In what is no doubt the single-largest transaction in the history of the paging industry, Arch Communications Group Inc. and MobileMedia Corp. confirmed they have completed a definitive merger agreement under which Arch will acquire MobileMedia for a combination of cash, stock and the assumption of certain liabilities.
The deal creates the second-largest paging carrier in the country, with about 7.5 million subscribers and more than $815 million in net revenues on a pro forma basis. The deal is expected to close in the first quarter of 1999.
Both companies hailed the agreement as mutually beneficial. “The transaction extinguishes our obligations to our creditors. It’s an extremely good deal for them,” said Ron Grawert, chief executive officer of MobileMedia, which has been under Chapter 11 bankruptcy protection since January 1997.
“The scope of the company changes dramatically. Now, we have local, regional and national paging coverage in all 50 states,” said Ed Baker, chairman and CEO of Arch. “I think it’s good for Arch and MobileMedia, but it’s also good for the entire paging and messaging sector.”
The announcement itself was not particularly surprising, as Arch filed an 8-K form with the Securities and Exchange Commission in June disclosing it was considering such a buy, a required admission prior to its senior debt note offering. One source close to the talks described it as “one of the worst-kept secrets in the country.” However, the financial details remained a mystery until the official announcement.
The transaction will relieve MobileMedia’s $649 million responsibility to its secured debt holders and the $480 million owed its unsecured creditors. Arch will settle those debts in a rather complicated transaction involving a combination of cash and stock. In return, Arch will gain a needed nationwide network presence in larger markets, large and lucrative business accounts and a lower debt ratio. However, its overall debt figure will rise to $1.3 billion.
The price tag is much more involved than the initial reports of $479 million. From MobileMedia’s perspective, the company is receiving cash, stock and the assumption of liabilities equivalent to between $750 million and $800 million.
Arch will pay MobileMedia $262 million in cash and assume another $60 million in liabilities, totaling $322 million. Then, Arch will issue shares of its common stock within a range that depends on how well Arch stock trades during a defined period. If the stock trades high, Arch will issue 48.8 million shares; if low, 57.7 million shares and if average, 52.1 million shares.
The value of this stock will be determined based on 8.2 times the combined companies’ cash flow, or enterprise value, less combined debt-which works out to about $650 million.
Taking the mid-range stock scenario, the 52.1 million shares will be valued at $8.44 each, a total of $440 million. That figure added to the $322 million combined cash and liability assumption totals $772 million.
MobileMedia secured creditors will get $479 million up front, $262 million in cash-which Arch will borrow from its newly recapitalized bank facility-and the remaining $217 million from the proceeds of a stock-rights transfer to the unsecured creditors. MobileMedia will pay off the remainder of its secured debt through a separate sale of its tower business for $170 million.
MobileMedia’s unsecured creditors, through the stock-rights transfer, will be able to acquire for cash the range of stock explained above, as well as warrants to buy another 2.5 percent to certain unsecured creditors agreeing to act as standby buyers of any Arch shares not bought in that transaction.
Depending on the number of shares issued, MobileMedia unsecured creditors will hold a combined 65.6 percent to 69.3 percent equity stake in the company, but because those shares will not be held by a group or by several people acting as a group, there will be no change of control.
A combined Arch/MobileMedia will create a whole new company. Arch had a strong direct sales distribution channel and will now gain a national retail presence from MobileMedia, which it lacked. Marketwise, Arch was limited to local and regional coverage, particularly in the Midwest and Southeast. The acquisition gives Arch a nationwide network with presence in all 50 states and into such large markets as San Francisco, New York and Boston where it had no facilities-based presence before. MobileMedia has presence in the top 100 markets in the country, covering more than 95 percent of the population.
Also, Arch will gain a more diverse customer base. The company mostly had residential consumer and small-business accounts. With MobileMedia, it will add to that a large number of higher-tier corporate accounts.
Arch’s only narrowband personal communications services interests were a minority stake in Benbow PCS Ventures, which holds a 50/12.5 NPCS license, and a 10-percent equity in InFLEXion carrier Conxus Communications Inc. The acquisition of MobileMedia gives it two more NPCS licenses that it will fully own and which MobileMedia already has begun building out.
Finally, Arch emerges from the transaction with a much-needed reduction in debt-to-cash-flow ratio.
“The only critical thing I’ve heard about Arch is that our debt leverage is too high,” said Baker. “This acquisition will move Arch to a debt leverage ratio in line with the rest of the industry.”
By borrowing from its bank facility to fund the cash portion of the deal, Arch’s overall debt load will increase from $1 billion to $1.3 billion. However, Arch will see cash-flow increase from $141 million to $240 million post merger, reducing Arch’s debt to about 5.6 times earnings before interest, tax, depreciation and amortization-from 7.1. Arch said it expects additional increases in cash flow and reduction of debt after the first year following the acquisition, expected to result in an annualized cost savings of $25 million.
Standard and Poor’s placed its ratings for Arch on CreditWatch, a positive step reflecting the company’s improved financial and business risk profile, the rating agency said. The single D rating on MobileMedia’s $480 million subordinated debt will be withdrawn. The CreditWatch decision was made in response the 5.6 times debt ratio, increased cash flow and annualized cost savings of $25 million, as well as other operational positives, S&P said.
The transaction will be implemented through a new reorganization plan MobileMedia would have to submit to the U.S. Bankruptcy Court for the District of Delaware.
“The fact that MobileMedia is emerging from Chapter 11 has absolutely no impact at all on the integration process of the plan,” Baker said. “What it means … is that it complicated the acquisition process, but nothing on the integration plan.
“They’ve got first-rate people and first-rate systems,” he continued. “I personally feel badly that the past management failed at its integration efforts. It gave MobileMedia a bum rap.”
Baker said the turnaround effort undertaken by the industry played a substantial role in Arch’s decision to pursue the company.
As to the management structure of the combined company, Ed Baker said there is “no question” that Joe Bondi, current MobileMedia restructuring chairman and managing director of the turnaround firm Alvarez & Marsal Inc., would leave the combined company and that Baker would assume the role of chairman and CEO. Most of Arch’s upper management team will extend their responsibilities to the combined company. Exactly which other members of MobileMedia’s management team will remain has not yet been decided.
