Sprint Spinoff to Affect Rural Telcos’ Future?

The future of the rural telco largely could hinge on the success and effects of the anticipated Sprint Nextel Corp. local spinoff, according to a recent study by Probe Financial Associates Inc.

That spinoff could spur the RBOCs to make similar moves, possibly endangering rural telcos by forcing them to compete against new entrants with big names, big marketing budgets and numerous services.

In “Rural Telcos – Anachronisms or Harbingers? Are the RBOCs Destroying Value?,” author Victor Schnee, founder and president of Probe Financial, writes that CLECs with high-dividend payouts have escalated telephone access-line valuations to new levels. Private equity investors have taken companies such as Iowa Telecom public, Schnee explains, and by paying generous dividends, got “a very, very high valuation when you relate it to the number of lines they had, and what they paid per line to buy the property.”

RBOCs with 15 million and more access lines are earning between $500 and $1,500 per line, while companies such as Iowa Telecom and Consolidated Communications Inc. with up to 267,000 access lines are pulling in $4,000 per line, thanks to investors, Schnee says. “It isn’t like … they have some oil wells out in Montana. They really don’t have anything else,” he adds. “[Iowa Telecom] has these access lines in these little towns out in Iowa. That’s where the ‘wow’ factor comes from.”

The Sprint local spinoff is going to bring telecom valuation and dividend issues to a head, Schnee predicts. If other companies follow suit, breaking off into smaller units, their access lines will be worth more. Sprint is the test case because it will be the only company in its category, offering about 7 million lines, falling solidly in between the RBOCs’ 15 million and more, and the small CLECs’ and rural telcos’ 2 million and less.

Thanks to Sprint’s spinoff, RBOCs will have a good handle on the regulatory issues they too would face if they wanted to start their own local companies, and will know how to get set up financially, Schnee notes. They also will be able to see what the market thinks of spinoffs. “Then they’re going to be able to say, ‘Can we do better with these lines that we have that have this very low implied valuation?’” Schnee says.

In his study, Schnee expects rural telcos to continue generating substantial interest from investors and to be able to sustain their models for the next several years. However, he notes they likely will face threats not only from RBOC spinoffs, but broadband wireless technologies. “So we think that, down the road, these rural telcos can’t totally stand still,” he says. “[T]hey’re going to have to look ahead and say, ‘What do we do about coming challenges like broadband wireless and so on, and do we get into it ahead of our competitors?’ and that will become important probably in the next two or three years.”

Consolidated Communications Inc. www.consolidated.com
Iowa Telecom www.iowatelecom.com
Probe Financial Associates Inc. www.probefin.com
Sprint Nextel Corp. www.sprint.com

Share this article: Email, Slashdot, Digg, Del.icio.us, Yahoo!MyWeb, Windows Live Favorites, Furl
Add this article feed to: RSS, My Yahoo, Newsgator, Bloglines