Arch/PageNet Team Up, Debt Sees Upside

Arch Communications and Paging Network last week made major inroads toward the much-needed consolidation in the paging sector.

Arch and PageNet, the two largest concerns in the industry, agreed to team up in a deal that will give PageNet's current bondholders a majority 44.5% share of the new company. Until now, it had been Arch investors who have seen most of the gains, market observers said last week.

"It's a great deal for [Arch's] senior issues," said Eric Mollman, analyst at BancOne Capital Markets. Those notes, which comprise four separate issues, have risen to the low-80s from the mid-60s a couple of weeks ago, analysts said.

The four issues are: a $130 million, 12.75% offering; a $125 million, 9.5% deal; a $100 million, 14% deal; and a $147 million, 13.75% offering.

Meanwhile, Arch's discount notes were in the low 40s, down from a high of 48 immediately after the announcement, but still up from the mid 30s before the announcement.

PageNet's notes had been in the 20s and then drifted up to the high 30s before settling at about 35 last week. Market players estimated that PageNet's bonds would fetch as much as 45 to 50 cents on the dollar in the merger.

The deal, which still needs approval by shareholders and bondholders, is expected to cut debt levels of the merged company by almost half to $1.8 billion.

The paging sector has been under fire for some months now, as the wireless phone companies are offering the same services on their units. And there had been too much supply in the sector, which further drove down prices and hurt the companies, analysts said.

One portfolio manager said last week that another company could easily step in and make a rival offer for PageNet, setting the stage for a bidding war with Arch.

However, PageNet has announced that if it does not strike a takeover deal, it may be forced to file bankruptcy.

Arch's 10.875% notes were downgraded to Caa3 from Caa2 by Moody's Investors Service, while PageNet's three subordinated issues were downgraded to Caa3 from Caa1.