CONESTOGA TAKES SECOND BID AS RURAL MARKET HEATS UP

Dec 3, 2001 12:00 PM, Amalia D. Parthenios

Deadline looms for counter offer from NTELOS

After accepting a merger bid from NTELOS, rural ILEC Conestoga Enterprises has opted for an unsolicited offer from D&E Communications. The competing deals exemplify the growing interest in rural ILECs, which have maintained their value relatively well amid the telecom downturn.

Who ultimately will own Conestoga is still in question. NTELOS has until Dec. 7 to decide if it will take a $10 million termination fee or counter D&E's offer in an effort to add Conestoga's $30 million in revenue to its balance sheet.

“Due to the changes in the price of NTELOS stock, the board felt they had a fiduciary responsibility to evaluate [D&E's offer],” said Conestoga President Albert Kramer.

NTELOS is reviewing its options, according to a company spokesman. Although NTELOS's offer for Conestoga would be dilutive to shareholders, the company may make a counter offer to ultimately position itself to be acquired.

And acquisitions appear to be a key component of the rural market. A Yankee Group report identified the rural ILEC market as one of the strongest sectors in telecom, with the carriers generating operating margins of 33%.

“[Telecom] is transitioning from an Internet high-growth-style emphasis to stable businesses that make money, that have strong cash flows and stable balance sheets,” said Joe Gagan, senior analyst for The Yankee Group. “Rural incumbent local exchange carriers fit that bill.”

But the investment community seems to be neglecting rural companies. Christopher King, associate analyst with Legg Mason, said ILECs can gain the liquidity needed to attract more investment by increasing their scale — an idea shared by D&E.

“Our stock is undervalued,” said Garth Sprecher, vice president and corporate secretary for D&E. “If we get on the radar screen of some analysts and develop a larger float of our company's stock, [an increased stock price] can happen.”

NTELOS announced it would merge with Conestoga on July 24. At the time, the deal was valued at $27.90 per share, or $231 million — almost three times the current value of $10 per share.

D&E convinced Conestoga to sign a conditional merger agreement on Nov. 21 that calls for Conestoga shareholders to receive $33 for each Conestoga share as long as D&E common stock before the deal's closing is valued between $13 and $23.

Both Conestoga and D&E are shedding their wireless businesses. D&E's wireless business is being sold to VoiceStream Wireless, with which it has a 50/50 partnership. Funds from the sale will be used to grow D&E's wireline business, Sprecher said.

Conestoga President Albert Kramer said he believes VoiceStream would still be interested in acquiring his company's wireless holdings if the NTELOS deal is terminated.