RLEC M&A faces tough timing

But there are other considerations related to all-equity deals. Namely, they dilute the value of shareholders’ existing stock. CenturyTel shareholders will end up owning only about a third of the company once it combines with Embarq.

“It’s more expensive [in terms of] the total cost of capital because shareholders don’t like that,” Granovsky said. “You could tell shareholders, ‘We’re doing this now because the markets are frozen, and once the markets come back, we’ll raise more debt and start buying back stock.’”

Shareholders may not like the dilution, but they also don’t want the companies they’ve invested in to keep losing access lines, market share and margins. So carriers are put between a rock and a hard place: Make a potentially costly move now or wait for the market to improve and get hammered in the mean time. Another risk in waiting is that – as stock prices fall and companies get cheaper to buy – a company that doesn’t pull the trigger now on its favorite acquisition target will lose those assets to a rival that is willing to deal today.

CenturyTel, for its part, has said that it doesn’t plan to wait long after the Embarq merger to plunge back into the M&A market. CenturyTel CEO Glen Post, who will lead the combined company said in response to a question on a conference call Monday announcing the Embarq deal, “I think within a year or so, we’d be ready to look at the possibility of other acquisition opportunities. I don’t think it will be a long time,” adding that he expects to be able to migrate Embarq’s network to its own back office systems very quickly.

Smaller rural telcos can still participate in M&A under certain circumstances as well, despite the tough market. Last week, Otelco – a rural telco based in Alabama that also serves Maine and Missouri – announced it had secured $188.5 million in debt financing for an acquisition of Country Road Communications.

Granovsky calls it a “club deal” – a group of six to ten banks that know the industry (and the borrower) very well and pool their efforts so that each bank’s contribution is in perhaps the low double-digit millions and their experience in the sector keeps their risk low. (Otelco’s deal last week was led by GE Capital Markets and CoBank.) Even in the current environment, Granovsky said, “A club deal can still get done.”

But larger deals will be much more difficult in this market, Granovsky said. “If you’re looking to raise more than $150 million to $200 million right now, that’s where the log jam is.”