Arch Communications Group Inc. announced a major restructuring plan for its U.S. business units-which includes cutting about 10 percent of its 2,800-strong work force-and initiated a new capital structure plan aimed at strengthening the company’s financial flexibility for future growth.

The work-force reduction is a streamlining effort that will condense Arch’s current seven geographic divisions across the country into four. The remaining offices-located in Saugus, Mass.; Charlotte, N.C.; Phoenix; and Columbus, Ohio-will have sole financial responsibility for its entire geographic area and will consolidate various administrative functions previously carried out at the regional or local level.

Additionally, Arch’s National Service Division, which had been responsible for national reseller and retail accounts, has been broken down into two divisions-sales and service-to become more of a support element in conjunction with the four geographic divisions. Those units also will provide sales support for major national accounts, maintain relationships with national resellers and develop new channels of distribution, Arch said.

Arch expects to complete the process in 18 months to two years. Arch said it expects the work-force reduction to occur through natural attrition.

Arch believes the new structure, when fully implemented, will save about $15 million a year. The company plans to reinvest a portion of those savings to expand sales activities, it said.

To account for the organizational changes, Arch expects to record a one-time restructuring charge between $15 million and $25 million during the second quarter.

Regarding the new capitalization plan, Arch said it received commitments from lenders to establish a new $400 million bank-credit facility, comprising a $175 million reducing revolver; a $100 million, 364-day facility that automatically converts on the last day to a six-year term loan; and a separate eight-year, $125 million term loan. The Bank of New York, Toronto Dominion Inc., and Royal Bank of Canada lead the 13-lender facility.

Arch said it also received a commitment from Sandler Capital Management to buy $23 million to $25 million of preferred stock convertible to Arch common stock at an initial conversion price of $5.50 a share. A cumulative dividend of 8 percent will accrue on the preferred stock, payable at Arch’s discretion or in cash or shares of Arch common stock. Sandler Managing’s director, John Kornreich, will be named to Arch’s board of directors.

Finally, Arch said it will offer $125 million of senior notes under Rule 144A. The company said it will use proceeds from the notes, as well as proceeds from the convertible preferred stock and the credit facility, to repay bank debt outstanding under the current credit facilities of Arch Communications Enterprises Inc. and USA Mobile Communications Inc.

Bob Lougee, Arch vice president of investor relations, noted Arch’s operational reorganization is a transition following a 12-year history of more than 30 mergers and acquisitions. Just four years ago, Arch had 400,000 subscribers, mostly in the East, and only a few hundred employees. Now, it claims about 4 million subscribers across the nation and 2,800 employees.

“I think the company’s structure served us well during our growth period, but going forward we needed to structure ourselves a little differently,” he said. “There comes a point in any cycle of a company in a growth industry when you ask yourself if you’re organized in the best way possible.”

The organizational restructuring effort began when Lyndon Daniels was named president and chief operating officer earlier this year.

“We believe our newly defined operating structure will provide significant economies of scale,” said Daniels. The four operating divisions and the national sales and services and corporate marketing groups report directly to him. “Over time, we think these scale advantages will produce measurable improvements in operating performance across all business units,” as well as in processing functions like customer service, order processing, billing, collections and accounting.

Financial analysts praised the recapitalization for two immediate positive results. First, it simplifies the confusing debt and legal structure the company had, a result of its many acquisitions. Instead of two credit facilities-ACE and USAM-Arch now will have only one. ACE will merge with the operating subsidiaries of USAM and will be renamed Arch Communications Inc., which will own all outstanding capital stock. The USAM credit facility will be terminated after these transactions close.

“It was a complex legal and capital structure,” Lougee said. “We wanted to try to simplify that. Another goal was to give ourselves some additional financial flexibility.”

The other plus is the new structure eliminates Arch’s amortization payments until 2001. “The new credit facility eliminates $156 million of principal payments that otherwise would have been required over the next three years,” said J. Roy Pottle, who in February was named Arch executive vice president and chief financial officer. “The new credit facility requires no principal payments until 2001 and is considerably more flexible than the existing 3-and-a-half-year-old facility.”

Debt downgrade

As a result of the recapitalization, Moody’s Investor Service downgraded Arch’s senior unsecured debt from B3 to Caa3, rated the proposed $125 million senior notes at Caa1 and rated its amended $400 credit facility at B3.

“The ratings reflect our expectation that Arch’s consolidated balance sheet will remain highly leveraged for the foreseeable future, absent a deleveraging transaction, as moderate internal EBITDA growth should only partially offset incremental borrowings required to fund capital expenditures and fixed-charge obligations.”

The recapitalization does little to reduce the company’s debt, and Arch is considered one of the more highly leveraged paging firms. Company debt for the first quarter increased to $1 billion, from $993.4 million in the fourth quarter of last year.

“Our debt leverage will really come down only slightly,” Lougee said.

Last April, the company announced its goal to reduce debt-to-cash flow ratio from 7.5 to 5.5 over several years. According to Lougee, that figure now is 7.4. After the recapitalization, in particular the private offering, it will fall to just more than 7. “Realistically, we would hope to get our leverage down to the 6.5 range by next year,” he said, barring any outside transactions.

According to Moody’s, Arch’s strategy “has achieved modest deleveraging to date, and we do not expect Arch to significantly reduce leverage over the intermediate term.”

Only a merger would significantly lower Arch’s debt load, analysts said.

“A transaction with another paging company would likely result in a deleveraging event in order for it to be permitted under the indentures, and would thereby likely improve Arch’s credit profile,” Moody’s said, adding it was unaware of any such pending transaction.

Arch has been quite straightforward about its views on consolidation.

“We have said very constantly that we think this industry has to be consolidated,” Lougee said. “We would be interested in participating in consolidation in the sector.”

Whether Arch would be an acquirer or an acquiree is still unknown.

Arch’s stock was at various levels of $5 all through May, but jumped to $6.10 by June 5. It fell back to $5 by press time.


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