Key to the merger agreement between Paging Network Inc. and Arch Communications Group Inc. is a massive debt reduction to be achieved through a proposed recapitalization plan that would convert their separate debt into equity of the new company.
Arch common shareholders will receive one share of stock in the new company for every Arch share they own today. PageNet shareholders will receive .1247 share of new stock for each PageNet share. Based on Arch’s closing stock price of $6.81 the Friday before the announcement, that translates to about 85 cents a share. Additionally, Arch will convert PageNet’s $1.2 billion in senior notes to 76.9 million shares in the new company through a registered exchange offer.
Between the shareholders and bondholders, Arch is offering about $612 million of stock in the combined company. Arch also will assume $804 million in PageNet bank debt, so the total purchase price could be set at $1.4 billion.
Some PageNet shareholders expressed dismay at the offer, which at 85 cents a share was almost 12 percent less than PageNet’s Friday closing price of 96 cents. But Ed Baker, Arch chairman and chief executive officer, said the deal is more valuable than that because shares in the new company will be worth more than shares of Arch on its own, a tactic used in Arch’s acquisition of MobileMedia.
“MobileMedia bondholders wouldn’t have done that deal if they thought they were just getting it at the $3 stock price Arch was at the time,” Baker said.
As part of the recapitalization plan, Arch will reduce its own debt by converting $28 million of its preferred shares and $384 million of Arch senior notes to 31.7 million shares in the new company.
The result will be that PageNet bondholders will own 44.5 percent of the new company and shareholders 7.5 percent, totaling 52 percent of the company. Arch shareholders will own 29.6 percent of the new company, noteholders will own 17.2 percent and Series C preferred shareholders will own 1.2 percent of the new business.
The resulting company will have 172.8 million shares and a market value of $1.08 billion, with $1.8 billion in bank debt.
Also, both PageNet shareholders and bondholders collectively will receive 80.5-percent interest in PageNet’s VAST Solutions subsidiary, which will be spun off into a separate entity once the merger is complete. Shareholders will get about 14 percent of the 80.5 percent figure, with the rest going to bondholders. The new combined company will retain the remaining 19.5 percent of VAST.
To what degree the VAST group adds to PageNet shareholder value is unknown. In its third-quarter earnings results, PageNet said VAST brought in $500,000 in revenue.
“VAST is the wild card in this transaction,” said William Power, vice president of equity research, wireless telecom, for Hoak Breedlove and Wesneski. “There is some potential upside for both bondholders and shareholders.”
While PageNet is not commenting on the expected value of VAST, analysts have looked to existing companies offering similar services, just as the newly public Aether Systems Inc. Aether closed its first day of trading at $48.43, reached as high as $72.62 and was trading at $66.25 at RCR press time.
Exactly how PageNet subscribers realize value from VAST also is unknown at this time. They could be given shares of VAST via a reverse initial public offering, or a participate in a private placement, or some other means. The details likely will be included in a Securities and Exchange Commission filing prior to a shareholder vote.
While PageNet shareholders may protest the deal, its consummation relies on the approval of bondholders, who hold the debt Arch and PageNet wish to convert into equity.
Bondholders of the $1.2 billion in debt saw bonds trading at 20 cents on the dollar before the merger announcement. Should they participate in the exchange offer fully, depending on Arch’s share price, they will get 38 cents on the dollar, Power said.
“The fact of the matter is, this deal gives bondholders more value than they had a week ago,” he said. “There’s no question this is definitely a better deal for bondholders. The company is against the wall. They have no choice.”
But 97.5 percent of bondholders must approve the plan for it to close out of court. As Arch’s previous merger effort with MobileMedia illustrates, it is difficult to get that many bondholders to agree on anything.
If 97.5 percent of PageNet bondholders do not participate in the exchange offering-as analysts expect-PageNet can enforce the merger as is through a prepackaged Chapter 11 bankruptcy reorganization, as long as at least two-thirds of the bondholders play ball. If less than two-thirds give their approval, then PageNet must pursue other bankruptcy reorganization plans.
Standard & Poor’s lowered its rating on PageNet following the announcement, citing concern’s over a likely default of PageNet’s senior subordinated notes if the deal is not consummated. The ratings agency previously lowered PageNet ratings with similar near-term liquidity concerns. However, it raised ratings on Arch, as the company gains 9 million subscribers and lowers debt by $1.6 billion, S&P said.
Moody’s Investor Service lowered its ratings on both PageNet and Arch as a result of the announcement, while Donaldson, Lufkin and Jenrette Securities Corp. cut PageNet to “market perform” from “buy.”
Wall Street’s reaction to the merger has done little to raise stock prices. PageNet stock rose from 96 cents to $1.03 the day of the announcement, but fell to 68 cents by RCR press time. Arch stock remains stable.
