Entries in Federated Telephone Company (Chokio MN) (2)

Sunday
Jan082012

2011 ILEC Deals Few and Far Between: Has the Ship Sailed? 

Will a Little Regulatory Certainty Kick-start this Tepid Market in 2012?

Despite fervent deal activity in most telecom sectors in 2011, ILEC deals were incredibly slim. Sixteen deals were announced in 2010, but JSI Capital Advisors only tracked 6 new deals in 2011—plus one more that didn’t quite make it to the finish line. Although there could be a variety of reasons why ILEC deals were so few and far between in 2011, the single most likely culprit is regulatory uncertainty surrounding USF and ICC. The question is:  did small ILECs miss the boat on a good deal before USF/ICC took a dark turn, or will there be a revitalization of ILEC deals once the fog clears and companies (hopefully) have a somewhat brighter future?

Of the 6 small ILEC deals in 2011, less than half were RLECs buying other RLECs, one involved an RLEC buying a telecom utility, and two involved investment firms on one side or another:

 

2011 was not the first year for a decrease in ILEC deals, but definitely the first year for such a steep decline- JSI Capital Advisors reported 16 deals in 2010, 18 deals in 2009, 19 in 2008 and 20 in 2007 (The Deal Advisor: ILEC Sales Closing in 2010 Approach $10b). Many of you may remember “The Great Dallas Debate” at the 2011 NTCA annual meeting where National Broadband Plan director and Aspen Institute fellow Blair Levin faced off against RLEC duo Randy Houdek (Venture Communications Cooperative) and Delbert Wilson (Hill County Telephone Cooperative). This debate became notorious for a lot of things, but Levin did make one point that even the most dedicated RLEC advocate would have a hard time denying—the “deal” that the rural industry could have gotten with USF/ICC reform a few years ago would have been relatively better than the deal they got in 2011, and the deal we ended up with in 2011 is probably better than the one we would get in the future. Can the same logic be applied to ILEC mergers and acquisitions?

If so, can we expect less than 6 small ILEC deals in 2012? It may depend on how the USF/ICC changes impact the value of these companies. Even though the sheer fact that USF/ICC reform has technically been achieved (assuming the pending appeals cases don’t change anything significantly), it sure doesn’t seem like there is a whole lot of “regulatory certainty”—at least not the level of certainty that could help increase valuations and make RLECs attractive to buyers as they were back in the day. An industry that was once considered safe, profitable and solid as a rock is starting to look like anything but when you factor in the regression analysis-induced “race to the middle,” reduced access revenue, declining landline connections and myriad competitive forces.

A couple of 2011 deals, like La Motte Telephone purchasing Andrew Telephone (both in Iowa) and Otelco acquiring Vermont-based Shoreham Telephone Company were fairly straightforward examples of convenient deals that would boost the buyer’s footprint and create various operating and strategic synergies. Interestingly the Otelco-Shoreham deal reflects the issue mentioned above—that RLECs have possibly missed the boat on a good deal—as Shoreham was reportedly offered three times more from a prospective buyer in 2003 than what Otelco offered in 2011 (The Deal Advisor: Otelco to Acquire Shoreham Telephone for $4.5m).

Also interesting is that the FCC has made no effort to hide its desires that small RLECs merge—consolidated switching is strongly recommended in the ICC section of the Order. The FCC may not have considered that its very own actions on USF/ICC are prohibiting a vibrant market for high-value small rural telephone company deals, but there are more factors to consider than just regulatory uncertainty. The almost-merger between small Minnesota RLECs Farmers Mutual Telephone Company and Federated Telephone Company illustrates this point quite effectively. It was the members of one of the cooperatives who killed a deal that (on paper at least) appeared to be a perfect match (The Deal Advisor: Farmers Mutual Fails to Approve Merger with Federated Tel.).

Is there any optimism for an upswing in ILEC deals in 2012? If prospective buyers are willing to accept the regulatory risks and if ILECs can figure out how to build value in this environment, then it is certainly possible. But will we look back at the 6 deals of 2011 as an unusually low outlier simply because of the year’s heightened regulatory uncertainty, or are single-digit deals the new norm?

Friday
Jun102011

Farmers Mutual Fails to Approve Merger with Federated Tel.

Unknown Opposition to Combination of Minnesota Coops Contributed to Lack of Support

For the second time in less than a year, the members of Farmers Mutual Telephone Company (Farmers) in Bellingham, Minn. have failed to support a proposed merger between Farmers and Federated Telephone Company (Federated) of Chokio, Minn. The members of the two cooperatives voted on the proposal yesterday after a relatively low turnout on the same matter last fall prompted the coops to change their bylaws to allow for mail ballots. 

At the vote in November only 30% of Farmers’ members had voted; with the addition of a mail ballot option, approximately half of Farmers’ members voted yesterday—but with nearly identical results.

About 90% of Federated’s members voted in support of the combination, according to Kevin Beyer, general manager for both Farmers and Federated. But only 57.5% of Farmers’ members voted to merge, and because Minnesota requires a supermajority, the merger proposal has now been shelved. Beyer indicated that the members of Farmers have made their lack of support clear and that there would be no attempt of bring the matter to vote again, at least not in the near future.

Unidentified opponents to the merger had been running radio ads urging members to oppose the combination, and while Board members offered to sit down with opponents and discuss their concerns, Beyer said they did not come forward and remain unidentified.

The cooperatives had advertised that they could save $200,000 per year in expenses and that the uncertainty surrounding Universal Service Funding and other competitive concerns made the merger an important strategic move. Beyer emphasized that the savings were not expected to come from lost jobs and that in fact the combined company would have hired new staff. The combination would also have extended Federated’s cable franchise and allowed the new company to offer video services in Farmers’ service areas.

Farmers had an estimated 1,037 access lines at the end of 2010; Federated had 2,350. Beyer said that the two companies already share a switch and network facilities as well as staff--the only difference between the two were their Board and members