Metrocall Inc. took the latest step in the paging industry’s evolutionary journey last week, unveiling an acquisition, a new joint venture, a recapitalization plan and a strong financial partner tapped to fund future acquisitions.
Although negotiated separately, the various developments serve a common purpose-to prepare Metrocall for the final stage of the paging industry’s transition, both in terms of consolidation and advanced messaging.
On the consolidation front, Metrocall bought paging carrier NationPage Inc. from AT&T Wireless Inc. for $13 million in cash. Vanguard Cellular bought NationPage in 1998 for $28 million. AT&T then bought Vanguard. With a footprint throughout New England and the East Coast, NationPage adds about 80,000 subscribers to Metrocall’s base, elevating it to more than 6 million.
But this is but an appetizer for Metrocall’s next acquisition move, which many feel will be a competing bid for Paging Network Inc., currently in the process of completing a merger deal with Arch Communications Group Inc.
Key to this is Metrocall’s recapitalization, achieved in two stages. First is a $51 million investment from three sources-Internet carrier PSINet Inc.; private equity investment and leveraged buyout firm Hicks, Muse, Tate & Furst Inc.; and an unnamed third party described only as a strategic technology company. Each will contribute $17 million, buying 7.8 million shares of Metrocall’s common stock at $2.19 a share. Each partner will own 9.9 percent of the company.
Also, AT&T Wireless said it will exchange the $105 million in series C preferred Metrocall stock it holds for 13.2 million shares of Metrocall common stock, at $8 a share, to achieve a 16.9-percent equity stake in Metrocall, making AT&T its largest single shareholder.
Metrocall said it will use the investments to pay down debt, currently at 4.7 times cash flow. This figure will rise with the NationPage purchase, but the investments will offset this and leave Metrocall with a debt ratio of less than 4.5 times cash flow after all is said and done, the company said.
But the role of these investors does not stop at the $51 million investment. The agreement gives Hicks Muse the option to buy a greater equity stake in Metrocall specifically for future acquisitions.
Hicks Muse may buy another $25 million in equity-or about 8 million shares at $3 a share-as well as yet another investment of $50 million-or 12.5 million shares at $4 a share. That makes another $75 million beyond the current investment that Metrocall could have access to in addition to its various bank facilities, which Metrocall President and Chief Executive Officer William Collins, III, said will be used to acquire more paging carriers.
“With the involvement of Hicks, Muse, Tate and Furst as a major strategic and financial partner, our company is looking forward to participating in the final round of industry consolidation,” Collins said in a conference call.
Going further, Hicks Muse, Metrocall, PSINet and the other unnamed investor have established a joint venture called Incision, formerly known as Metrocall.net, to position Metrocall for the future of advanced messaging, as well as the convergence of wireless and the Internet.
Incision is designed to offer a suite of technology services such as broadband Internet access, paging, two-way wireless data and e-mail hosting to small/home office customers and middle-market enterprises.
The members of the joint venture represent what Metrocall called a dream team of players.
Hicks Muse has stated its intention to build a media empire. It has assembled limited partnership investment pools targeting companies with specific niches with media holdings, including transmission towers, movie theaters, radio, TV and outdoor advertising. It also owns International Home Foods, makers of Jiffy Pop and Chef Boyardee products.
PSINet is a major partner for Metrocall in this effort as well. The Internet carrier, DSL provider provides e-commerce and Web hosting services for global businesses and has 800 points of presence worldwide. It conducted 27 acquisitions last year alone.
Metrocall wouldn’t name the third member of the venture.
“They are a major, significant technology enterprise,” is all Collins would say. “They are a leading player in their space.”
Initial speculation is that it is Covad Communications, a DSL and high-speed Internet provider with which Metrocall partnered when forming the Metrocall.net division. Metrocall is expected to name the partner this week.
With its cards assembled, the speculation begins as to what kind of hand Metrocall will play.
The company would not comment on its interest in PageNet or any other company specifically.
“We haven’t said for sure we’re going to go after PageNet or somebody else,” said Vince Kelly, Metrocall chief financial officer.
Collins only said Metrocall is targeting companies with large business customer bases.
“We will not be looking at reseller bases or focus on the lower end of the spectrum,” he said. “It is the business customers and those companies that have that focus … There are eight major players in this universe. We believe there will be two, no more than three, by the end of the year 2000.”
Those eight players are PageNet, Arch, WebLink, Metrocall, AirTouch Paging, Ameritech, MCI WorldCom Inc. and TSR Wireless.
However analysts almost universally expect Metrocall to make a play for PageNet. Although not officially confirmed by either company, it is almost common knowledge that Metrocall approached PageNet with a merger proposal last year.
In a Securities and Exchange Commission filing that detailed the Arch merger plan, PageNet admitted it had been approached by another company before Arch, but said the terms were not agreeable, offering no further details. Analysts say Metrocall was the company but its plan relied too heavily on debt. Last week’s recapitalization and equity investment options alleviate that concern.
In addition, few feel PageNet has the shareholder support needed to approve its merger deal with Arch. This, combined with the recent announcement that it cannot pay its senior notes, has many expecting PageNet will try to enact the Arch deal through a prepackaged bankruptcy filing. In bankruptcy, bondholders have the option to choose another plan, potentially giving Metrocall the room needed to make its play.
An aggressive consolidator, Metrocall was rumored to have attempted a similar intervention of Arch’s merger with MobileMedia, although the company officially denied it.
If anything, last week’s announcements lit a fire under Metrocall’s stock. It rose 211 percent the day of the announcement to close at $6.31. Friday, it continued to climb, rising another $5.31 to $11.62.
