YOU ARE AT:Archived ArticlesPALMER WIRELESS IS STRUGGLING WITH HIGH COSTS OF COMPETITION

PALMER WIRELESS IS STRUGGLING WITH HIGH COSTS OF COMPETITION

Tough competition from other operators has led to increased costs for cellular carrier Palmer Wireless Inc., fueling speculation that the carrier is up for sale.

Fort Myers, Fla.-based Palmer won’t comment on what it calls “a market rumor” that it is looking for a buyer. The company is scheduled to release its first-quarter earnings on Thursday.

Palmer owns 18 A-side cellular systems, in both metropolitan and rural markets, branded Cellular One.

Last fall, Powertel launched 1900 MHz networks in three of Palmer’s metropolitan markets, Panama City, Fla., Dothan, and Montgomery, Ala. One Powertel promotion offered customers unlimited airtime for $50 a month.

PrimeCo Personal Communications Inc. launched service last October in two of Palmer’s markets, Panama City and Fort Myers. At the same time, Palmer’s established B-side competitors, such as BellSouth Cellular Corp., began beefing up their offerings in anticipation of competition.

Palmer’s reaction to this posturing led to these results for fourth-quarter 1996:

Sales and marketing costs went up 52.7 percent, to $8.2 million.

The cost to add a gross subscriber rose to $232, compared with $160 for the fourth quarter 1995.

As customers were lured away by other promotions, Palmer’s monthly churn rate increased to 2.1 percent compared with 1.6 percent in 1995. Churn for the year was 1.8 percent.

Net subscriber additions decreased 24 percent, to 18,191 compared with 23,890 additions in fourth quarter 1995.

“Increased phone subsidies, coupled with lower gross activations being spread over Palmer’s fixed marketing infrastructure are the primary reasons for the increase in the cost to add a gross subscriber,” Palmer said.

Analysts say these trends are expected to continue throughout the near future for Palmer and other cellular carriers as they face ever-increasing competition.

Smith Barney Inc. predicts Palmer’s churn will remain at 1.8 in 1997 and rise to 2 percent in 1998.

“We forecast net adds to peak over the next few years given higher churn rate, due to competition, and given the sheer size of the subscriber base, (and) greater disconnects,” said Thomas J. Lee, Smith Barney analyst.

Palmer reports having nearly 280,000 subscribers, and one of the lowest cash operating costs per subscriber per month in the industry, $29.

The company is adding 70 cell sites this year to its existing coverage area, to extend transmission for portables. Palmer continues to build a Time Division Multiple Access digital overlay system into its networks; it has a roaming agreement with AT&T Wireless Services Inc.

“There are many positive aspects to Palmer’s story, including its efficient operations, demonstrated by industry-leading 47 percent cash flow margins, and excellent management team,” Smith Barney’s Lee said, “as well as attractive middle-size markets, which would suggest the price received could be well above the stock’s current price.”

The stock has been trading at around $12. Palmer already is among the most expensive wireless stocks at present, Lee said, and “given its already efficient operations, Palmer does not offer” an acquiring company immediate cost-savings opportunities.

During the first quarter, Palmer acquired the Georgia 13 rural service area with the intent of tightening the company’s Georgia cluster. But while Palmer is positioning itself, more competitors are right around the corner.

BellSouth Mobility DCS will launch 1900 MHz networks in Palmer’s Cellular One markets of Savannah and Augusta, Ga. this year. BellSouth acquired the 10 megahertz of spectrum in January at auction.

AT&T is expected to launch its 1900 MHz service sometime this year in Georgia, where Palmer has three large markets, Columbus, Macon and Albany. Powertel is launching in Georgia as well this year.

Smith Barney said some potential buyers could be AirTouch Communications Inc., Bell Atlantic Nynex Corp., 360

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