Long Distance Love
The telecommunications industry continues to roil
with mergers in the wake of landmark
telecommunications reform passed last year by
Congress. Although today's merger between
competitive long-distance providers EXCEL
COMMUNICATIONS (NYSE: ECI) and
TELCO COMMUNICATIONS GROUP
(Nasdaq: TCGX) would have been possible before
the bill became law, the urgency to merge in the face
of future competition from the titanic Regional Bell
Operating Companies (RBOCs) is certainly a few
notches higher. Executives at both companies
stressed the combined company will be much better
poised to enter the local market as well as the market
for wireless services in the future, a dream only
possible after the substantial deregulation that occurred in 1996. Obviously,
investors agreed that the merger made the resulting company much more
competitive as they not only boosted Telco Communications shares $4 5/8 to
$26 5/8 but also pushed EXCEL Communications up $1 1/2 to $20 1/4.
EXCEL Communications will exchange 0.7595 of its own shares and $15
cash for each outstanding share of Telco Communications in deal that values
Telco at $1.1 billion. The combined company's market capitalization will be
$2.9 billion plus the $1 billion in credit Excel received from Lehman Brothers
in order to complete the deal. On the plus side of the merger ledger, the
company will have 6.3 million customers on 100,000 miles of DS-3 fiber optic
lines that generated $2 billion in revenues last year. EXCEL management also
believes that it can generate $100 million in cost savings in the first full fiscal
year following the merger by putting EXCEL's off-peak minutes on Telco's
network, cutting the cost of delivering that long-distance service by 20%, as
well as by gaining the normal savings in general and administrative expenses
one would expect by consolidating information technology and billing systems.
The fourth-largest residential long-distance carrier in the country, EXCEL
Communications utilizes a network marketing system to sell its long-distance
service by encouraging "salespeople" to sign up friends, family and neighbors
by offering commissions for each account. EXCEL recently had problems with
its current network provider, FRONTIER COMMUNICATIONS (NYSE:
FRO), which may have precipitated today's merger. Telco Communications
has quite a bit of fiber in the ground, and is the largest provider of
"dial-around" long-distance service -- where you bypass conventional
long-distance carriers by entering a five-digit code before dialing a
long-distance number. As the combined companies were only estimated to
make $222.3 million in fiscal 1998, the $100 million in savings they project
would be a substantial increase. With 137 million shares outstanding following
the merger, not counting the authorization the company has to repurchase 10
million shares on the open market, earnings for fiscal 1998 could be as high as
$2.35 per share if the company hits its cost-savings target. |
