It was hard to miss SureWest Communications (Nasdaq: SURW) price jumping 43% yesterday. That sudden increase in value was caused by Consolidated Communications (Nasdaq: CNSL) buying SureWest for $340.9 million in cash and stock. Consolidated's offer of $23 a share -- up from the day's opening of $15.59 a share -- is quite a premium to pay. So what is the company going to get for its money?
Consolidated will get SureWest's 321,700 residential and 15,700 commercial subscribers in the greater Kansas City (Kansas and Missouri) and Sacramento areas. Combined with their existing voice, data, and video subscribers in rural Illinois, Pennsylvania, and Texas, Consolidated will have a total of almost 784,000 connections.
Consolidated's grab for SureWest may have been hastened by talk last month of another buyer swooping in. Google has been in Kansas City, Kansas for two years building an experimental fiber-optic network, but it has had problems in getting the rights to use existing utility poles in the city. This has caused a major delay in Google's plan to begin servicing its customers in the first quarter of 2012. One solution, put forth by equity researcher Barry M. Sine of Drexel Hamilton, was for Google to buy SureWest. Google has apparently worked out the pole-access problem with the city, but the possibility of Google big-footing Consolidated's plans may have played a role in SureWest's high price.
The shrinking telecom universe
This is just the latest in a series of telecom consolidations. In 2011, Windstream (Nasdaq: WIN) bought up PAETEC for $2.3 billion to increase its national footprint; CenturyLink (NYSE: CTL) acquired Savvis for $2.5 billion to give it a global reach; Level 3 (Nasdaq: LVLT) bought Global Crossing for $3 billion to enhance its enterprise business; and Verizon bought up Terremark for $1.4 billion to grow its data center capabililties.
Investors who go for dividends should know that Consolidated's dividend yield is currently around 8.2%, and it does it with a free-cash-flow-to-dividend-payout ratio of a very reasonable 48%. It has paid a dividend for the last six years. I am finding Consolidated a company deserving of a closer look. It seems to have a lot going for it, but it does have a sizeable amount of debt. This is a company I will be keeping an eye on.
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