NEW YORK-As the Federal Communication Commission’s C-block auction for personal communications services draws to a close, a key consideration for systems build-out is the kind of role equipment vendors will play.
Although many creative financing ideas are under way or under consideration, two persistent stumbling blocks confront C-block bid winners.
First, there is the so-called FCC “debt overhang,” according to Robert F. Paige, vice president of business development, telecom vendor financial services, for General Electric Capital Corp., Dallas. In exchange for lending license purchase money to C-block bid winners at low interest rates, the FCC demands top billing among creditors in the repayment pecking order. “As long as the FCC debt position is senior to us, we’re not interested in being subordinate,” Paige said.
Second, there is the problem of availability of capital from the vendors, according to Paige and Woody Ritchey, senior director of sales and operations for Motorola Inc.’s Cellular Infrastructure Group, Arlington Heights, Ill. “The top 20 C-band players will need some form of vendor financing, about $10 billion in the relatively short term,” Paige said. “Lucent and the four other major players have about $2 billion to $3 billion left without close scrutiny of their ratings.”
Much of the growth in wireless communications is occurring outside the United States, in developing nations where vendor financing also is in demand. “Worldwide, we have to look not only at the C-block but also at the international markets, and to prioritize those needs,” Ritchey said. “My personal feeling is that we are like Ericsson and Nokia in that we are looking as well at Brazil, China and India.”
C-block bid winners need a vendor financing role to provide a critical comfort level to the third leg of the financing stool, the public debt and equity investors markets, according to Norman C. Frost, Jr., managing director, Bear, Stearns & Co. Inc., New York.
Within the constraints of FCC debt overhang and equipment vendor capital availability limits, deals no doubt will get done. Much will depend on the individual stories behind each C-block bid winner, stories that will be told after the bidding closes, said Kathy Egan, vice president of communications for Ericsson Inc., New York.
“We provide the total systems, so we’ll look at the total picture,” Egan said. “There is no formula, but we will be looking for the pieces to fit together: if the company is well-funded with equity, has a sound business plan, good management and a good market, to make sure it has what it takes for the long haul.”
Osmo Hautanen, general manager and vice president of PCS for Nokia Corp., which already provides PCS handsets in Hawaii and Washington, D.C., called financing the C-block players, “extremely risky business, especially on the handset side.” All of Nokia’s sales are financed on a 30-day payback schedule, he added.
One way to jump start the process of getting financing sources up to the plate simultaneously is for vendors to sign provisional contracts, said Paul Carroll, vice president of marketing for Siemens Stromberg-Carlson, Boca Raton, Fla. Siemens, which supplies handsets and systems, “can set up contingency financing agreeing to be your supplier provided you meet certain criteria, including other types of financing.”
The high prices paid for C-block licenses “can increase companies’ risk profile, but it won’t be the first case of companies heavily loaded with debt,” Carroll said. “Look at the wreckage that came out of the leveraged buyouts of the ’80s, but some companies used cash flow to their advantage and came out winners. There likely are companies that did bid too high and will go out of business. We’ll do all we can to pick the winners.”
Group purchasing arrangements are another venue by which vendors like Lucent Technologies Inc., Murray Hill, N.J., and Motorola plan to help C-block licensees. Part of AT&T Corp., what is now Lucent, provided seed capital to launch North American Wireless Inc., Vienna, Va. “We intend to function in a way akin to a purchasing cooperative for licensees that wish to align with us for economies of scale,” said Bill Leonard, chief financial officer. “We’d buy the equipment, own it and lease it to them for the term of their license. The way that plays into the vendor financing equation is that, if the concept is valid, we would serve as a bit of a C-block mutual fund.”
