The purchase of Nationwide Cellular Service Inc. is a good short-term strategy for MCI Communications Corp., but the nation’s second largest long-distance company will need to acquire some infrastructure to become a competitive wireless provider, said a Virginia-based communications analyst.
MCI announced plans to become a solid, successful player in the wireless arena strictly through reseller agreements because it can mass purchase, has good distribution and is experienced in marketing and customer strategy.
Taking a step in that direction, MCI announced a merger agreement on May 22 to acquire Nationwide Cellular Services Inc., the nation’s largest cellular reseller, for about $190 million in cash, or $18.50 per share of Nationwide stock.
Nationwide, which reported revenue of $213 million in 1994, claims 275,000 subscribers in 10 major U.S. cities, including Baltimore, Boston, Chicago, Los Angeles, Milwaukee, New York City, Philadelphia, San Diego, San Francisco and Washington, D.C. Those cities encompass nearly 25 percent of the nation’s population, MCI said.
The acquisition will put MCI into 10 major markets immediately, without paying the high fixed costs of entry undertaken by many of its competitors, said Jon Foxman of BIA Consulting Inc.
“In the long run, however, the economies of scale available to carriers and their resultant profitability will put MCI at a competitive disadvantage,” Foxman said. “MCI’s future as a wireless power will be determined by its ability to leverage the benefits of its acquisition of Nationwide by taking the next step of acquiring a network infrastructure to serve as the financial backbone of its full-service provider strategy,” he added.
Nationwide has resale agreements in nine metropolitan statistical areas, with both A and B side coverage. All are short-term with no penalties, according to Nationwide Chairman Stephen Katz.
Analyst Jack Grubman of Salomon Brothers said the 35 percent discount Nationwide receives off retail rates probably beats what MCI could have gotten entering cellular without existing customers. Katz commented that Nationwide is experiencing 50 percent gross profit in some markets.
Grubman said that MCI is being financially prudent by using other people’s assets to get revenues and maximize returns. “We think that MCI’s strategy of resale will end up having a much higher return on invested capital and create much better shareholder returns than other companies that have spent billions of dollars on wireless spectrum,” Grubman said.
MCI views wireless as a product, not a technology, said Doug Maine, MCI’s chief financial officer.
“Nationwide will continue as a stand-alone entity for the short-run, operating under the Nationwide name, but it will be transitioned to the MCI brand over time.”
The MCI board is scheduled to meet June 7; the company said it expects the transaction to close in late summer or early fall. The merger is subject to approval by the MCI board of directors, Nationwide stockholders, regulatory bodies and other conditions. Nationwide’s board of directors voted in favor of the merger.
MCI has been a strong supporter of a wireless resale amendment by Rep. Joe Barton, R-Texas, part of congressional telecom reform legislation. The amendment, currently stalled and slightly altered, involves interconnectivity. But with or without the amendment, reselling is MCI’s choice, the company said.
Nationwide was profitable last year and its cash flow will be positive immediately for MCI. Nationwide’s stand-alone annual revenue for 1995 is estimated at more than $250 million, Maine said.
“Participating with MCI is at the top of our wish list,” said Nationwide’s Katz. He said the convergence of technology-pulling wireless, long distance and local access into the same arena-is no longer a futuristic vision.
“It is approaching reality,” Katz said. “The dexterity and capital assets needed to deliver this promise is staggering. Although Nationwide has proven to be very nimble and competitive in the wireless arena, we are today ill-equipped to compete in the wireline arena.”
MCI said Nationwide’s revenue per subscriber rate is 20 percent above the industry average, its churn rate was 20 percent below industry average and customer acquisition and overhead costs have been 30 percent below industry average, Maine said.
MCI’s current strategy of reselling is consistent with the company’s previously announced plans to add wireless services to its offerings but to avoid ownership of local wireless transmission facilities.
MCI announced in January purchase agreements with Paging Network Inc. and SkyTel Corp. Customers have responded positively to the service, MCI said.
Negotiations are underway with various “cellcos” to get arrangements for airtime to expand cellular service nationwide, said Maine.
Prior to the merger, Nationwide will distribute pro rata to its shareholders the shares it holds in Cellular Technical Services Co. Inc. at a rate of about .38 CTS shares for each share of Nationwide held. CTS develops, markets and supports real-time information management systems for the wireless communications industry.
MCI said it will pay the $28 million in income taxes the transaction will create for Nationwide.
