Fitch: Competitive Pressures Favor Consolidation in U.S. RLEC Industry.

CHICAGO -- Fitch Ratings believes that underlying negative trends support consolidation in the rural local exchange carrier (RLEC) industry over the coming years.

RLEC companies are experiencing relatively little organic growth, as the increased revenues from growing services such as high-speed data have not materially offset declining voice revenues. The erosion of the traditional wireline voice business of the RLECs, mainly by competition from cable multiple-system operators (MSOs) and wireless operators, has already led to some industry consolidation over the past year. Over the longer term, RLECs also face the uncertain effects of increased competition on service revenues for the rural operators, as well as uncertainties on the regulatory side.

'In the absence of meaningful organic growth, acquisitions become a means for rural carriers to increase revenues, cash flow and diversity,' said John Culver, Senior Director, Fitch Ratings.

While growth through acquisition is, in Fitch's view, an appropriate strategy, Fitch also notes that acquisition-driven growth entails higher risk to the credit quality of one or both companies involved in a transaction, as well as operational risks. In addition to the potential for increased leverage, growth through acquisition can be irregular and dependant on valuations.

The full report 'Rural Local Exchange Carrier Consolidation and Sensitivity Analysis' can be found on the Fitch Ratings' web site www.fitchratings.com. Fitch's report reviews the three general types of transactions that could take place as the rural telecom space consolidates, and the potential credit implications:

--Continued acquisition of smaller RLECs by the larger carriers;

--Acquisition of rural lines from the regional Bell operating companies (RBOCs);

--Potential combinations of the large RLECs.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.