Regulatory concerns, private equity interest impacting rural line sales

LAS VEGAS—The acquisition of rural access lines has been slowed to some extent by the regulatory uncertainty facing companies that have been trying to sell off those assets, according to panelists at Legg Mason’s financial conference at Telecom ’04.

With both SBC and Verizon having halted recent auctions of rural exchanges and Citizens failing to sell itself this year, the CFOs of both CenturyTel and Alltel said valuations have been thrown into flux by issues such as inter-carrier compensation and universal service. That in turn has made it more difficult for both companies, which have traditionally viewed acquisition as a key growth strategy, to place a precise valuation on potential acquisitions.

"Our approach really hasn’t changed but the environment is dictating different assumptions," said Stewart Ewing, chief financial officer of CenturyTel. "The risk model is changing."

Additionally, the access line market has been dominated by large line counts being put on the block, which are traditionally more difficult to sell, said Jeff Gardner, CFO of Alltel.

Both executives, however, are taking a slightly positive approach on the emergence of private equity firms buying into the rural telco market. Carlyle Group’s recently completed acquisition of Verizon’s Hawaii properties has sparked numerous reports that other private equity companies are on the hunt for rural properties. However, there also has been a concern expressed by some that potential "financial" buyers may not benefit the industry in the same way as existing telcos because they have a lack of incentive to invest in the acquired properties.

"The private equity firms are attracted for the same reason I’m interested in the business," Gardner said. "In some ways they may be better suited for some of these acquisitions. I also don’t think it’s a slam-dunk that they don’t want to improve these companies."

Ewing added that some of the private equity valuations of assets up for sale have started coming closer to traditional buyers’ valuations.

"I think they are operating more for the long term," he said.