Centel Corporation

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Centel Corporation

311 South Wacker Drive
Suite 5200
Chicago, Illinois 60606
U.S.A.
(312) 399-2500
Fax: (312) 399-4795

Public Company
Incorporated: 1900 as McGraw Electric Company
Employees: 9,300
Sales: $1.18 billion
Stock Exchange: New York

The Centel Corporation is an independent telecommunications company that provides local telephone service in seven states and cellular telephone operations to customers in 22 states. The company was founded by an Iowa entrepreneur at the turn of the century, and in the intervening years has merged with and acquired a large number of companies in the utilities and telecommunications industries, expanding and shrinking its fields of operations at various times. In the early 1990s, Centel’s leaders decided that the nature of the modern telecommunications industry made it impossible for a small, independent company to survive and prosper for long, and put the company up for sale.

Centel began with Max McGraw, who was born in Clear Lake, Iowa, on February 1, 1883. Fascinated by electricity as a boy, McGraw acquired a wiring permit at the age of 17, and used $500 in savings from his paper route to start an electrical repair and supply shop in Sioux City, Iowa, in 1900. He called his venture, located in the basement of a drugstore, the McGraw Electric Company. The bulk of McGraw’s business consisted of wiring homes for electric lighting, as they converted from the more archaic gas lighting. Business was slow for the first six months, and McGraw held onto his paper route to pay his store’s rent. At the end of his first year in operation, the young entrepreneur had grossed $39.70.

In his second year in operation, McGraw snagged two large contracts, one to wire the Sioux City Stockyards, and one for the city’s Peavey Grand Opera House, and with this success, McGraw moved his company to bigger quarters. One year later, McGraw rounded up five shareholders, including his father and his best friend, and began a second business, called Interstate Supply Company. This company, a wholesaler of electrical supplies, grew rapidly.

In 1907, McGraw embarked on a third business venture when he set up Interstate Electric Manufacturing Company, which produced magnetos, and light, telephone, and power switchboards. In 1910, McGraw consolidated his second two enterprises into the Interstate Supply and Manufacturing Company. Two years later, his interests in these properties put him in a position to buy the assets of the Lehmer Company, an Omaha, Nebraska, mill supplier and manufacturer of electrical equipment, after the death of the company’s founder. McGraw merged his acquisition, and his Interstate holdings, back into his first firm, McGraw Electric, creating a company with revenues of more than $2 million a year. It was 1912, and he was 31 years old.

In July 1922, McGraw bought the Central Telephone and Electric Company, of St. Louis, Missouri. Within three years, the company’s operations had expanded to cover much of the Midwest, including areas of Iowa, Kansas, Nebraska, Oklahoma, Missouri, Arkansas, Kentucky, Colorado, Wyoming, South Dakota, and Minnesota. During this time, McGraw also acquired other utility properties, including an electric plant in South Dakota, and other operations in Iowa, Nebraska, South Dakota, and Minnesota.

On June 28, 1926, McGraw spun off these utility holdings into a new company, Central West Public Service Company. This entity represented the consolidation of more than 20 formerly separate electric and telephone companies. The company was reorganized in the mid-1930s, and its name changed to Central Electric and Telephone Company, Inc. Ten years later, McGraw reconfigured his holdings in the company again, splitting it into the Central Electric & Gas Company, and the Central Telephone Company, in May 1944.

In the 1950s and early 1960s, Central Electric & Gas embarked on a decade-long series of acquisitions and mergers between the company and other utilities providers, under the leadership of the company president, McGraw’s old friend Judson Large. The Central Electric & Gas holdings merged with the Southern Colorado Power Company in May 1961, and the company’s name was changed to Western Power & Gas Company at that time. Three years later, on October 26, 1964, the company’s founder, Max McGraw, died at the age of 81. He had remained chairman of the company up until his sudden death while on a hunting trip.

A year later, the company McGraw inaugurated merged with the Western Light & Telephone Company. Western Light & Telephone had been founded in May 1935 and had merged with the Kansas Power Company (founded as the Concordia Electric Light Company in 1908) in 1945. Now, Western Light & Telephone altered its name to that of McGraw’s company, Western Power & Gas, starting on July 1, 1965.

The company now provided electric, gas, water, and telephone services, and it also acted as a holding company for subsidiaries that offered telephone services. These subsidiaries were Central Telephone, serving seven states; Southeastern Telephone, of northwestern Florida; and Worthington Telephone, with operations in southern Minnesota. Western Power & Gas, with its headquarters in Lincoln, Nebraska, now comprised the country’s third largest independent telephone system, offering service in ten states overall: Florida, North Carolina, Virginia, Wisconsin, Illinois, Missouri, Iowa, Minnesota, Kansas, and Nevada.

Analysts praised the merger, noting that it allowed Western Power & Gas to diversify the services it offered, making the company less vulnerable to a downturn in any one field. The merger also permitted the companies to eliminate redundancies among their managerial corps, inaugurating more efficient operations. Western Power & Gas boasted up-to-date facilities and equipment, and the company was aggressive in promoting use of its services.

