Acquisitions Continue in Telecom

The telecom sector is awash in earnings announcements, and most analsyts seem to think they all point to one thing: continued consolidation, which will make way for some attractive buying opportunities for junk bond investors.

To be sure, there were a couple of other general trends, said Gary Jacobi, analyst at Deutsche Banc Alex. Brown. One, he said, was strong revenue, particularly from data services. And while residential voice services returned slightly weaker than expected revenues, overall revenue was stronger across the sector than expected. Another general trend was higher-than-expected expenses, which caused worse than expected EBITDA, he said.

Like other analysts, Jacobi looks for more consolidation in the industry partly because the competitive local exchange carriers are still in need of economies of scale: That is, none of them are really big enough to truly compete. And there are indeed some that have had good quarters recently, leaving them with highly valued stocks to use as currency to buy more market share.

Names he noted as likely acquirers include Nextlink and McLeod.

Nextlink has about $2.8 billion worth of high yield bonds outstanding in six separate issues and is one of the biggest names in the market. McLeod has $1.8 billion outstanding in five issues.

Conversely, other names that have not done as well, and consequently are takeover targets, include e.spire and GST, he said. E.spire has about $1.3 billion in the junk bond market in six issues, which are all non-rated. And GST also has $1.3 billion in debt outstanding in five different issues, which also are non-rated.

Others in the market noted the possibility that some of the massive communications networks are finally hitting the saturation point.

Aryeh Bourkoff, cable, telecom and media analyst at CIBC World Markets, said that with consumer prices falling, some of the issuers are offering new services - such as Web hosting - and even lowering their expectations.

Bourkoff sees continued upside in the names that enable the final connections to the consumer's home, paving the way for more acquisitions. He pointed to the recent Global Crossing/Frontier deal as just one example.

And that, he said, bodes well for other "connectivity" companies; namely the CLECs. Bourkoff also named GST as a possible takeover target, as well as Intermedia.