Tying up one of the loose ends caused by Cingular Wireless L.L.C.’s pending acquisition of AT&T Wireless Services Inc., the companies announced a multi-faceted deal with Triton PCS Holdings Inc. that will free Cingular of AWS’ non-compete clause with Triton, and in turn, cut Triton affiliation ties with AWS.
However, Triton investors were dismayed by the deal. As such, Triton saw its stock drop to a 52-week low immediately after the announcement.
The deal, which is contingent on Cingular closing its $41 billion acquisition of AWS scheduled for later this year, calls for the carriers to swap markets in Virginia, North Carolina, South Carolina and Puerto Rico; Triton to receive $175 million in cash from Cingular; the termination of Triton’s affiliation agreement and co-branding arrangement with AWS and the return of AWS’ 17-percent equity stake in Triton; and a long-term roaming deal between Cingular and Triton.
Triton will give up its Virginia network and customers in exchange for a handful of AWS’ network assets and customers in North Carolina and Puerto Rico, which Cingular already owns, as well as the cash considerations. Triton also will receive the $140 million in stock AWS currently owns as part of their affiliation agreement and gain exclusive control of the SunCom brand name. The deal also calls for Triton to have a long-term roaming agreement with Cingular through 2011, with preferred status through 2008 that includes reciprocal GSM roaming rates and non-reciprocal TDMA roaming rates.
In addition to gaining the rights to market services in Triton markets following the AWS acquisition, Cingular said the combination of AWS’ assets and the agreement with Triton will position the carrier as the leading wireless provider in the country.
“When all are finalized, we will have spectrum and coverage in all top 100 U.S. metro areas-yet another move in delivering on our promise to be the premier wireless carrier in the U.S.,” said Stan Sigman, president and CEO of Cingular.
The agreement also reduces some questions hanging over Cingular’s planned acquisition of AWS, which has garnered shareholder approval but still must withstand government scrutiny and possible asset divestitures before attaining a final OK.
The agreement is expected to have a greater impact on Triton, which has posted troubled financial results tied to increased competition and declining roaming revenues.
Triton noted the market swaps will fill in the hole in its North and South Carolina coverage and provide the carrier with 20 megahertz of spectrum in three of the nation’s top 50 markets in Charlotte, Raleigh-Durham and Greensboro at the expense of 30 megahertz of spectrum and a pair of large markets in Norfolk and Richmond, Va. The North Carolina licenses cover 5.3 million potential customers and include 189,000 subscribers, while the Virginia markets cover 5 million pops and include 350,000 subscribers.
In addition to its new contiguous footprint in the Carolinas, Triton picked up an additional 10 megahertz of spectrum in Asheville, Jacksonville and Wilmington in exchange for what it termed excess spectrum in Georgia consisting of 20 megahertz in Augusta and five megahertz in Savannah.
Triton also picked up AWS’ cellular assets in Puerto Rico, which cover the entire island and include a pair of top 50 markets in San Juan and Mayaguez, as well as about 240,000 wireless customers.
Overall, Triton said the deal will increase its licensed pops from 13.8 million to 18.3 million, raise the number of top 100 markets it serves from nine to 12 and increase its customer base from approximately 920,000 to 1 million subscribers.
“We like the deal a lot,” said Michael Kalogris, chairman and CEO of Triton. “It positions the company well in the Southeast and adds a lot of potential in Puerto Rico.”
Kalogris added that in conjunction with its new roaming deal, Triton will be able to “re-invent itself” and reduce its dependence on roaming revenues from 20 to 25 percent to between 5 and 10 percent. The company still has ample roaming opportunities through a deal with T-Mobile USA Inc., which lacks coverage in the Carolinas, and following the agreement with Cingular will be the only TDMA network provider in the region.
Part of Triton’s reinvention is also expected to include dumping AT&T Wireless co-branding. Kalogris said the company has already begun to ease out of the AT&T Wireless brand and expects the effort to be completed by the end of the year. Triton originally agreed to the multi-year co-branding initiative as a way to build up its name, but has recently been working on a yearly contract that will not be renewed.
Analysts were less than thrilled with the deal, with many noting the best outcome for Triton would have been an outright acquisition by Cingular. Triton will be forced to compete against a strengthened Cingular in its home markets as well as greater competition from Cingular’s wireline parent company, BellSouth Corp., which is putting an increased marketing push behind its bundled offerings with Cingular.
“We believe this is a key element to the deal, subjecting [Triton] to competition with Cingular in BellSouth’s wireline markets, where the company places a premium on bundled service offerings,” said Tom Watts, telecom industry analyst at SG Cowen. “We believe it will be difficult for [Triton] to compete on this basis.”
SG Cowen also pointed out that the pact would result in a 15-percent drop in Triton’s common stock count and a 20-percent decrease in enterprise value, and a 40-percent drop in 2005 earnings before interest, taxes, depreciation and amortization from $260 million to $160 million fueled by an expected 60- to 75-percent drop in roaming revenues.
Investors heeded analysts’ concerns, sending Triton PCS’ stock down nearly 41 percent last Thursday to a 52-week low of $2.52 per share.
“Investors definitely let their concerns be known,” said Kevin Roe of Roe Equity Research L.L.C. “Many thought Triton would have the upper hand in negotiating a deal with Cingular because of their non-compete clause, but it turned out that their hand was not as strong after all.”
Triton’s management brushed aside such competitive concerns, noting its SunCom brand name is well positioned in its markets and that it would continue to emphasize its nearly unlimited local calling UnPlan’s that have garnered an increasing percentage of its net customer additions.
“We want to be the value leader in our markets when compared with the national carriers,” Kalogris said.
Kalogris further bolstered Triton’s future by noting Triton would be in a position to expand its footprint, though he said he did not expect such a move until at least 2006.
If Triton continues to struggle after the deal with Cingular is completed, SG Cowen added that Triton could be targeted by T-Mobile USA as a take-over candidate, though T-Mobile could fill-in its lack of coverage in the Carolinas through upcoming spectrum auctions, which will include ample capacity in a number of major markets in the region.
