Cash Infusion Spurs McLeod on Acquisition Trail

After competitive local exchange carrier McLeod received a $1 billion cash infusion - putting it squarely in the takeover game - the company's $1.8 billion of outstanding junk bonds saw an immediate boost of about two points. And telecom analysts say there are more gains to come in other names as well.

(Bond investors have buyout firm Forstmann Little & Co. to thank for the uptick. The company invested $1 billion in the Iowa-based high yield telecom firm in return for a 12% stake of McLeod.)

Indeed, now others may see higher returns as McLeod puts its new pot of cash to work on acquisitions. Telecom systems are continually proving themselves in terms of valuations when acquirers come knocking, and there are some likely takeover candidates out there now.

ICG, e.spire and GST are three names that popped up last week as takeover possibilities.

In an increasingly competitive landscape where rates for long-distance phone calls keep dropping, it's becoming more important for providers to own links to the customers' homes, whether it's in the form of cables, wires, or rights to cellular communications, according to a high yield telecom analyst at a major bank.

The telecom world is one in which pricing is being benchmarked to marginal costs, the analyst said, and marginal costs are getting lower.

To be sure, just last week, AT&T said it would soon launch a new seven-cents-a-minute plan for long distance calls in response to competitors new rates of five cents a minute.

Telecom investors added that in such a playing field, the way to make money is through volume. Companies need customers and lines - and lots of them. And all this puts McLeod in a good competitive situation, sources said.

McLeod officials did not return phone calls, but outside sources familiar with the issuer said that it really isn't big enough yet to draw the interest of huge players like AT&T or SBC. Although an acquisition by one of the giants in the industry is the eventual hope of most investors.

And in the meantime, it now can go on the acquisition hunt itself. The investor said that he expects to see some activity even before the end of the year.

The billion-dollar cash infusion into McLeod represents one of Forstmann's largest single investments, according to people in the industry. It also may establish a trend with buyout firms taking part of CLECs.

Last month, Kohlberg Kravis Roberts & Co. invested up to $110 million in Birch Telecom.