Metrocall Inc. finally made its long-awaited acquisition play by submitting a competing proposal to buy Paging Network Inc., hoping to edge out current PageNet suitor Arch Communications Group Inc. in the process.
Metrocall’s proposal-which offers PageNet a combined cash, stock and assumed debt deal-calls for the merger plan to work through a PageNet reorganization plan under Chapter 11 bankruptcy protection. It also offers PageNet’s senior subordinated bondholders an aggregate of $100 million in cash, 86.8 million shares of new Metrocall common stock and 81 percent of PageNet’s Vast subsidiary common stock.
Metrocall is offering PageNet’s unsecured creditors the full amount of their claims in cash. PageNet stockholders would get 13 million shares of new Metrocall common stock and 11.6 percent of Vast common stock.
To fund the transaction, Metrocall said it is negotiating with its current bank group for a new consolidated loan facility for about $946 million, a tranche of which would repay PageNet’s existing bank debt.
If the Metrocall bid succeeds, PageNet would have to pay an additional $40 million breakup fee to Arch, presumably covered by Metrocall.
Vince Kelly, Metrocall chief financial officer, valued the offer at $1.5 billion. Arch’s offer was valued at $1.4 billion when unveiled last November.
PageNet had no comment on Metrocall’s competing proposal. However, both Arch and Metrocall had much to say.
“Arch’s merger agreement is economically superior to the Metrocall bid. In addition to that, it has received Department of Justice approval and FCC approval. We’ve even begun pre-integration activities,” said Bob Lougee, Arch vice president of investor relations.
“You have to look at it on a cash-flow multiple basis. They offer cash, but you have to look at it in terms of equity. A lot of the Metrocall offer is identical to ours, but it reads as if it’s somehow better. You have to look at it on an apples-to-apples basis. They will say to look at it based on the present market value, but that’s not apples-to-apples.”
Arch wants its proposal viewed on a pro-forma basis, based on the value of the combined Arch-PageNet. Metrocall, however, points to existing valuations.
“It’s a better deal economically by any measure,” argued Metrocall’s Kelly. “We value our bid at a 40-percent premium to PageNet bondholders and a 9-percent premium to PageNet shareholders. Overall, we value the deal at a 35-percent premium to the entire deal, and that’s before you factor in Vast.”
Tejas Securities Group Inc. analyst Mike Hidalgo, a strong supporter of the merger effort, agreed. He said the Arch proposal would exchange stock for equity on a cash-flow multiple of six, while Metrocall’s offer does the same at a multiple of nine.
“If you’re a shareholder, you want the lowest cash-flow multiple possible,” he said.
Kelly disputed this.
“What they say is that Metrocall stock trades at a higher multiple. That’s true … We think we’re more valuable,” he said. “It’s just sour grapes on their part.”
Looking to the bond market, Hidalgo said PageNet’s bonds trade at about 44 cents on the dollar, whereas 50 cents on the dollar would be more indicative of Metrocall posing a serious threat. At the same time, Metrocall’s stock remains near $6.75 a share.
“If the market considered this a serious bid, there’d be massive moves toward shorting Metrocall’s stock and buying PageNet bonds,” Hidalgo said. “In fact, the reverse has happened … It’s a distraction to the marketplace, but I don’t think they have much of a shot.”
He reiterated his “buy” rating on all tranches of debt securities held by PageNet and Arch. He also set a “buy” rating on Arch’s stock with a target price of $33 on pro-forma equity of the combined companies.
Kelly, though, said he expects the Metrocall bid to prevail.
“Those guys (Arch) are sweating bullets,” he said. “We don’t think we can be beat. Arch was going to steal this company and we’re not going to let that happen.”
Metrocall’s offer came just days after three PageNet bondholders filed a petition with the U.S. Bankruptcy Court in Delaware seeking to force PageNet into bankruptcy, purportedly with the intent to accelerate the sluggish Arch-PageNet merger pace.
PageNet responded to the petition by announcing its intent to convert to a voluntary Chapter 11 bankruptcy protection status within the 20-day response time frame allowed following such a petition.
Once in Chapter 11, PageNet is required to consider any acquisition proposal put before it, which is all the vulnerability Metrocall needed to make its move. Earlier in the month, Metrocall publicly revealed it had broken off discussions with PageNet bondholders, who it said had requested an alternative proposal, but would not agree to terms of confidentiality.
Metrocall’s interest in PageNet has a long history. The company originally approached PageNet with a merger offer well before Arch and PageNet announced their agreement.
Arch’s Lougee said Metrocall has been trying to interfere with the merger since the beginning of the year.
“The fact that they submitted a bid is not surprising,” he said. “They had made some proposals to PageNet bondholders dating back to January and February this year. They have been interested in intervening for some time. We did expect that they would resurface at a time when PageNet filed for bankruptcy.”
And PageNet filing for bankruptcy protection is near certain. PageNet and Arch both originally filed registration statements with the SEC detailing their intent to achieve their merger through a prepackaged Chapter 11 bankruptcy filing, meaning it would have solicited bondholders and shareholders for permission first, then entered into bankruptcy to effectuate the merger. On Thursday both withdrew that registration statement.
“While we had hoped to obtain the requisite consent of our noteholders to the proposed plan of reorganization prior to a bankruptcy filing, we will now move forward to seek approval within the framework of the bankruptcy court proceedings,” said John Frazee Jr., PageNet chairman and CEO. His statements were made prior to the Metrocall announcement.
