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Paging companies WebLink Wireless Inc. and Metrocall Inc. will attempt to become the first companies to merge by simultaneously filing for bankruptcy protection with interlocking reorganization plans. The merger scheme, announced Monday, hinges on the ability of both companies to convince their many bondholders to exchange debt paper for equity in the new combined entity. “This is fascinating. I have not seen this done before,” said Evan Flaschen, co-head of the financial restructuring group at Boston-based law firm Bingham Dana LLP. “It can be done, but there’s a lot of negotiations to be worked out.” While the current plan calls for the merged company’s equity to be divided evenly between current stakeholders, Flaschen said he would not be surprised if bondholders lobbied to retain some of their investments in secured debt instruments. Also to be decided is whether shareholders retain any of their stakes following the bankruptcy and merger proceedings. Although shareholders are commonly left in the cold once a company files for Chapter 11 protection, Michael Scanlon, a Metrocall executive, said that because Metrocall’s market capitalization is only about $20 million — trading in the company’s shares was halted Monday afternoon at $0.22 a share — it was not unfathomable that shareholders could receive some equity in the new company. WebLink Chairman and CEO John Beletic said he was confident bondholders would endorse the bankruptcy and reorganization plans. Merger talks between WebLink and Metrocall began about six months ago when it became clear both companies were headed for a financial squeeze. However, it was not until Metrocall had to defer a $19.5 million interest payment to its bondholders March 15, a move that sparked bankruptcy concerns, that negotiations became more serious. Recognizing the unusual nature of the reorganization effort, Beletic added that he would not be surprised to see other telecommunication providers arrange similar transactions. “We are pioneers in what is unprecedented to date, but I suspect that this is something that will be followed by others in the telecom sector,” he said. If a combined company emerges from bankruptcy, it would retain the name WebLink Wireless and would be based in Alexandria, Va., Metrocall’s current headquarters, but run its operations out of Dallas, WebLink’s current base. Beletic would become chairman and Metrocall Chairman and CEO William Collins III would take the positions of vice-chairman and CEO. Both WebLink and Metrocall have been plagued by the low margins of running large, one-way paging operations in an era when new two-way devices and the proliferation of cellular telephones has made the long-term viability of pagers questionable. In an early effort to pool their resources, the two companies signed a partnership agreement in June, whereby Metrocall began using WebLink’s wireless spectrum network to carry its two-way paging business. Both companies have since been trying, with mixed results, to move their one-way paging customers over to the higher margin two-way paging devices. When negotiations with bondholders begin, Metrocall executives will have $626 million in senior subordinated debt to restructure and an additional $133 million in bank loans to refinance. WebLink, meanwhile, must attend to bond debts of $523 million and $85 million in secured bank loans. And while Metrocall says its cash flow is strong enough to fund its daily operations, WebLink has had to arrange $50 million in additional bank financing to go along with a $25 million pre-payment by Metrocall for the use of its wireless network for the remainder of the year. Whether bondholders will go along with the companies’ plans or balk at the proposed arrangements for dividing equity in the merged company will be determined over the next six weeks. Michael Gill, an analyst at Tejas Securities in Austin, Texas, said he expects bondholders to demand more equity than the companies may be willing to give. If conflicts do arise, he said, there could be attempts to attract a third party such as Nextel Communications, Motient Inc. or WorldCom Inc. to acquire either of the two companies. “It’s unprecedented to take two companies into bankruptcy and repackage them as a merger,” Gill said. “I have serious doubts that it can be done successfully.” Over the past month, Scanlon added, Metrocall has been working furiously with its many financial and legal advisers to fashion a merger agreement that bondholders and bankruptcy court would be likely to accept. Metrocall’s lawyers are from Wilmer, Cutler & Pickering in Washington, D.C., and New York’s Shulte Roth & Zabel LLP. Since deferring its interest payment in mid-March, Metrocall hired the investment banks Wit SoundView and Banc of America Securities LLC to handle the WebLink merger transaction and the firms of Deutsche Bank Alex. Brown and Lazard to usher the company though the Chapter 11 bankruptcy restructuring. Copyright (c)2001 TDD, LLC. All rights reserved.

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