Global Insight Perspective | |
Significance | With a number of mergers between the tier-1 carriers completed, several smaller mergers have been initiated recently. |
Implications | The smaller telephone companies face an increasingly competitive market as the majors consolidate while continuing to roll out powerful new high-speed networks and deliver new services. Competition from cable operators, VoIP providers, and mobile substitution also continues to eat into their share of the traditional voice market. |
Outlook | Operators are likely to continue consolidating in the face of the investment required to deliver and market new services. |
Consolidation within the U.S. telecoms industry continues with the acquisition of Talk America by the smaller, privately held company Cavalier Telephone & TV, announced on Friday. At US$8.10 a share, a 23% premium on Thursday's closing price, the deal is valued at US$251 million.
Talk America provides telephony and broadband services while Cavalier Telephone & TV provides the full triple play of telephony, data, and TV services, having initiated roll-out of the IP TV service in May 2006. Talk America earned revenues of US$463 million in 2005 to provide a net income of US$2 million. Privately held Cavalier announced revenues of US$264 million in 2005, and strong growth of revenues at around 20% year-on-year from 215,000 residential customers and 35,000 business customers. The combined company will be called Cavalier and will provide services to 550,000 residential customers and 85,000 business customers with earnings estimated at US$750 million and earnings before interest, tax, depreciation, and amortisation (EBITDA) of US$130 million.
Outlook and Implications
Combined Assets: The two networks have some footprint overlap, with Cavalier owning more extensive fibre network assets in Michigan, Ohio, and the South-East. The main markets served by the combined company will be in Atlanta, Baltimore, Cleveland, Detroit, Philadelphia, and suburban Washington, D.C. The merger with the more advanced networks of Cavalier will improve the poor prospects for Talk America, as the emergent entity will be able to deliver a more competitive suite of products to a larger footprint. Talk America recently reported that is has been having problems reducing customer churn. Multi-play offerings have been known to reduce this key metric significantly.
Competition Increases: This continues the wave of consolidations throughout the North American communications market that has seen both large and small providers combining in the face of an increasingly competitive market. Cable companies and telephone service operators are increasingly delivering the same services. The regional bell operating companies (RBOCs) are rolling out fibre TV services (see United States: 15 September 2006: FiOS TV Enabled in Eight More Cities) and beginning to target the business services market (see United States: 21 September 2006: Comcast Announces Growth; Cable Companies Target Businesses). Cable operators are leveraging VoIP to deliver telephone services (see United States - Canada: 22 September 2006: VoIP Telephony Powers Cable Operators' Growth), and services are increasingly being sold as multi-play bundles. This state of affairs has led to a significant increase in the competitive landscape, with major cuts in the price of the core telephony services (see United States: 9 November 2005: Verizon Cuts Prices for Traditional Telephony as Cable Competition Starts to Bite). Wireless companies are also getting a slice of the action, with a significant number of households now "mobile only". In the move to offer the quadruple play of voice, data, video, and wireless, there are also a number of agreements emerging between the wireless and fixed/cable operators (see United States: 5 January 2006: Sprint Nextel Cable Services to be Launched in Mid-2006).
Other Consolidations: With the increase in the number of companies offering competing services, consolidation has been the natural defensive reaction. The last year has seen major tier-1 operators combining, including SBC's buyout of AT&T, which is subsequently swallowing Bellsouth; Verizon's acquisition of MCI; and the divestment of Adelphia between Time Warner and Comcast (see United States: 1 November 2005: FCC Approves SBC-AT&T and Verizon-MCI Mergers, United States: 6 March 2006: AT&T and BellSouth Agree to Merge, United States: 1 August 2006: Time Warner, Comcast Complete Adelphia Acquisition; and United States: 1 August 2006: Time Warner, Comcast Complete Adelphia Acquisition).
A number of very small operators have also been acquired recently, while mid-range merger and acquisition activity includes Citizen and Commonwealth (see United States: 18 September 2006: Citizen Communications Buys Commonwealth Telephone for US$1.16 bil.) and, in Canada, the recent acquisition of alternative carrier Yak Communications by Globalive (see Canada: 22 September 2006: Globalive to Buy Yak Communications for US$5.25 Per Share).