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The wireline sector of the telecom industry has seen increasing consolidation in recent years. Remaining players buy up competitors to take advantage of economies of scale and to counter line losses. In the past year, Frontier Communications (NYSE: FTR ) picked up a huge chunk of Verizon's (NYSE: VZ ) wireline business. A couple years ago, CenturyLink (NYSE: CTL ) picked up Embarq, and it's in the process of buying Qwest (NYSE: Q ) . And this year Windstream (Nasdaq: WIN ) closed the deal on Iowa Telecom.
So this space is rife with takeovers. And rumors have abounded for years that one of these players – Frontier, CenturyLink, or Windstream – would take over another. Barring such a big takeover, there are still a number of bolt-on acquisitions that these wireline peers could make to enhance their cash flow – and their dividends – which is the real attraction for investors in this space. And it looks like there will be another target soon.
Earlier this week, NTELOS (Nasdaq: NTLS ) announced it would spin off its wireline division, which has operations in Virginia, West Virginia, and Pennsylvania. The wireline division generated revenue of $214 million in the year ended September. The spin wouldn't happen until later next year.
The spun-off division could be attractive to Frontier, CenturyLink, or Windstream. But it might fit best within Frontier, which has a heavy presence in West Virginia and some presence in Pennsylvania, or within CenturyLink, with its extensive presence in Virginia and Pennsylvania. Windstream has operations in Pennsylvania. In any case, such an acquisition would be a bolt-on buy for any of these much larger players.
As competition heats up in the telecom space – both in the wireline and wireless spaces – expect further industry consolidation and deal making. Verizon jettisoned its more rural wireline operations to Frontier in a bid to concentrate on more exciting opportunities in its wireless segment. And recent news that super-investor David Einhorn has taken a stake in beleaguered Sprint Nextel (NYSE: S ) suggests that there may yet be value in some names. Plus, there are a whole host of smaller telecom operators.
Who do you think could be a telecom takeover?