The announcement of a proposed merger between a large New York investment firm and CommNet Cellular Inc. increased CommNet’s already high profile in the rural cellular market while boosting the value of the company’s stock by nearly 15 percent.
CommNet and Blackstone Capital Partners Merchant Banking Fund signed a $718 million merger agreement in which Blackstone plans to acquire 87 percent of CommNet stock, most of which currently is held by institutional investors and company management and employees.
Under terms of the agreement-announced May 28-Blackstone will pay CommNet investors about $36 per share. In recent weeks, the company’s stock has been trading in the $25 to $30 range. Following the announcement of the merger agreement, CommNet stock soared $4.81 per share to close at $34.38.
“The investment community was not rewarding companies like ours that outperformed and was punishing those companies that did not perform up to standard,” said CommNet President and Chief Executive Officer Arnold Pohs. “In light of the strong operating performance we have continued to attain, that lack of recognition was inhibiting the price of CommNet stock.”
Pohs, who has guided CommNet since 1989, will remain in control of the company. “Although the makeup of our board of directors will change, our management structure will remain identical to what it is today,” he said.
CommNet operates, manages and finances mostly rural U.S. cellular telephone systems in 82 markets in 14 states with a proportionate interest in 3.5 million pops. Pohs believes-and Blackstone is betting-that CommNet’s dominance of the rural cellular markets in which it operates will continue. “Our perception is that we will not face PCS competition because of the lack of population density in the areas we serve,” Pohs said.
Blackstone, a private, New York-based equity fund manager with $2 billion in assets, was founded in 1985 by financier Peter G. Peterson. The company’s main businesses include strictly friendly principal investments, real estate investments and asset management, restructuring and merger-and-acquisition advisory services. Although Blackstone has had an ownership interest in a Mexican cellular concern, this is the company’s first foray into the U.S. cellular business.
“CommNet is well positioned to continue growing rapidly in its rural markets where cellular penetration is increasing,” said Blackstone President and CEO Stephen A. Schwarzman. “The combination of CommNet’s strong management team, leading market positions and well-developed cellular infrastructure together with Blackstone’s financial resources should allow CommNet to realize its full potential.”
“We are delighted to team with Blackstone and be the beneficiaries of their superior financial experience, expertise and strength,” said CommNet’s Pohs, who sees Blackstone’s time frame for holding the company as “three to eight years-although a strategic buyer could come along at any time and make an offer you can’t refuse, always a possibility in this business.”
Lehman Brothers analyst John Bensche thinks the CommNet-Blackstone deal could be a precursor to additional mergers. “Other rural cellular stocks could fall in the cross hairs of financial buyers,” Bensche said. “A financial buyer underscores the fact that these cellular companies have been undervalued by the public market in a hasty judgment that competition will be troublesome. Sophisticated buyers are now stepping to the fore and snapping up good companies at a premium to the public market, but still below the intrinsic values as determined by the free cash flows.”
The merger agreement provides that in no event can more than approximately 590,000 shares of CommNet common stock (about four percent of the currently outstanding shares) be retained by present CommNet shareholders. If shareholders elect to retain more than 590,000 of the outstanding shares, then the shares available will be prorated among those electing to retain shares and cash will be paid for all other shares. If shareholders elect to retain fewer than 590,000 of the outstanding shares, the remaining available shares will be prorated among those electing cash.
The transaction, in which Blackstone plans to invest up to $142 million of equity, is subject to certain conditions including the approval of CommNet shareholders and the Federal Communication Commission, the expiration of antitrust regulatory waiting periods and the funding of financing arrangements.
“Optimally,” Pohs said, “we hope to close the transaction by the end of our fiscal year on Sept. 30. Realistically, with the changes underway at the FCC, it may take a bit longer-up to six months-to complete the deal.”
