When Arch Communications Group Inc. last week disclosed it was in talks with MobileMedia Communications Corp. about acquiring the bankrupt company, it sparked a rash of speculation about the future consolidation of the paging industry.

Yet MobileMedia has been a prime target for acquisition since it filed for Chapter 11 bankruptcy protection last January, and Arch has never been shy about its intention to continue acting as an industry consolidator.

That companies have approached MobileMedia with tentative acquisition plans is no secret. MobileMedia spokeswoman Krista Grossman has said before the company is in discussions with several companies about a possible acquisition, but would not say with how many nor name them.

“MobileMedia is legally obligated while in Chapter 11 to review all options that would maximize value to our creditors, including possible combinations,” with other companies, she said.

In fact, some analysts believe the current management at MobileMedia have no intention of running the company after it emerges from bankruptcy and the entire point is to fix it up and sell it.

“Turnaround specialists don’t particularly like to stick around afterwards,” said Bo Fifer, wireless analyst at BT Alex. Brown.

Regardless, MobileMedia has been given kudos for achieving a dramatic turnaround. While its disclosure statement and reorganization plan await court approval-expected sometime this summer-analysts predict the company will emerge from Chapter 11 with a healthy balance sheet and one of the lowest debt-to-cash-flow ratios in the industry, projected as low as 2-1. With such a low debt load, any company looking to deleverage itself would find MobileMedia attractive, given the right price.

Arch has been highly vocal about its longstanding commitment to consolidation. Its 12-year history of more than 30 acquisitions, as well as past statements by company officials, identify Arch as a bullish consolidator.

“We have said very consistently that we think this industry has to be consolidated. We would be interested in participating in consolidation in the sector,” said Arch Vice President of Investor Relations Bob Lougee.

This interest serves Arch well. Financial analysts believe only an acquisition transaction could significantly reduce Arch’s industry-leading $1 billion debt, a fact not lost on the company. Arch “believes that an acquisition of MobileMedia … would result in a reduction of (Arch’s) overall financial leverage as well as certain anticipated operating synergies and cost savings,” the company said in the Securities and Exchange Commission filing disclosing the talks.

Analysts concur.

“Almost any way you slice it, it would be a deleveraging event,” Fifer said. “They won’t do it if it doesn’t delever them.”

With MobileMedia boasting a post-bankruptcy cash flow of about $200 million and $750 million of enterprise value, Arch could buy the company easily and not gain any extra debt, he said.

Arch’s recapitalization effort also gives the company solid ground on which to pursue an acquisition. The recapitalization established a new $400 million bank-credit facility, a commitment from Sandler Capital Management to buy as much as $25 million in stock, and an impending private debt offer of $130 million in 12.75 percent senior notes due 2007, to which Standard and Poor’s last week assigned a CCC+ rating.

The move was an “emergency effort,” according to Fifer, that was necessary to simplify Arch’s complicated legal structure and eliminate amortization fees over the next three years. But Fifer also said the recapitalization was done is such as way that points to an intent to consolidate.

“The financial restructuring was undertaken with some form of deleveraging event in mind, such as an acquisition,” he said.

What was most surprising was not that Arch is considering making such a purchase, but that the company divulged the information before any semblance of a deal was complete.

However, the company was required to by law.

Arch disclosed its discussions with MobileMedia in an 8-K form filed with the SEC last Monday. Since Arch is planning a senior note debt offer, it is required to disclose any material event that could affect its financial situation, such as a possible merger.

According to the filing, the talks with MobileMedia would have Arch acquire MobileMedia for a mixture of debt notes and/or cash, as well as assuming certain MobileMedia liabilities and issuing MobileMedia creditors with equity interest in Arch.

The equity interest issued to MobileMedia would represent a majority of Arch’s equity. Yet, Arch, in the filing, said there would be no “change of control” following the equity change, and that Arch’s current directors would remain in command at the company, even if it transferred the majority of its equity to MobileMedia. Whether “change of control” meant a percent change of ownership or change in management was not clear and officials at Arch would not comment further outside the facts listed in the 8-K form.

Arch stressed it has signed no letter of intent nor entered any definitive agreement to acquire of MobileMedia. There are “significant issues to be resolved” in the matter, according to the filing.


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