In the wake of the merger, Western Power & Gas continued its policy of growth through acquisitions. In buying up utilities, the company looked for properties that would complement its existing holdings. This factor led to the purchase of the Lee Telephone Company, of Martinsville, Virginia, at the end of 1965, in a state where Central Telephone already had operations. In addition, the company looked for areas with a strong potential for growth. This concern had prompted its purchase of the Southern Nevada Telephone Company, serving the Las Vegas area. Although Nevada was not geographically linked to the rest of Western Power & Gas’ operations, being much further west, the area was poised for demographic expansion, as the region’s industrial and mining base grew, and nuclear research activities intensified outside of Las Vegas. Indeed, Nevada soon became one of the company’s most important areas of operation.

In the year following the merger, Western Power & Gas increased its holdings in its subsidiary, the Central Telephone Company, to 95 percent, and in 1967, the company transferred its Iowa and Missouri telephone properties to Central Telephone. In March 1967, the company reported annual revenues of $142 million for 1966, an increase of $20 million from the year before. By October of that year, the company served nearly 750,000 company-owned telephones in its ten states of operation.

On June 5, 1968, Western Power & Gas changed its name to Central Telephone & Utilities Corporation, reflecting the shift in the company’s priorities from gas and electric service to telephone systems. Between 1966 and the end of 1970, Central Telephone’s system more than doubled, despite the fact that the company had sold off its operations in Wisconsin. Overall, Central Telephone expected its growth to continue at that rate. To pay for this growth, which took place primarily in the area around Las Vegas, the suburbs west of Chicago near the newly developed O’Hare airport, and the Florida panhandle, the company dramatically increased its construction budget, to $130 million in 1971, embarking on an equipment modernization program that lasted through the end of 1972. Rumors persisted throughout this period that Central Telephone would be sold to one of its larger competitors, and the company’s leaders did nothing to dispel the speculation. “We’ll sell anything if it’s the right price,” the company’s president told the Wall Street Journal.

In December 1975, Central Telephone acquired Mid-Texas Communications Systems, a small telephone company with annual revenues of $20 million. The company’s growth potential derived from the fact that it served the areas surrounding Houston’s international airport, and the recently opened Dallas-Fort Worth Regional Airport, as well as the site of a large army base. Central Telephone hoped that this company would experience the same rapid rate of growth enjoyed by its operations near Chicago’s O’Hare Airport.

In the mid-1970s, Central Telephone also embarked on a program to install state-of-the-art electronic switching systems in its subsidiaries. These provided potential savings, because the costs to maintain them were much lower than conventional systems. The company planned to have three-quarters of its properties converted within ten years. In addition, Central Telephone worked hard at marketing its services, encouraging residential customers to add extra phones, increasing profits for the company.

By 1976, roughly three-quarters of the company’s sales stemmed from its telephone businesses. Central Telephone moved to streamline its operations when it sold Cengas, the holding company for its major gas properties in Nebraska and South Dakota, for $31 million in April 1976. The company hoped to find a buyer for its other, slow-growing midwestern electric properties as well, but their large size made this unlikely.

Central Telephone purchased two more telephone companies in the late 1970s, but it had become clear that the local telephone industry, with its heavy regulation and slow growth, was not the most fertile ground for profits. Rather than follow the lead of its competitors and enter the longdistance telephone market, Central Telephone decided to make the most of its strengths and seek out opportunities in the local and regional markets it already knew well. In search of higher margins and faster growth, Central Telephone formed a new unit of the company, called Centel Communications, and launched an aggressive campaign to diversify the company’s operations. Centel entered two new businesses: cable television and telecommunications systems for businesses.

In August 1978, Centel got off the ground by buying the Acoustics Development Corporation, which sold phone booth equipment, and Comm-Quip, which distributed communications equipment to companies. In 1980, Centel added to these holdings, purchasing Livingston Communications and Fisk Telephone Systems, which would become the basis of Centel Communications Systems and Centel Information Systems, which together designed, marketed, and installed sophisticated telecommunications and data systems.

In addition, the company began buying up cable television properties in the areas where Central Telephone already had phone operations. To this end, the company purchased Consolidated Cable Utilities, with 12,000 customers in Illinois, and a few months later it bought Lone Star Video, Inc., a business located in Houston.

In January 1980, Central Telephone divested itself of its Kansas telephone operations, earning $3.6 million in the transaction. In turn, the company bought two more telephone systems, including one in Nevada, and four additional cable television properties. Cable Communications Operations, Inc., of Ohio, and OVC, Inc., of Virginia, together cost the company $27.5 million.

Central Telephone’s brisk pace of acquisitions continued in 1981, as it acquired four more cable systems. In addition, the company merged its regional communications equipment distribution holdings with the marketing departments of its telephone companies to form Centel Business Systems. The purpose of this unit was to effectively market telecommunications equipment to local businesses. In 1981, the group had sales of $112 million, to notch earnings of $10 million.

