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Fast-Growing SmarTalk to Buy Ohio Firm

Telecom: The $65-million deal would be the third major acquisition by the L.A. prepaid calling-card company recently.


Significantly boosting its national presence, SmarTalk Teleservices Inc. is expected to announce today that it has signed an agreement to purchase an Ohio firm for about $65 million in stock, the third major acquisition by the Los Angeles company in two months.

SmarTalk, the prepaid telephone calling-card firm founded in a room over a Bel-Air garage almost three years ago, has become one of the fastest-growing firms in California, in part through its aggressive acquisitions. It makes and distributes prepaid phone cards to such major retailers as Office Depot Inc., Ralphs Grocery Co. and Staples Inc.

Privately held ConQuest Telecommunications Services Corp., a Dublin, Ohio-based developer of prepaid phone cards with about 200 employees, would increase SmarTalk's distribution network by 6,000 stores, to a total of more than 35,000.

The deal reflects increasing consolidation in the growing $1-billion prepaid phone-card industry, where more than 500 vendors are vying for name recognition. Publicly traded SmarTalk, already one of the nation's largest sellers of prepaid phone cards, must create stronger distribution channels through acquisitions and future growth if it is going to compete with giants like MCI Communications Corp. and AT&T Corp., analysts have said.

"We are the consolidator of this industry--we're trying to grow both our scale and scope and create a national brand," said Robert H. Lorsch, chairman and chief executive of SmarTalk, which would grow to more than 400 employees with the purchase. "We're trying to bring together all these wonderful entrepreneurs to better compete with the major carriers in the prepaid calling-card industry."

The deal would also give SmarTalk a stronger foothold in the Midwest and in Britain, where ConQuest has an alliance. Once finalized, the deal will boost SmarTalk's market share in the travel industry, as ConQuest currently provides long-distance services to Holiday Inn, Ramada Inn, Comfort Inns and Days Inns franchises.

A major part of SmarTalk's success is in co-branding, where it allows another company's name to appear on the prepaid phone card, analysts said.

While larger telecommunications giants such as AT&T are expected to start aggressively marketing their own sophisticated prepaid phone cards, so far they have not engaged in co-branding, analysts said. By increased co-branding with major airlines, hotels or larger retailers, analysts are predicting SmarTalk's revenue could increase to $325 million in 2000, from $15 million in 1996.

SmarTalk, which expects to pursue other purchases this year, was represented in the deal by Salomon Bros., the Wall Street investment banking firm.

SmarTalk saw its sales increase 3,208% to $15 million in 1996 from the previous year. ConQuest reported $39 million in sales in 1996.

The prepaid calling-card industry is expected to continue to grow as more consumers find such cards cheaper than traditional phone cards, analysts said. More than 85% of all Americans have yet to purchase a prepaid phone card, and most who have received the cards got them as part of a promotion or gift. Calls on prepaid cards generally cost less than traditional short calls, but more than longer ones.

Consumers activated 924,000 SmarTalk cards in 1996, up from 71,319 in 1995.

The cards are sold in 30-, 60- or 120-minute segments. Consumers activate a card by calling a toll-free number and punching in an access code that connects them to a bank of prepaid calling-card minutes. Other services, such as a private answering machine and weather and news services, are available through the cards.

SmarTalk markets to what is known as the "unphoned," immigrants, students or anyone who cannot get or does not want his or her own phone. Small businesses that do not want to hand out traditional calling cards are finding that fixed-amount prepaid cards can suit their needs.

To increase its market share, SmarTalk said in late May it would pay $10 million in stock to acquire SmarTel Communications Inc. of Boston, which specializes in selling prepaid calling cards to companies for use in promotions. In early June, the company said it would acquire Orlando, Fla.-based GTI Telecom Inc. for $70 million in stock and debt, a purchase that expanded SmarTalk's market share in the retail drug and grocery segments by 4,000 locations.

As part of its most recent acquisition, which is expected to be completed in the fourth quarter, SmarTalk will sell 4.8 million shares of its stock.

In Nasdaq trading Tuesday, SmarTalk shares fell 13 cents to close at $13.88.

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