NEW YORK-When it comes to further consolidation in paging, the industry in the United States has taken a deep breath and is waiting to exhale.
During 1995 and early 1996, the paging industry underwent rapid consolidation. “Public stock prices have been off considerably over the last nine to 12 months, and this puts a damper on some of the things operators in the industry can do,” said Brad Busse, chief operating officer of Daniels & Associates, Denver. “There will be a slowdown until the financial markets get comfortable again.”
By the end of 1996, the top 10 paging companies had about 80 percent of the 34.1 million subscribers, with the other 300 or so carriers dividing up the remaining slice of the pie, said Iain Gillott, manager of wireless communications research for IDC/Link Resources, Austin, Texas.
“[Paging Network Inc.] owns about 25 percent of the market and is doing OK,” Gillott said. “If you look at the difference in size among the top 10, it’s huge.”
The question no one has answered yet is how many paging carriers will be necessary in the tough marketplace of this low-margin business. Ultimately, Gillott said he believes, “PageNet will be left standing, but beyond that, it’s anyone’s guess.”
PageNet, with about nine million subscribers, “never has had a strategy to be an acquirer,” said Jeanine M. Oburchay, managing director, Bear Stearns & Co. Inc., New York. “Arch (Communications Group Inc.), with 3.3 million subscribers, is still digesting its Westlink acquisition and cleaning up its balance sheet to develop free cash flow.”
John Beletic, president of Dallas-based PageMart Wireless Inc., which has two million subscribers, said his company doesn’t preclude being part of an acquisition deal but isn’t involved in any such discussions at present. PageMart, he said, already has a nationwide narrowband personal communications services frequency, a large deal with Telefonos de Mexico, an agreement with Radio Shack and strategic alliances with several major American landline telephone companies.
However, Beletic said he believes the domestic paging industry “will see additional consolidation in a way that increases shareholders’ values, as opposed to the overpriced, high-leverage transactions of the last two years.”
With paging stock prices low and company valuations well below what they were a few years ago, even the biggest players like PageNet and Arch could be vulnerable to takeover. “But many companies we’d consider natural acquirers are too busy right now,” Oburchay said. “(Regional Bell operating companies) are trying to get into long distance. Long-distance companies are trying to get into local telephone service. Cellular companies are fending off broadband (personal communications services).”
The pause in merger-and-acquisition activity by paging carriers isn’t so much the result of bigger companies being preoccupied with integrating prior acquisitions, said Mark Roberts, managing director, Montgomery Securities, San Francisco. “The industry itself is ripe for consolidation, but the likely consolidators don’t have the wherewithal to do additional capital raising,” he said. “They leveraged themselves very highly when Wall Street wanted to lend them money, and they don’t have additional access to capital.”
Over time, Roberts said he believes it is likely that a few or several large players will control the entire domestic paging industry. “I don’t see why five is the right number as opposed to two or seven; the number depends on the consumer marketplace.”
The paging sector demonstrates all the characteristics for further consolidation, said Samuel L. May, research analyst for Pacific Growth Equities, San Francisco. “There is a need for nationwide branding, for leveraging investment over a large area because of continual downward pressure on subscriber rates, and that means big, lean and mean operators.
“The sector is poised for rebound. It still has some good cash flow characteristics. Prices are down, so it’s a good time for mergers, to buy cheap.”
Depending on the state of the capital markets, consolidation could pick up within the next six to nine months, May said. Similarly, Oburchay of Bear Stearns said the pace could accelerate after the next one or two quarters.
The next consolidation scenario may not only involve the biggest carriers acquiring the smallest. “We tend to forget that the (commercial) banks are still in there, and that some companies have considerable bank financing,” Oburchay said. “We may see some of the smaller companies come together.”
Busse of Daniels & Associates said he sees “the potential for things that look more like a merger than an acquisition, and there could be an element of that at the smaller company level.”
Because there isn’t always a direct correlation between the valuations of publicly traded and privately held companies, Busse said he thinks mergers would be more likely to happen between a public and a private company, as opposed to two private or two public companies.
Paging subscriber growth rates in the unrealistically high range of 40 percent have come to be expected. “Given where growth rates are headed, if the increases are in the 10 (percent) to 15 percent range, it will set off a panic that will cause a lot of the smaller players to offer themselves for sale,” said Roberts of Montgomery Securities.
But David Abraham, president of David Abraham & Co., Westport, Conn., begs to differ. “If growth subsided a bit, the little guys would be happy,” he said. “The biggest problem is getting capital to keep up with growth, and that’s a continual cash drain.”
Small players that provide good local service and local presence are in good shape. “Almost any local carrier can tie in to resell regional or national service,” Abraham said. “There certainly is some truth to the volume discount argument, but carriers don’t make money selling pagers; they make money selling airtime. A big carrier may be able to buy pagers for less money but it also has more overhead.”
Nevertheless, Abraham said he is starting to see some signs that smaller carriers may be looking to merge or be acquired. “You tend not to see announcements about small deals until after they’ve closed,” he said.
