Telecom Merger Activity Seen Continuing in ‘Permissive’ Regulatory Environment
CHICAGO -- Recent merger activity among wireline phone operators likely will continue, with private equity groups in a limited role despite their larger presence in other sectors, telecom executives said Wednesday on a NXTcomm panel. Along with a “permissive” regulatory environment, the executives cited available capital and a desire among operators to scale up. “Absent a serious change in the capital supply, I think it will continue,” said Michael Prior, CEO of Atlantic Tele-Network.
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Private equity groups, active in wireless and media, may hesitate to buy wireline companies for fear of overburdening them with debt, Windstream CEO Jeff Gardner said. That could change, though. “These businesses do generate a lot of cash,” the lure for private equity groups, he said. But uncertainty over when more capital spending will be needed may keep private funds at bay, Prior said: “Every time you think capex is going to down a lot, it’s not. There’s always something new.” And private equity groups have proven less than adept at handling state regulators, SureWest CEO Steve Oldham said: “Once burned, I think they may look twice before getting back in that space.”
With the merger environment driven mainly by strategic deals, clear policy on issues like universal service and broadband deployment incentives could encourage activity and investment in rural broadband deployments, said Prior. “There’s a lot of talk about broadband subsidies, and if there were some clarity on that I think you would see a lot more investment,” he said: “Adding that certainty on the subsidy side would drive a lot more investment in rural.” Universal service reform isn’t likely to change SureWest’s strategy, Oldham said. He'd rather see other government incentives to rural broadband deployments such as tax breaks.
Small cable operators and overbuilders like Knology are alluring acquisition targets but often too pricey, executives said. SureWest bought part of Western Integrated Networks in 2002 and could replicate that success in other markets, Oldham said. Combining back-office and customer service operations could lead to huge savings, he said. Plus, some overbuilders initially had to agree to “onerous build out requirements” to win franchises, leaving them with valuable but unused assets, he said. As attractive as they are, they're often expensive, he said: “Price is everything.” And buying an overbuilder would bring new regulatory challenges, Gardner said: “Owning two pipes into the home is different,” and likely to catch regulators’ eyes.