MobileMedia Corp. marked the end of the third quarter with poor earnings, anticipated bank covenant violations, increased churn, a decrease in net new subscribers and potential trouble with the Federal Communications Commission. The grim news sent MobileMedia’s stock for a dive.
Such are the travails of merging. By becoming the second largest U.S. paging carrier through its acquisition of BellSouth Corp.’s MobileComm division, MobileMedia said it remains optimistic it will regain its financial health through new management and by revamping customer service, slowing capital spending and raising money.
“Right now we’re going through some growing pains and working diligently to shape our destiny … This is a growth business. We have the infrastructure nationwide in [personal communications services] licenses. We have the national footprint. In short, all the ingredients are there, we just have to get the company through its adolescent period as promptly as possible,” said Mike Lorelli, who inherited the company’s financial challenges a month ago when he became chief executive officer.
On the day MobileMedia dropped its third quarter bomb, which included an estimate $35 million earnings before interest, taxes, depreciation and amortization-down from $42.8 million EBITDA in earnings in the second quarter-the company’s stock dropped about $2 to close at $4.50. Soon after, Moody’s Investor Service placed MobileMedia’s ratings under review for possible downgrade. Official third quarter results are scheduled for release Oct. 24.
Despite the fact MobileMedia’s immediate financial troubles are mostly its own, in the world of stocks and bonds, the company’s bad news reinforces speculation about paging stocks overall, particularly as broadband PCS-with alphanumeric capability built into the phones-enters the marketplace. Some analysts believe PCS could mean the end for paging in coming years. Others believe the services will succeed autonomously.
MobileMedia said it intended to raise between $190 million and $200 million by the end of this year, but was impaired by management changes in July, errors in records sent to the FCC and “choppiness in the bottom market.” The company said it would need to raise at least $100 million to comply with its bank covenants. “Our prospect of a default under our bank agreement is embarrassing and a lousy option,” said Lorelli.
MobileMedia is supported by investment management firm Hellman & Friedman, one of its largest stockholder, and is in discussions with a number of investment banks regarding financing. Options being considered include the issue of high-yield stock at the corporate level or of preferred stock, the sale of assets, and vendor financing. The company also is talking with Motorola Inc. and Glenayre Technologies Inc. regarding vendor financing.
MobileMedia has not to date considered selling its two nationwide narrowband PCS licenses, said Santo Pittsman, senior vice president and chief financial officer.
“Our biggest operating issue is churn,” said the company. MobileMedia’s churn rate increased to more than 3.8 percent and gross unit additions, estimated at 55,000 for the quarter, have slowed. Outside of churn that is inherent to the industry-an average of 2.8 percent per month at the end of 1995-the company attributes subscriber turnover to below par customer service in its Dallas call center.
In integrating MobileComm and MobileMedia, offices were closed, “a lot of experienced personnel were lost and the knowledge that they possessed … all of those things feed each other,” said David Bayer, chairman of MobileMedia’s board of directors.
MobileMedia may be in trouble with the FCC for reporting incorrect information regarding 400 to 500 of the company’s local paging stations, which represent 6 percent to 7 percent of the company’s total local licenses, said Lorelli. For each transmitter, a licensee must seek authorization to build, then complete construction within one year and report start of operation to the FCC. MobileMedia reported about 225 sites were constructed when they were not, and for other sites that were constructed, the company filed the paperwork late.
When MobileMedia discovered its errors, outside counsel was hired to conduct an investigation, which is nearly complete. The errors were reported to the FCC, but no action has been taken.
Moody’s is evaluating MobileMedia’s B1 rated $750 million secured bank credit facility, $250 million in B3 rated 9.4 percent senior subordinated notes due 2007 and $210 million in 10.5 percent senior subordinated deferred coupon notes due 2003.
Eric Goldstein, senior analyst, speculative rate gradings for Moody’s, said three key factors prompted the firm’s review of MobileMedia: problems integrating MobileMedia’s and MobileComm’s operations-which include increased operating expenses, increased churn and decreased cash flow-FCC violations and, most significantly, the expected difficulty MobileMedia will encounter raising future capital for building narrowband PCS networks.
“If you’ve just violated bank covenants, how are you going to” attract new capital? asked Goldstein. The “bank group will waive their covenant violations,” but MobileMedia has “damaged its reputation in the capital markets,” Goldstein commented.
The challenge to raise capital is intensified in a market where some already are nervous about how PCS will impact the industry, said Goldstein. Competition among broadband services will drive down costs for mobile phones and service to the point that the price gap between two-way voice and two-way messaging or paging is so minimal, consumers will pay the little extra for a phone, Goldstein forecast.
Between Sept. 25 and Oct. 2, MobileMedia’s stock dropped 42.6 percent. The majority of big paging companies experienced at least a slight decrease in stock price during the same period. ProNet Inc., Paging Network Inc., PageMart Wireless Inc., and Arch Communications Group experienced drops of between .9 percent and 3.7 percent. Metrocall’s stock fell 19.7 percent, and A+ Communications’ stock dropped 20.6 percent. Teletouch Communications Inc. remained unchanged and Mobile Telecommunication Technologies Corp. and Paging Partners Inc. had increases of 3.7 percent and 10 percent, respectively.
Collectively, the share prices of A+, Arch, Metrocall, MobileMedia, PageNet and ProNet dropped 32.4 percent between May 2 and June 26, according to Perry Walter, analyst for The Robinson-Humphrey Co., Atlanta.
Lorelli said MobileMedia plans to “slow down and defer … capital expenditures over the next three months,” in attempt to stay cash-flow.