By the end of that year, the company’s cable television and business communications equipment revenues together made up one quarter of the company total, and one tenth of overall earnings. With cable systems operating in 73 different communities, Centel served 125,000 subscribers. In May 1982, the changing nature of the company was incorporated into its name, when the Central Telephone & Utilities Corporation officially became the Centel Corporation.

In addition to its focus on opportunities in local markets, Centel looked to technological breakthroughs for its growth. The company planned “Videopath,” a system of microwave towers to link the cable TV operators of a metropolitan area. This would allow advertisers to distribute materials to a large number of cable systems all at once, and would also permit video-conferencing for businesses. In addition, Centel looked to pioneer information retrieval systems for homes, giving new capabilities to the telephone and TV linked together.

The most successful innovation that Centel took up was undoubtedly the cellular telephone, which used radio technology to offer mobile phones. The company entered the business in 1982, when it purchased a minority ownership in the first operational cellular system in the country, in Chicago.

In an effort to further reposition itself, Centel announced in 1984 that it would concentrate on building its holdings in just three areas in the next few years, including video information services, specialized communications networks, and cable television. The company sold off its communications equipment manufacturing subsidiaries in June of 1984. In November 1984, Centel introduced KEYFAX, a videotex service providing home banking, shopping, stock information, and updated news briefs to the Chicago area, seven months after its launch was originally planned. A joint venture with the Honeywell computer company, on which Centel was estimated to have spent $15 million, used personal computers in the home and a software package to link users to the system. The company planned a large advertising push to accompany the service’s introduction and convince consumers to invest in the new technology. In April 1985, Centel bought out its partner in the KEYFAX joint venture, becoming sole owner of the project. Four months later, however, the company was forced to abandon the service, as low consumer interest failed to justify the project’s expense.

Centel continued to make acquisitions in the cable television and cellular phone fields throughout the mid-1980s, and the company’s income grew steadily, enhanced by strong revenues from its utility holdings. By early 1988, Centel’s success had attracted the attention of two corporate raiders who launched a hostile attempt to take over the company and sell off its five operating parts: telephone services, electric utilities in Kansas and Colorado, the business systems group, cellular phone operations, and cable television. This attempt was the first time that such a maneuver had been attempted in the telephone industry. In September 1988, however, Centel beat back the hostile takeover by repur chasing 2.15 million of its shares, a quantity representing 5.5 percent of the company’s stock, for $43 a share. Also in 1988, the company vaulted itself into the top ranks of the cellular phone industry when it spent $775 million on United Telespectrum, the cellular unit of United Telecommunications.

As a result of its experience in fighting off a takeover, Centel decided to dramatically restructure its operations, focusing exclusively on telephone services, both in terms of local exchange systems and the cellular telephone business. Accordingly, the company announced plans to sell off its cable television operations, its business, communications, and information systems units, and the part of the company devoted to fulfilling contracts from the federal government.

In 1989, Centel announced finalization of six separate deals to sell Centel Cable Television in parts, for $1.4 billion. That year, the company posted a loss of $9.5 million as the company made high interest payments on money borrowed to buy back stock and purchase cellular phone systems. The following year, the company sold its federal systems unit, and in 1991, Centel’s communications systems unit was purchased by a group of private investors. In early 1992, Centel sold its electric utility holdings in Kansas and Colorado to UtiliCorp United. In addition, the company continued to search for an investor to buy its information systems division.

Throughout this time, Centel had been using the proceeds from these sales to increase its holdings in the cellular phone industry. In addition, the company moved to consolidate its local telephone holdings, eliminating operations in states where the company had less than 100,000 telephone access lines. To this end, Centel exchanged its phone operations in Iowa and Minnesota with Rochester telephone for cash, nearly 10 percent of the company’s stock, and its cellular phone holdings, in January 1991. In November 1991, the company put its Ohio telephone operations up for sale, and five months later, they were transferred to Century Telephone Enterprises.

Despite these efforts at consolidation, and the company’s continued strong revenue stream from its local phone operations, Centel’s leaders decided in January 1992 that the best way to maximize returns to shareholders was to dissolve the company. The company’s management believed that operations in the telecommunications industry would be consolidated in the hands of a few companies in the coming years, and that Centel’s status as a small, independent company made it an inevitable takeover target. Given its eventual fate, the company’s leaders decided to attempt to control the ultimate disposition of the company’s assets by choosing their buyer and the terms of purchase rather than sit by and be passively acquired. “Given our size, we serve a relatively small part of America,” the company’s chairman told the Wall Street Journal, “We really view the local and cellular business as a national business.” Centel retained two large investment banking firms to assist in the sale of its assets, and asked prospective buyers to submit proposals by mid-April 1992. On May 27, the company announced its intention to merge with long-distance carrier Sprint, and by late August, papers had been filed with the Securities and Exchange Commission to make this possible, with shareholder assent. Max McGraw’s independent enterprise, augmented, renamed, reconfigured, and split repeatedly during its nine decades of existence, will thus enter the 21st century as a small part of another much larger telecommunications conglomerate.