5/21/2008 12:35:00 PM
Fone Log’s bold move
So bleak was the outlook for distribution that one company ran a sweepstake at the start of the year on which distributor would be first to fall out. At the time, the person who drew Dextra out of the hat was reckoned to be an unlikely winner. Although there’s consolidation in the sector, few expected Dextra to be taken out.
The terms of the proposed transaction are fascinating. Dextra’s private equity owner has effectively off-loaded the airtime business without a sale price, believing there is no future in it. Fone Logistics clearly has different ideas. The distribution airtime market has shrunk to just 40,000 connections per month from 170,000 one year ago.
In a contracting market, companies usually have two options: scale down and run a lean operation, or build up scale to be a dominant player. The identity of Fone Logistics’ second target is not known but if it were to take out another major player, it would give it sufficient clout in the market. The thinking is that it would have similar fixed costs to rivals, but it would have more market power to offer better deals to dealers. The flip side is that a dealer base is a notoriously intangible asset to acquire, given the promiscuity of dealers and the discomfort felt by dealers when they are re-routed to a particular distributor.
Consolidation in distribution has been tipped for some time, but the survival instincts of distributors has delayed the trend until now. The future looks like three major players will make up a smaller pool of connections, bringing stability in what has been a volatile part of the market.