Is BellSouth About to Buy Paging Network? A Wake-Up Call for Nassau County Pols
By Jacqueline Doherty
July 5, 1999
Barron's
Recent action in the bond market suggests that a takeover may be afoot, perhaps one in volving BellSouth and a smaller company called Paging Network. Reading merger prospects into bond-market movements is a little like reading tea leaves, but it has been known to work. The first indication comes from a triple-A-rated bond issued by BellSouth, which is now trading at an unusually high yield relative to Treasury bonds. That reflects expectations that the Baby Bell will soon launch a takeover, according to J. Curtis Shambaugh, corporate strategist at Credit Suisse/First Boston.
The BellSouth bonds in question, the 6 3/8 % issue due 2028, have been trading at yields that are 1.2 percentage points above the yields on Treasury bonds. That means the BellSouth bonds are considered just as risky as AT&T's 6 1/2 % bonds due 2029, which trade around 1.18 percentage points above Treasuries. The relationship is odd because AT&T's bonds have a much lower rating, at single-A1 by Moody's and double-A-minus by Standard & Poor's, than BellSouth's debt. So AT&T's bonds should yield 0.10 percentage points more than BellSouth paper.
"There's an expectation that BellSouth's credit will be hurt if and when they make an acquisition," explains Shambaugh. However, he believes the market may have overreacted. "It would take an extraordinarily large transaction to lower the rating of a big player like BellSouth." His recommendation: Buy BellSouth bonds, but carefully.
Another interesting indication is coming from the junk-bond market. Over the past week or so, Paging Network's 10% bonds due in 2008 rallied by about 10 points, or $100 per $1,000 bond, while other junk bonds improved by only about one point.
Paging Network's bonds soared on the hope that a large telephone company will come along and buy the paging company. The names attached to the rumor: none other than BellSouth and AT&T. The bonds of other paging companies, like Arch Communications, have also advanced due to acquisition hopes.
Paging Network's debt also received a boost from recent conferences held separately by Goldman Sachs and Donaldson Lufkin & Jenrette, where the paging industry's prospects were favorably reviewed. Much of the speculation about the paging industry began after MCI WorldCom bid for the wireless communications service company SkyTel Communications.
"Paging is cool again," says one junk-bond trader. "If MCI bought a paging company, then AT&T will need to buy one too." Or so the theory goes.
And if an acquirer of a paging company has the high investment-grade credit of either telephone company we've mentioned, the paging company's bonds would skyrocket. Paging Network's 10% bonds due in 2008 now trade at about 78, leaving them plenty of room for price appreciation in the case of an acquisition.
A word of warning: Betting on "potential" acquisitions is risky. Les Levi, a telecommunications analyst at Chase Manhattan, thinks a deal is doubtful. "I just don't see how paging makes sense for these carriers because they have wireless platforms already," he explains. "If this wave of speculation subsides, the bonds could fall again."
|
