Telecom M&A Creates Speculation, Potential Upside

Mergers and acquisitions in the telecommunications sector appear to be back, after a slowdown in activity over the spring and summer. And some of the existing high yield names are already reflecting a takeover premium as investors scour the market to find the next round of possible acquisition targets.

M&A has been a staple of the telecommunications industry, but in recent months it has been a bifurcated market in terms of mergers, with most of the activity coming in the high-grade names. The biggest deal of all, of course, was the $129 billion merger of MCI Worldom and Sprint just last month.

In just the past few weeks, however, consolidation seems to be returning to the high yield sector of telecom, as well.

There will be some "very strong upside potential," in some of the names, said Deutsche Banc Alex. Brown analyst Gary Jacobi, as the four big players in the industry - AT&T, Worldcom, SBC and Bell Atlantic - continue to fill holes in their operations.

The increased high yield activity has been underscored in the past several weeks by several announcements: RCN's $1 billion cash infusion from Paul Allen's Vulcan Ventures; a $1.6 billion investment in Metromedia Fiber by Bell Atlantic; and the $2.3 billion acquisition of American Cellular by an AT&T/Dobson joint venture.

All of those bode well for bond investors, although the American Cellular deal had the least upside because it was widely expected, Jacobi said.

So where are investors now looking for that same potential upside? Two names that are being tossed around by market players are Powertel and Canada-based Clearnet Communications, according to another analyst.

Powertel is thought to be a takeover candidate by VoiceStream, which has gone on a buying spree lately of GSM wireless providers (HYR 10/25). GSM is one of the technologies used to deliver wireless calls, and Powertel uses that platform in its markets in the Southeast. Clearnet, a wireless company, is thought to be a takeover candidate by Bell Mobility, an affiliate of Bell Canada.

A spokesmen for Powertel declined to comment on market speculation; Clearnet could not be reached by press time.

Regulations Expedite M&A

Oddly enough, one factor that will expedite the market consolidation is regulations. Instead of being burdensome and slowing things down, new rules will knock down the few remaining barriers in telecom, analysts said.

Specifically, when the regional Bells are finally allowed into the national long-distance game, it will unleash fierce competition and thus heighten the need of the big guys to have their networks in place.

That, in turn, will prompt them to buy the market share they need to plug in the holes they have in their operating systems.