Entries in La Motte Telephone (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?

Thursday
Sep012011

La Motte Telephone to Purchase Bordering LEC Andrew Telephone

Andrew Telephone Sellers Remain Invested in Iowa Telecom

While cable and data center purchases have dominated The Deal Advisor of late, ILEC deals have been few and far between. The telcos that have been active buyers are targeting new revenue streams in cloud computing, data storage and managed services—not looking to expand their wireline operations. Iowa-based La Motte Telephone Company breathed some life into ILEC M&A last week, announcing its purchase of fellow Iowa LEC, Andrew Telephone Company. Financial terms of the deal were not disclosed. 

La Motte currently serves around 700 access lines in the cities of La Motte, St. Donatus and Zwingle, located in Northeastern Iowa. It offers voice, television and high speed Internet services in addition to wireless phone and Internet through its PCS tower in Bellevue, IA. The smaller Andrew serves around 280 access lines in its exchange which borders La Motte’s territory to the south, making it a logical acquisition target. La Motte will begin offering digital television services to its Andrew exchange customers—a service Andrew Telephone did not offer previously.

The deal appears to have been done as much out of convenience, as it was from an expansion effort on La Motte’s part. In addition to the closeness of their territories, La Motte has provided maintenance service for Andrew’s customers over the past two years. Andrew’s current office will also remain in operation under La Motte after the acquisition is finalized, rendering cost savings from the deal minimal. JoAnne Gregorich, the general manager at La Motte describes a cordial and neighborly relationship between the two telcos, adding that future deals are not likely in La Motte’s future.

“We are not considering any additional acquisitions of LECS at this time. Andrew Telephone Company and La Motte Telephone Company are next door to each other; we have been neighbors for years,” commented Gregorich, adding “financially, we feel that purchasing Andrew will be good for La Motte and Andrew.”    

Andrew in this case refers to the telco's four current owners: Robert Mauer, Virginia Mauer Cox, Valerie Mauer Weis and Ed Buchanan. The Mauers account for 90% of Andrew’s ownership, and while they are exiting this telecom investment, they will remain players in Iowa telecom. 

The trio also owns a 95% stake in Interstate 35 Telephone Company, the holding company of the Southwest Telephone Exchange—an independent LEC that serves around 1,750 access lines in the southwest part of the state. Interstate 35 also owns CATV provider Interstate Cablevision Company and maintains partnerships with various cellular providers. While the Andrew deal might suggest the Mauer’s are starting to unwind their telecom investments, it feels more like a one-time sale of one of its smaller entities. 

Although La Motte suggested that it will not target other properties, if there is one state ripe for more ILEC consolidation, it would be Iowa.  With 134 telcos, Iowa has far more phone carriers than any other state. Texas with 51 comes the closest, but Iowa LECs serve only 13% of the access lines that Texas telcos manage. And while Andrew with its 280 access lines seems tiny, there are more than 20 smaller telcos in the Hawkeye State that are logical acquisition targets for larger neighbors like La Motte.