NEW YORK-“The summer of 1996 was when high-yield (debt) investors decided they’re not in the venture capital business. They prefer cash flow now, not cash flow in five years,” said Richelle Elberg, analyst for Paul Kagan Associates Inc., Carmel, Calif.
“The returns demanded are in the 25 to 30 percent range, which is pretty rich for the high-yield market,” Elberg added. But commercial banks are willing to step up with working capital where there is none, and the same goes for the equipment vendors.
About $6.5 billion in vendor capital has been committed to broadband personal communications services to date, and an additional $3.3 billion will be needed for the C-, D-, E- and F-band auction winners, said Robert F. Paige, vice president of business development for General Electric Capital Corp., Dallas. Northern Telecom Ltd. and Lucent Technologies Inc. account for more than $4 billion of the $4.9 billion committed to A- and B-block winners. About $4 billion is needed for the C-block winners, of which 12 separate vendor commitments totaling $2.5 billion are in place, although no deals had been funded by mid-October, he said.
Lucent “snared over $3 billion in U.S. cellular/PCS contracts over the past year or so, over double any competitor, assuring it the leading U.S. market share,” said Luke T. Szymczak, a telecommunications analyst for Prudential Securities Inc., New York.
“Market buildout success depends on finding financial partners to fill the holes for the vendors,” General Electric Capital’s Paige said. “The key for vendors is to get (the obligations) out the back door to financial institutions because they don’t want to hold the paper for too long.”
Jill Greenthal, managing director of Donaldson, Lufkin & Jenrette Securities Corp., New York, concurred. “We’ve only seen the tip of the iceberg. The vendors-the Lucents and the Nortels-will tap the debt markets to offload their obligations” incurred by fronting money to PCS providers purchasing their equipment.
This is especially urgent for the vendors since the Federal Communications Commission imposed C-block license payments as a debt obligation senior to all others. In case of a default, the FCC would get first priority and possibly leave all other creditors empty-handed.
“The FCC should have looked at that side before it jumped in to scoop up all the money. In some cases, if these companies can’t get to positive cash flow, the FCC won’t get its money,” said Douglas Shute, president of Tellabs Wireless, Burlington, Mass. “It could have allowed the licensees to pay it back over time, maybe for each call made paying a commission to the government, instead of imposing this tremendous burden on people trying to create new business opportunities.”
Barring a change of heart by the FCC, other creative financing initiatives are under consideration, according to Paige. These include equipment leasing as an alternative to purchase, special purpose corporations to buy equipment and merchant banking activity with Wall Street securities firms.
“Hope abounds,” he added, because “new vendors are coming into the field-Siemens (Corp.), Hughes, Lockheed Martin.”
By contrast, in the stock market, Greenthal called the situation, “a sobering, depressing story.” Competition in wireless communications is so rapid and widespread that the equity marketplace still is trying to sort out its impact on stock prices.
“The C-block guys are having a lot of trouble finding supporters” on Wall Street, she said. “The equity markets are relatively robust, but some are not there, (in part because) today they’re more of a discount market, so bringing new issues out is more difficult.”
Consequently, she added, C-block auction winners “will have to look for alternative sources, including private capital.”
For new PCS licensees, the benchmark indicator of their own success from the capital market’s perspective is how well Omnipoint Corp. and Western Wireless Corp. do in terms of consumer acceptance, Greenthal said.
Lance C. Cawley, vice president of Fidelity Capital’s telecommunications and technology group, Boston, is less sanguine. He predicted the winners of the C-block auction “will be the equipment suppliers and the taxpayers. The losers will be over-leveraged.”
A- and B-band PCS players “will garner 80 percent of market share, 800 MHz cellular will still have major market share and paging will be around forever,” he said. “After eight years in the PCS market, I left it with the C-band auction.”
Tellabs’ Shute and John M. Bensche, vice president of equity research for CS First Boston, New York, both predicted mergers and acquisitions as smaller players fall by the wayside and are scooped up by other companies.
