Two leading publicly traded
affiliates are preparing to acquire some of their closely held brethren, analysts and investors say.
are each in talks to acquire privately held Sprint PCS affiliates in deals that will expand their service areas and customer bases, say people close to the companies.
AirGate and Alamosa could benefit from buying various privately held affiliates, but neighboring affiliates make the most sense as a first step, observers say:
borders AirGate's territory, and
Washington & Oregon Wireless
border Alamosa's. Specific details of any potential deals weren't immediately available, and company officials didn't immediately return calls seeking comment.
The acquisitions could start the Sprint PCS network on the way to a consolidation that could make the affiliate relationships less unwieldy for the big wireless firm, analysts say.
"It certainly makes sense," says Bill Benton, an analyst with
, adding that AirGate and Alamosa shares could rise 30% from current levels. William Blair hasn't underwritten for either Sprint PCS affiliate, but Benton has a buy rating on both companies.
"There are too many Sprint PCS affiliates now," says Chris Avery, an analyst with Alamosa underwriter
Deutsche Banc Alex. Brown
, which has a market perform rating on Alamosa. "They'd want
consolidation to happen. It'd make management easier." Sprint PCS has more than a dozen affiliates, while
, by comparison, has two.
The larger private Sprint PCS affiliates may try to go it alone --
Independent Wireless One
have both filed to go public -- but the smaller affiliates are more likely to be taken out.
Sprint PCS affiliates bear the cost of constructing their wireless networks, but maintain the right to market their service under the nationally recognized Sprint PCS name. In return, Sprint PCS can increase its service coverage without having to finance the network buildout. Both parties, meanwhile, benefit from attractive roaming agreements.
Unlike AT&T Wireless, however, Sprint PCS owns its affiliates' licenses and collects 8% of their revenue as part of the leasing agreement. Sprint PCS could look to acquire its affiliates after they have fully built out their networks, but whether that would be a financially sensible move would depend on a host of future market conditions.
For now, investors will probably have to be content with watching these companies try to expand on their own. AirGate has an equity market capitalization of around $642 million, while Alamosa's is $1.26 billion. (
story about the companies' valuation gap.) Those figures are down sharply from their spring highs, when both firms were worth more than twice as much amid the tech-stock froth that temporarily boosted wireless and Internet stocks.
And earnings numbers aren't necessarily going to boost these stocks, either: Alamosa, for instance, released second-quarter financials last week, posting a 38% sequential increase in subscribers and a 51% jump in subscriber revenue from first-quarter levels. Still, cash flow was negative $7.3 million, and the company posted a second-quarter loss of $12.9 million, or 21 cents a share.
"These affiliates don't have the mass to be public market candidates," says Art Poole, an analyst at
. "It becomes a question of their exit strategies. And valuations are looking pretty good right now."