Citizens buys Commonwealth Tel for $1.16 billion

Citizen Communications announced today it will acquire Pennsylvania-based Commonwealth Telephone for $1.16 billion, extending its rural telco footprint and creating the seventh largest U.S. telephone company in the process with 2.6 million access lines, 388,000 High-Speed Internet subscribers and 6,600 employees.

Commonwealth shareholders will receive $41.72 per share in a cash-and-stock transaction. The deal must be approved by the boards of each company and the Pennsylvania Public Utilities Commission. The deal is expected to close in mid-2007.

Commonwealth had essentially put itself on the market earlier in the year, announcing that it was seeking outside counsel to explore its options.

Citizens views Commonwealth as an immediate growth opportunity, that will be cash flow accretive in the first year, said Maggie Wilderotter, chairman and CEO of Citizens, and believes there is $30 million in synergy savings over three years, based on combining management, IT and other functions.

“First and foremost it gives us expansion into rural markets which is definitely our sweet spot, with revenue opportunities that will enable us to be free cash flow accretive in year one,” she said. “It maintains our strong balance sheet, keeping our dividend in tract and maintaining our payout ratio.”

She said growth opportunities include opportunities for higher penetration of advanced services, including Citizens’ Frontier branded products and bundled services.

“We will re-brand the entire operations to Frontier as soon as possible,” Wilderotter said. “We will increase the penetration of customer-focused, revenue-generating solutions throughout the market, to continue to drive revenues. We expect to sell our bundled services—double plays or triple plays. And we will introduce customer contracts -- today Commonwealth doesn’t have any customer contracts. Citizens already has over 35% of its customers on one or two-year contracts. By putting contracts in place, we can reduce churn and increase customer loyalty.”

Based on its experience, Citizens believes it can achieve the promised savings over the next three years, said CFO Don Shassian. “We believe these cash savings are real and they will be achieved,” he said. Citizens will not have to increase its debt substantially, he added, maintaining a stable balance sheet. For the time being, however, Citizens must suspect its stock buy-back plan but will continue its debt-reduction effort, said Shassian.

Ken Arndt, a vice president with Citizens, will be moving to Pennsylvania to run the combined Citizens-Commonwealth operation, Wilderotter said.

“They have a rural profile, which fits our sweet spot, they also have very fragmented cable competition – there are 20 different cable companies in their territory, plus they have very interactive demographics, income growth is comparable to national averages and they have very high quality assets – [President and CEO of Commonwealth] Mike Mahoney and his team have been keeping their infrastructure current, so we see upside for organic growth, plus we can leverage our scale economies,” she said.