Centennial Communications: Temporary Selloff Is a Buying Opportunity

Yesterday Centennial Communications (CYCL), which is in the process of being acquired by AT&T (NYSE:T) for USD 944m or USD 8.5 cash per share offer, saw a 9.6% drop from USD 8.12 to USD 7.35 on the back of no news. The acquisition has already been approved by CYCL shareholders and remains subject to HSR (USA) and FCC (USA) approval. On 02-July-09, AT&T informed the market that they expect completion and regulatory approvals during the third quarter of 2009. With clearances expected -with or without imposed divestitures or asset swaps- by September/October, we believe that the 14-Jul-09 share price drop represents a (short-term) buying opportunity as the merger spread widened out from 4.6% (annualised 22% return -assuming latest end-Sep 09 closing) to 16% (annualised 75% return).

We believe that the intraday drop could (similarly to what happened to the Anheuser-Busch, Genentech, Puget Energy merger situations) have been triggered by regulatory fears and/or margin calls or merger arbitrage fund liquidation(s).

Although we feel there is regulatory risk on CYCL's Puerto Rican assets (44% of CYCL total sales), there would still be three other wireless companies providing highly competing service in Puerto Rico, with AT&T controlling under 40% of the market. Given that the merger spread has been stable between 1 and 5% for the last 6 months (reflecting the regulatory risk), we recommend to play the technical anomaly and buy CYCL around USD 7.4, and playing the temporary narrowing of the 16% merger spread.

Disclosure: Long CYCL