Rural cellular operators are reaping generous roaming revenues from nationwide operators. As such, larger players have become willing to pay top dollar to acquire these companies and eliminate the high roaming fees they pay to them.
AT&T Corp. and rural cellular operator Dobson Communications Corp., through a newly created joint venture, have agreed to acquire American Cellular Corp. for $2.32 billion, 14 times American Cellular’s 1999 cash flow, note analysts.
“Some might argue that there’s been a paradigm shift in the industry over the last few months,” said Dobson Chairman and Chief Executive Officer Everett Dobson in a conference call with analysts. “Clearly the values are up, clearly minutes of use have skyrocketed throughout the industry and particularly in the rural cellular part of the industry. I might argue that we thought the paradigm shift was happening a few years ago, and maybe the equity values are just now catching up.”
For example, said Dobson, American Cellular is seeing 48 percent year-over-year growth in roaming. His own company is seeing nearly 80 percent growth in some markets. American Cellular’s average revenue per user through June was $57; $25 of that figure is attributed to roaming revenue. Virtually all rural operators are benefiting considerably from nationwide calling plans large carriers like AT&T Wireless and Sprint PCS are offering. One-rate plans are leading customers to use their phones in rural areas where they wouldn’t have before.
Dobson said the goal of its joint venture with AT&T will be to increase American Cellular’s capital expenditure budget to keep the carrier’s exponential growth going.
“AT&T will direct more traffic toward the joint venture,” said Dobson. “This is a classic situation where we think more capital will translate to even more and more minutes of use … I can assure you that when we’ve added capital, we’ve seen the benefit. When we’ve increased the capacity on our networks, we seen a one-for-one benefit.”
AT&T Wireless is American Cellular’s largest roaming partner. For the first half of the year, AT&T Wireless accounted for 48 percent of American Cellular’s roaming minutes and 35 percent of the rural carrier’s roaming revenues.
Dobson and AT&T Wireless will begin a new five-year roaming agreement upon closing the acquisition, expected in the first half next year. Dobson said the roaming rate will be nearly the same as the rate it has with AT&T Wireless today. Dobson charges around 50 cents per roaming minute, while American Cellular has charged significantly more than that rate, noted Dobson. However, joint venture customers will pay a lower rate to AT&T Wireless than AT&T Wireless customers will to the joint venture.
“The strategy for both of us is to lower rates and make it up through volume,” said Dobson.
Dobson will be responsible for day-to-day management of the new joint venture, which AT&T and Dobson will own and control equally. The two companies will fund the acquisition through non-recourse bank debt by the joint venture and cash equity contributions of up to $370 million each from the two partners.
Dobson said it plans to issue an equity offering to raise the $370 million prior to the transaction, but hasn’t decided whether it will tap the public market.
“We don’t have to access the public market to complete the transaction,” said Dobson. “Bank of America did give us a fully underwritten commitment. That amount is $1.7 billion.”
American Cellular controlled about 398,000 subscribers at the end of September. The carrier owns licenses in New York, Wisconsin, Minnesota, Michigan, Kentucky, Tennessee, West Virginia, Ohio, Pennsylvania and Illinois. Dobson will expand its managed pops from 5.9 million to 10.8 million.
