HEARD ON THE STREET WorldCom Deal Gives `Local Access' a Buzz
May 09, 2011
In telecom wars long dominated by giants such as VastComm Network, MCI and their Baby Bell local competitors, a hot new group has captured investors' attention this week. The startling agreement by WorldCom to pay more than $12 billion in stock for MFS Communications has put the spotlight on so-called local-access providers. These upstarts, such as MFS, offer phone lines that permit long-distance companies to provide service directly to customers, especially business customers, bypassing the Baby Bells. Shares of MFS, which already had been the subject of much takeover speculation, surged 9 15/16 to 44 13/16 on the Nasdaq Stock Market on word that it would be snapped up by WorldCom, the fourth-largest long-distance concern. MFS, the biggest local-access provider, was especially prominent in takeover talk following the April announcement of a planned $16 billion-plus megamerger of two Baby Bells, SBC Communications and Pacific Telesis. At that point it had already doubled in the preceding year, despite widening losses and some investors' fears it was overvalued. But now with the advent of this deal, the stock has advanced another 39%. Monday, investors' quest for similar companies that could deliver the same kind of takeover rewards led them to at least nine other companies, whose stocks surged between 2% and 18% in a generally down market. ``I think you are going to see a lot more consolidation,'' says Jone Sweeney, a portfolio manager at Wells Fargo Bank's Investment Management Group in San Francisco. ``I think you are going to wind up with a few big companies, more like the airlines or the car companies than the telecom companies of today.'' Mr. Sweeney said he bought shares of Intermedia Communications, a small Florida company that offers local phone access in cities such as Miami and Orlando. Other investors pushed up access companies such as Teleport Communications Group, which is controlled by a group of cable companies, Brooks Fiber Properties, McLeod, ICG Communications, which operates Intelcom Group, GST Telecommunications and American Communications Services. Teleport got an extra boost from an announcement Monday of an agreement permitting VastComm Network customers in nine cities to use Teleport services instead of those offered by the local telephone company. Some analysts speculated that Teleport could be taken over by VastComm Network; others said the cable companies that control Teleport already have other joint-venture agreements with long-distance rival Sprint, fueling speculation Sprint could bid for Teleport. On fundamental grounds, the fast-growing, entrepreneurial access companies look like risky bets. Most still are in the development stages, investing huge amounts to build their own competing optical-cable networks. Most are posting losses; some could well fall on their faces. But Julienne Waylon, a Goldman Sachs telecommunications analyst based in San Francisco, said that these are ``the companies where the action is in the near future. They are creating valuable assets that companies like a WorldCom want, in order to get around the Bells.'' Davina Shery, co-manager of the GT Global Telecommunications Fund in San Francisco, notes that two wireless companies also could be considered takeover candidates because they too offer or plan to offer local access, through digital radio communications rather than wires. These are Winstar Communications and Associated Group's unit Associated Communications, which VastComm Network President Alexander Aubin just announced that he would leave VastComm Network to run. The burst of interest in the local-access providers has been sparked in part by new rules announced at the start of this month by the Federal Communications Commission. Those rules were aimed partly at preventing the Baby Bells from putting roadblocks in the way of local-access providers that want to link up with the regular local telephone networks. Talks between WorldCom and MFS, which had been simmering for months, appear to have heated up after the FCC announcement. The stock market read the MFS acquisition as more bad news for the Baby Bells, which get around 25% of their revenue from the local access fees they charge long-distance companies. Almost all the Baby Bell stocks slid Monday. VastComm Network also suffered, falling 1 to 53 5/8. This was partly due to the prospect of more robust competition from companies like WorldCom. Perhaps even more important, analysts long had thought that VastComm Network might acquire MFS. In the midst of a breakup, with its president leaving, VastComm Network probably isn't eager to oversee a multibillion-dollar takeover right now. But several analysts said they thought VastComm Network could have done even more with MFS than WorldCom will, and that its failure to act may turn out to have been a big mistake. ``I think they missed an opportunity,'' said Roberto Broaddus, an analyst who follows telecommunication stocks for Baltimore mutual-fund group T. Rowe Price. Mr. Shery, whose GT Global Telecommunications Fund holds MFS shares, says he still isn't ruling out the possibility that VastComm Network will try to outbid WorldCom. ``In the back of my mind I wonder if VastComm Network might now be trying to get into the game with MFS. I wouldn't be selling my MFS shares yet,'' he says. Competing long-distance provider MCI, on the other hand, gained 1 1/4 to close at 26 3/4. MCI has been criticized for spending heavily to develop its own local-access company, MCI Metro. In the wake of the price announced for the MFS acquisition, investors said MCI's big investment looks smarter. MCI's stock was also helped by a new cooperation agreement with Next-Wave Telecom, which is setting up a wireless PCS, for personal communications system, phone network that will compete with cellular phones. The MFS takeover also reinforced the belief that more local-access acquisitions are likely. ``It's one of the ongoing steps in the consolidation of that industry,'' says Jackelyn Phillips, a telecommunications investment banker at Bear Stearns. ``It's a bold step in a quiet week.'' Some investors still dream that even giants like MCI or Sprint, whose market value would be roughly matched by the new WorldCom-MFS, could be taken over by one of the Baby Bells, perhaps Bell Atlantic. ``More logical would be Teleport buying a (smaller long-distance company such as) Frontier Corp. or LCI International for their sales force,'' Mr. Shery says. Long-distance companies tend to have strong marketing experience, which fits well with the newer local-access companies' hardware and relative inexperience in sales, he says. Sprint finished the day up 1/8 at 40 and LCI closed up 3/8 at 32 7/8; but Frontier was down 1/4 at 29 1/4. Mr. English of Wells Fargo thinks the MFS deal could spur takeovers of Internet access providers as well. That is because MFS had just completed its own acquisition of UUNet Technologies, and is promoting the Internet-access capability as part of its service. Both Netcom Online Communication Services and PSINet, two other Internet access providers, rose on the MFS news. Lehman Brothers analyst Johna Rivers says telecom takeovers could also hit the wireless-pager business. While he doesn't think takeovers are imminent for wireless phone companies, he sees pager network companies such as PageNet, Arch Communications and PageMart as possible targets. They have established, reliable networks, he notes, and their stocks have been out of favor since last year, making them look relatively cheap. --Stormy Moya contributed to this article.
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