Telecom Deals Underscore Data Services
January 17, 2000
McLeodUSA Inc. and Nextlink Communications both made acquisitions last week that were overshadowed in the mainstream press by America Online and Time Warner's mammoth merger, but they may have even bigger implications in the high yield universe.
McLeod bought Splitrock Services for $2.1 billion, while Nextlink bought Concentric Network Corp. for $2.9 billion.
All four companies have outstanding high yield debt and both the acquired names, Splitrock and Concentric, rewarded bondholders with a spike of six or seven points, according to portfolio managers.
Both the acquirers, McLeod and Nextlink, are big names among high yield competitive local exchange carriers, but both have been involved primarily in voice systems. These acquisitions mark a big move into the data transmission industry for them.
And similar to the larger AOL deal with Time Warner, it highlights the increasing importance of content to deliver over the various high speed networks, sources said.
Splitrock's debt was trading at 96 before the announcement, and then it shot up to about 102, according to one portfolio manager. Furthermore, he said he believes it could go as high as 107 to 108.
One buy-sider said that Concentric's stock was up nearly 30% on the news.
McLeod's deal - which includes the assumption of about $150 million in Splitrock's debt - gives Splitrock's shareholders an approximate 27% premium. And since Splitrock, a network operator, reaches almost 90% of the U.S. population, the deal enables McLeod to avoid paying competitors such as SBC Communication Inc. a fee to complete calls that fall in their service areas. Splitrock shareholders will own about 12.5% of the company after the deal is complete.
In the second of the two deals, Nextlink will pay a premium of about 50% for Concentric. Nextlink focuses on small and medium-sized businesses, but so far it has only delivered the voice services. This acquisition will enable it to also provide the data services that its clients demand.