I was struck by the apparent drop-off in RLEC M&A activity this year as described in Frontier Communications’ (NYSE: FTR) recent regulatory filings. Leading up to the mid-tier telco’s deal to acquire nearly 5 million access lines from Verizon (NYSE: VZ), Frontier was only considering one other major deal, and even that didn’t get very far.
It’s a stark contrast with last year, when offers were flying in every direction across the RLEC sector, including proposals for three-way mergers. Embarq and CenturyTel talked with at least five other companies about serious M&A offers before the two merged last fall.
And it wasn’t just the RLECs. M&A offers were flying in the CLEC sector, too, last year. The Wall Street Journal reported for the first time only last week that Paetec, Zayo Group and one other company all bid for part or all of XO Holdings with offers in the $1-billion range. This year, however, Qwest couldn’t even find a buyer for its long-haul network.
In January, Frontier approached one carrier with an offer to buy certain assets but was told they weren’t for sale. (Any guesses, folks?) Another carrier Frontier approached in March said it wasn’t interested in talking at all. Frontier did get some interest from one potential acquirer in the first quarter, but the two couldn’t agree on terms, and the would-be acquirer walked away a few weeks later, just as Frontier began talking to Verizon. As Frontier neared a deal with Verizon, it offered that lone suitor another shot; the suitor made an offer, but Frontier opted to take the Verizon deal instead.
I’d have thought recent RLEC M&A – coupled with this year’s thawing of the debt markets – would be fueling a lot more major consolidation moves, especially when you see the wide gap that now exists between merged players and everyone else. Sure, the economy was horrible in the first half of this year, but it was pretty volatile last fall, too, when everyone was looking to deal.
Instead, carrier M&A –at least RLEC M&A – is likely to take a breather while those recently merged assets are assimilated, according to Gerald Granovsky, vice president and senior credit officer at Moody’s Investors Service. “Given the volume of current activity, we don’t expect [RLEC] M&A to pick up over the next year, since everyone will be busy integrating the acquisitions,” he said. “Frontier will be limited in what they do for two years by the Morris Trust restrictions. After that, we expect more consolidation.”
“A wild card in the consolidation [trend] could be FairPoint,” Granovsky added. “At this point, it is toxic for other telcos. But if they get the operations straightened out and fix the capital structure, it could be an interesting opportunity for one of them.”
Looking at the chart, you’d expect Windstream to be particularly pressured to make bigger deals than its recent $330-million acquisition of D&E Communications or the sale of its equipment distribution arm last week. And according to Granovsky, it’s “highly possible” that Windstream was the one offering to acquire Frontier before it bought Verizon’s lines.
Clarification: That chart represents carriers’ access line counts if the last three major M&A deals — Embarq/CenturyTel, Frontier/Verizon and Windstream/D&E — had closed last December.