NEW YORK-The public capital markets were not kind to personal communications services companies in 1996, but 1997 is looking a bit more hopeful.
“The seven publicly traded PCS players not only under-performed but negatively performed the market, down 10.5 percent, while the S&P 500 was up more than 20 percent. Omnipoint (Corp.) is the only PCS success story so far as market performance is concerned,” said Kevin Roe, vice president of equity research for ABN Amro Securities Inc., New York. “It’s been a tough time to be a sell-side analyst. Few want PCS, even fewer paging, not even so much cellular.” Roe attributed the situation to “competition, and not the rational competition of the four-player United Kingdom market.”
e variations in license costs also are giving investors pause as they try to sort out which individual cases are likely to be success stories. Although Omnipoint’s New York franchise has proven a stock market success story so far, Roe also said the investment community is trying to sort out the significance of wide disparities in license costs, even within the same major trading areas. “In the New York MTA, the C-block cost $47 per pop, the D- F-block, $8.45. No portfolio manager wants to be the dumb bunny who gets into the most expensive one.”
Another disparity that has given investors pause is handset subsidy. “With the launch of PrimeCo PCS, the technology choice is less important,” Roe said. “[Code Division Multiple Access] is giving a $300 subsidy, [Global System for Mobile communications], a $150 to $200 subsidy. Subsidy matters over the long term.”
Roe said equity investors also will be scrutinizing: private equity partners, i.e. venture capital investors; specific competition in a carrier’s area; time to full commercial operation; lead and co-lead managers of securities underwriting syndicates; appropriateness of equity pricing; and vendor financing agreements.
“The market will change when it sees real operational numbers, and most of the (new) deals eventually will get done,” he said.
Both public equity and high-yield debt markets have been looking to see what role equipment vendors can and will play in providing one of the key financing legs that PCS start-ups need in order to proceed.
“The early money in after equity usually is high-yield debt,” said Stephen Martin, vice president of customer financing North America for Northern Telecom Ltd., Richardson, Texas. “There has not yet been a single successful high-yield public debt offering by a PCS provider, but the (investment) banks will be in eventually because it’s a super opportunity.”
Nortel announced in December a $1.1 billion financing of its vendor credit facility with Sprint Spectrum L.P. that was syndicated by the Bank of New York, with no recourse back to Nortel. In developing countries, this type of sponsorship support would come from a quasi-government entity like the Export-Import Bank.
The recent bank loan syndication took a bit of heat off of Nortel, which has more than $2 billion in outstanding loan commitments to wireless carriers. “We do reserve very conservatively against these loans, but our balance sheets already are feeling the strain, and the rating agencies are scrutinizing them,” Martin said.
Banks have “lurched from crisis to crisis” and typically don’t want to finance startup companies, he said. They want to see positive cash flow and earnings before making loans. And unlike the equipment vendors, banks aren’t as well-placed to understand particular wireless companies.
At the same time, equipment vendors have to make their own decisions about where to draw the line. “We are not a bank and don’t wish to become one,” Martin said. “Nortel also is a bit reluctant to take an equity position in a (wireless carrier) because we sell equipment to their competitors.”
I have heard that Hughes (Network Systems Inc.) made an equity investment in NextWave (Personal Communications Inc.), but Hughes is a relatively new entrant. [More often], equipment vendors make discreet (equity stake) investments overseas where there is less competition.”
The vendors are being pulled in not only by the unprecedented and large capital needs of this new generation of wireless carriers but also by new and “intense” competition from other equipment vendors, Martin said. “In my opinion, the vendor’s perspective is, number one, vendor finance, and number two, hope for a good fairy to grant you three wishes.”
