In a deal loud with industry-shaking repercussions, the nation’s top two paging carriers announced their intention to merge last week, raising the consolidation bar to a level as yet unseen in industry’s history.
Arch Communications Group Inc., the second-largest paging carrier, emerged as the victor in this latest consolidation round with an offer to buy rival No. 1 carrier Paging Network Inc. for about $1.4 billion in stock and assumed debt.
The new company will keep the Arch name, Nasdaq ticker symbol and headquarters in Westborough, Mass. Much of PageNet’s Dallas operations center will be retained. John Frazee Jr., PageNet chairman and chief executive officer, will be chairman of the new company, while Arch Chairman and CEO Edward Baker Jr., will serve as CEO.
PageNet’s VAST Solutions subsidiary will be spun off, and PageNet shareholders will receive a pro rata distribution of 80.5 percent of PageNet’s interest in VAST at that time.
A combined Arch-PageNet would result in the largest carrier in the nation by far, with 16 million customers and an estimated annual operating cash flow of about $535 million and annual net revenues of more than $1.7 billion. It also would operate PageNet’s nationwide two-way ReFLEX 25 paging network.
In particular, the merger would form a highly deleveraged paging carrier free of the debt strain that has hindered the two carriers’ separate efforts to compete in the new wireless arena, and could lead the way for others to follow.
“We recognize that the future of our industry lies in wireless information and wireless instant messaging,” said Arch’s Baker. “This is going to require strong sales and marketing efforts and robust wireless messaging networks. You need to invest in sales and marketing and the technology of your network. To do so, you have to be financially flexible. By trading equity for debt, we can do this.”
“Both (Arch and PageNet), as wireless messaging companies, have significant debt, which makes it difficult to accomplish the objectives of making traditional paging profitable as well as make the emerging advanced messaging business viable,” said Scott Baradell, PageNet vice president of corporate communications.
The merger is the latest, and possibly last, move by Frazee since he took over control of the company in August 1997, following PageNet’s VoiceNow rollout fiasco, when he replaced Glen Marschal as president and CEO.
Frazee initially earned praise for his personnel choices during the ensuing management restructuring, with PageNet stock climbing from about $9 to a high of $16.50 in his first eight months. But the honeymoon soon ended. PageNet’s stock price fell consistently over the following year to a low of 59 cents in mid-October.
Much of the fall had to do with the drawn-out reorganization effort Frazee implemented to centralize PageNet’s various regional businesses to centralized Centers of Excellence. This reorganization ate deeply into PageNet’s capital expenditures during a time of falling revenues in the face of customer base rationalization and increased price competition. The VAST subsidiary has yet to bring in significant revenue.
As a result, PageNet was forced to borrow heavily from its bank lenders to continue operations, raising concerns about its near-term liquidity as several times it came dangerously close to defaulting on its loan covenants.
Many financial experts see the merger as PageNet’s only option to avoid bankruptcy-a growing concern all year. This was reaffirmed by what analysts called a disastrous third-quarter earnings report PageNet released the day after the merger announcement, featuring a net loss of $49.4 million, or 48 cents a share, net revenues of $231 million, cash flow of -$34.4 million and a 462,000-unit subscriber base reduction.
“The financial results and operational results continue to deteriorate,” said William Power, vice president of equity research, wireless telecom, for Hoak Breedlove and Wesneski. “I think they needed to pursue some kind of transaction to stave off bankruptcy.”
A sign of how important the merger is to PageNet is that the agreement allows PageNet to solicit the consents needed for a prepackaged Chapter 11 bankruptcy backup plan should the out-of-court agreement fail to win bondholder approval.
According to Baker, PageNet’s Frazee approached Arch with the transaction offer.
“I give credit to Jack Frazee,” Baker said. “He had the vision of putting together the two largest messaging companies in the United States. In an industry that reveres consolidation, putting together the two largest is a compelling move and an industry-changing event.”
Baker said together the companies can meet the challenges of a new wireless landscape, including new competition from packet-data carriers offering messaging services, such as BellSouth Wireless Data L.P. and American Mobile Satellite Corp.
The combination also creates a company that can serve as a strong paging industry leader with the ability to set a new pace for the business’ future.
“Clearly, the new entity is a strong company,” said Power. “Ideally, they can use that clout to rationalize the competition that has plagued this group for years.”
“It’s clearly a very good deal for Arch and PageNet,” Baradell said. “PageNet and Arch together are in a much stronger position to compete in what is a much broader wireless competitive market. Both companies benefit from a stronger financial foundation.”
If anything, the merger places more pressure on the remaining paging carriers to consolidate. All eyes now are on PageMart Wireless Inc., Metrocall Inc. and AirTouch Paging.
Metrocall is a known consolidator not shy of chasing bigger deals with an eye for the No. 1 position on the chart. It has a resale agreement with PageMart, under which the two will share a two-way network buildout process, which some see as a getting-to-know-you deal that may result in a merger.
AirTouch, which boasts a profitable paging business, also is part of that resale alliance. AirTouch and PageMart both are based in Dallas, and their management teams are said to be very close. Speculation exists that AirTouch either may buy PageMart and incorporate it into the overall company, like what MCI WorldCom Inc. did with SkyTel Communications Inc., or spin off its paging operation and merge it with PageMart.
Arch is yet another company involved in the PageMart resale alliance, a relationship Baker said will be impacted by the PageNet acquisition since Arch will operate PageNet’s existing two-way network.
