Metrocall Holdings Inc. and Arch Wireless Inc.-the nation’s two remaining independent paging and messaging carriers-announced a major plan to merge operations in an effort to forestall massive revenue declines as well as safeguard against the rapidly growing threat from the mobile-phone industry.
If approved, the merger could also represent the conclusion of years of consolidation within the dwindling paging and messaging industry.
“The merger of Arch with Metrocall will not change the competitive landscape … but it will help extend the lifecycle of our business,” said Vincent Kelly, Metrocall’s president and chief executive officer. Kelly will head the newly combined carrier. “This merger is critical to our long-term success.”
The deal, pending approval from shareholders, antitrust regulators and the Federal Communications Commission, is expected to be completed in the second half of this year. The combined carrier will operate under a new, as-yet-undecided brand, and its common stock is expected to be listed on Nasdaq. The carrier will be based in Metrocall’s headquarters of Alexandria, Va., with operations in Dallas; Westboro, Mass.,; and Jackson, Miss. Carrier executives said layoffs are a likely result of the merger-the two carriers employ a total of almost 4,000 workers-but that specifics had not yet been decided.
Also undecided is the new carrier’s management team. Metrocall and Arch will appoint equal numbers to the new board of directors. Metrocall’s Kelly will act as president and chief executive officer, and will choose the new carrier’s management team from among Metrocall and Arch executives. Kelly said the management team will comprise “the best possible combination of both firms’ considerable management talent.” However, Arch’s Chairman and CEO Ed Baker, as well as Arch’s president and executive vice president have said they plan to leave the business after the close of the merger.
The blockbuster union is the culmination of years of consolidation within the ailing paging and messaging industry, which has been spiraling downward since the late 1990s. Indeed, according to those in the industry, the number of paging and messaging subscribers has dwindled from a high point of about 40 million in 1998 to as few as 12 million today. Arch and Metrocall combined count around 7 million subscribers. Such declines are the inverse of the mobile-phone industry, which has grown from around 80 million subscribers in 1998 to more than 150 million today.
The industry’s troubles have sparked some drastic moves. Over the past several years, device provider Motorola Inc. and infrastructure vendor Glenayre Technologies Inc. have exited the business. VCP, SunTelecom, PerComm and Huntec have since taken over the device side while GTES and ISC Technologies Inc. manage the infrastructure business-although innovation essentially has ground to a halt. On the carrier side, MobileMedia, PageNet, WebLink Wireless and others have been swallowed in acquisitions, while carriers like TSR Wireless have simply shut down. Even Arch and Metrocall have shed debt through Chapter 11 bankruptcy filings. SkyTel Communication Inc. (owned by MCI), SBC Paging (formerly Ameritech) and Verizon Wireless’ paging business are among the last of the industry’s providers.
Those remaining in the paging and messaging industry argue that there is still a market for such services. Hospitals, delivery companies and other businesses represent the bulk of the remaining user base. However, Metrocall’s Kelly said mobile phones are popping up in even these last few bastions of paging, as some hospitals have begun installing micro-cell transmitters for mobile phones in order to replace their paging services.
Under terms of the Metro-call/Arch merger, a new holding company will be formed to own both carriers. Metrocall’s shareholders will receive $150 million in cash and 27.5 percent of the combined carrier. Arch shareholders will exchange their Arch stock for stock in the new carrier, and will own 72.5 percent. The carriers said the cash generated by the newly combined carrier will be sufficient to retire all of the debt associated with the cash portion of the transaction, leaving enough money for future dividends, stock repurchases and other uses.
The companies said the structure of the deal, including the cash paid out to Metrocall’s shareholders, will preserve the possibility of retaining Arch’s tax attributes. However, company executives declined to elaborate, explaining that tax and merger details should be filed with the Securities and Exchange Commission in the next few weeks.
Some Metrocall shareholders criticized the terms of the merger during a corporate conference call. They argued that, with almost three-quarters of the new company, Arch shareholders seemed to be gaining most of the merger’s value. Arch’s stock shot up almost 30 percent to $31.01 per share following the merger announcement, while Metrocall’s stock dropped about 10 percent to $67.75 per share.
“As a Metrocall shareholder, I’m extremely disappointed in the deal here,” said one investor during the carriers’ conference call. “As probably representing most Metrocall shareholders here, I don’t think we’d be in agreement with this kind of plan. I think that something better has to be put on the table.”
Metrocall’s Kelly said the deal was in the best interests of all shareholders, and that forthcoming SEC filings would further outline his reasoning. Kelly repeatedly declined to discuss the upcoming SEC filings.
