RLEC M&A to rise in 2008

Rural carrier consolidation is expected to heat up this year, according to Jeff Gardner, CEO of Windstream Communications.

Speaking at an investor conference in January, Gardner said, “I do think there will be more consolidation this year; there could be significantly more.

“Cost structure is incredibly important,” he added. “Scale really matters. The smaller guys are under more pressure because consolidation hasn't taken place.”

In September 2007, Gardner told another investor show crowd that rural telco consolidation likely would be on hold until this year as a turbulent credit market gave rise to fears of lower valuations for deal-hungry companies. Those remarks came after a notable summer for RLEC deals: Alltel was acquired by private equity firms for $27.5 billion, and Windstream acquired CT Communications for $585 million, expecting CT to be completely integrated by this quarter.

And Gardner is not alone. Executives at Citizens Communications, which acquired Commonwealth Telephone for $1.3 billion last year, told investors in January it was “actively looking” for more deals.

“We're ready to do more transactions,” said Donald Shassian, chief financial officer for Citizens. “Size is not important. Geography is not important; it does not have to be contiguous.”

Many of the large rural providers such as Windstream can't justify launching their own terrestrial IPTV services — one of the reasons Gardner sees consolidation, and the synergies it yields, as one of the biggest opportunities for rural telcos to create value.

However, the country's largest rural telco will be something of a wild card in this story. Embarq long has been expected to make acquisitions, but the recent departure of its CEO theoretically could delay deals while a replacement is sought. At the same time, the loss of its leader also could soften the company to merger offers. Still, the sentiments of Embarq's peers suggest a deal is likely before January rolls around again.