If a company cannot meet listing requirements for an exchange such as Nasdaq or the New York Stock Exchange -- or, as in a few cases, it doesn't want the hassle of complying -- it will often trade on the Over-the-Counter Bulletin Board (OTC BB). And if a company can't or won't meet the minimal requirements of the OTC BB, it will be quoted on the Pink Sheets.
Basically, the Pink Sheets are the backwater of the securities markets, and, as a result, the liquidity in their securities is often nonexistent. This factor alone probably played a role in last week's merger between iPCSInc. (Pink Sheets: IPCX) and Horizon PCS Inc. (Pink Sheets: HZPS), aside from expected merger benefits such as synergistic effects in selling and distribution networks. If the company relists on the Nasdaq, it should make it easier to raise further capital and conduct other deals.
The practical effect of a merger of this nature is increased stock liquidity, which makes the company more accessible to investors and generally translates into more or easier equity financing.
Both of these outfits are wireless affiliates of a company that is listed on the New York Stock Exchange: Sprint (NYSE:FON). The deal is a stock-for-stock transaction in which, at the closing, iPCS stockholders will have about 57.5% of the combined company's shares outstanding. It also means that the debt of both companies will be combined, which will be roughly $290 million in senior notes ($106 million of which can be covered via the company's cash coffers).
Horizon has exclusive rights to sell Sprint products and services in 11 states, whereas iPCS has exclusive rights in Illinois, Michigan, Iowa, and eastern Nebraska. The combined company will be the second largest Sprint affiliate in terms of covered POPs (points of presence, which are access lines for customers) at 11.2 million, the No. 1 being Alamosa (NASDAQ:APCS). In 2004, the combined companies would have generated $384 million in revenues and $69 million in EBITDA. The deal is expected to generate $5 million in savings for the next year. What's more, with only 3.9% penetration in its covered POPs, there is certainly much headroom.
Moreover, iPCS/Horizon plans to pursue more aggressive shareholder relations. The biggest problem the combined entity faces, in terms of listing on the Nasdaq, is that the combined company does not meet the minimum number of round-lot (multiples of 100 shares) shareholders (Nasdaq SmallCap, a subset of the exchange with listing requirements in between the OTC exchanges and the regular "National" Nasdaq exchange, requires 300 round-lot shareholders). Assuming the new company is listed on either version of the Nasdaq, we might find a bump in the stock price as liquidity comes in.
This deal could well be a strong indication that, for regional wireless players to compete effectively, they need to scale up. So, expect more deal-making, with perhaps the next to be UbiquiTelInc. (NASDAQ:UPCS), which is now the No. 4 player and saddled with issues much akin to Horizon and iPCS.
Fool contributor Tom Taulli does not own shares in this company.
