Consolidation is expected to continue in the telecom service provider space, particularly among smaller players, panelists at the Stifel Nicolaus conference agreed. But conditions in the overall economy are forcing potential acquirers to view potential targets in a new way, one in which the value of telecom assets is, more than ever, in the eye of the beholder.

“It’s a little like 2001,” said Michael Huber, managing principal for Quadrangle Group, a private equity investor. “Buyers are…constrained by the debt markets and don’t feel they can be aggressive. Sellers hope if they wait six months, it will get better.”

The turbulence in the credit market hampering equity investors gives an advantage to telecom companies looking to buy assets for strategic reasons, since strategic buyers are willing to pay a lower price. “We can’t compete with a strategic buyer,” Huber said.

The recent sale of Alltel by private equity firms to Verizon may be illustrative of this dynamic. Just a year after acquiring Alltel, TPG and Goldman Sachs settled for a 2.1% return.

“They’re very smart people,” Huber said of TPG and Goldman Sachs. “They probably recognized it was going to get worse before it got better, and they got out. I think they recognized that they’d have had to slug it out for years, after which it could be worse.”

So what are strategic buyers looking for? Iowa Telecom, which last year acquired data networking and storage provider Baker Communications for $8.25 million, looks most closely at free cash flow and potential synergies when evaluating possible acquisitions, according to Alan Wells, its chief executive officer, who also sat on the panel. For Surewest Communications, which last year acquired Kansas-based triple-play provider Everest Broadband, the most important characteristic is the quality of the assets themselves, according to Steve Oldham, SureWest’s CEO. “The second is customer demographics -- average income and education levels. We track that very closely. [Well-educated, high-income customers] are far more likely to have high [average revenue per user].”

Where some smaller carriers may look for networks contiguous to their own -- some expect Embarq to remedy the inconvenient distribution of its own network, for example -- geographic proximity is not a concern for overbuilders such as Surewest, which added its new Kansas network to its original one in California. “When you’re an overbuilder, you can choose where you go,” Oldham said.