a BellSouth/PageNet merger. Both companies have needs the other can meet.
Although BellSouth already has a wireless messaging interest in the form of its BellSouth Wireless Data L.P. subsidiary’s Interactive Paging service, the messaging unit has had little success to date. While BellSouth will not reveal the number of subscribers using the Mobitex packet-based service, analysts estimate it remains in the low 20,000 range.
BellSouth recently formed a joint marketing partnership with PageNet, in part to gain access to PageNet’s sales and distribution department with hopes of ramping up its sales figures. The existing partnership has fueled the fire behind the takeover rumors.
As the largest paging carrier in the country, PageNet also has an attractive customer base of almost 10 million. That’s a large base to which BellSouth could market its vast array of telecom services. An added bonus is PageNet’s low $6-a-share stock price, which would allow BellSouth to buy its 10 million customers at a relative bargain.
For its part, PageNet could use some financial assistance. The company is dangerously close to running out of money to borrow, on which it relies to continue providing service. Analysts speculate PageNet had only about $16 million left to borrow under its loan covenants at the end of the first quarter, leading to further speculation the company would negotiate a waiver to those covenants in the near future.
But despite these needs, few think the BellSouth/PageNet rumor holds water.
“I find it unlikely at this point,” Oburchay said. “Strategically they are good partners, but I don’t think it is likely it will happen the way it was described.”
While PageNet’s low stock price would allow BellSouth to acquire the company’s subscriber base for little money, the reasons behind the low stock price would cause other problems, she explained. In particular, PageNet’s challenges in implementing its restructuring process have resulted in reduced cash flow.
“I don’t know if BellSouth would want to take on declining (earnings before interest, taxes, depreciation and amortization) right now,” Oburchay said.
Also at issue is what some analysts feel is the source of PageNet’s restructuring problems-leadership.
Some investors and financial experts have expressed a lack of confidence in PageNet’s management team. When President and Chief Executive Officer John Frazee launched the restructuring process more than a year ago, analysts widely praised the move. But the implementation of that restructuring has taken longer than expected. Just recently, PageNet implemented a second restructuring of sorts by reassigning several executives to a new operating subsidiary called VAST Wireless Solutions.
But the Yankee Group’s Sterling said these concerns miss the big picture.
“They’re the most forward thinking and strategic-minded paging company out there,” he said. “The value of PageNet is they’re positioning the company strategically for the future of wireless.”
