NEW YORK-Standard & Poor’s Corp., an international debt rating agency based in New York, estimates there will be US$1 trillion in wireline and wireless telecommunications capital needs before the new millennium arrives.
“Because of the low number of telephone lines worldwide, much of the growth … will come from the addition of basic phone lines,” a Standard & Poor’s report said. “However, demand for wireless services … including cellular, paging, personal communications services (PCS) and low-earth-orbit satellites … also is expected to increase dramatically.”
At the same time, at least for now, the United States’ economy, from which a sizable portion of the investment dollars flow, is awash in retirement savings and other cash that money managers need to place fast in appreciating financial instruments.
However, this fortunate confluence of capital need and capital availability by no means indicates that every telecommunications project will get financing. The debacle of the U.S. Federal Communications Commission’s C-block license auction for PCS provides a warning that “not every carrier will be successful,” said Mark Lowenstein, senior vice president of the global wireless telecommunications practice for The Yankee Group in Boston.
Some of the C-block bid winners, whose systems would have been start-ups in already-crowded U.S. markets, found the doors of the capital markets slammed shut on their financing needs. However, Lowenstein also noted that after the C-block situation, some federal agencies, particularly in Latin America, imposed far more stringent pre-screening of bidders for their countries’ wireless licenses.
“At this stage, most of the really good opportunities in wireless already have been awarded or will be soon, (although) there may be some attractive markets coming up in the future,” said Richard Siderman, managing director of telecommunications and cable television debt ratings for Standard & Poor’s.
On the stock side of the public-capital equation, investors looking for gains in telecommunications shares may be too late into the game if they’re not already in it, said Amit S. Khandwala, senior vice president of international investments for U.S.-based Wright Investors Service.
“I would be cautious,” he said. “I wouldn’t suggest getting in now because the valuations are so high, but it’s not the time to get out either.”
Expectations of exploding demand for and growth in telecommunications services have pushed up the valuations of telecommunications companies to the point where jumping on the investment bandwagon now probably is a bad idea, Khandwala said.
Vendor financing of network buildout is a relatively recent financing phenomenon resulting from the plethora of new telecommunications companies. However, the lending capacity of network infrastructure manufacturers for additional telecommunications projects “remains to be seen,” Lowenstein said.
Furthermore, even if it’s available, vendor financing “can only take you so far, especially if the capital you need isn’t for equipment,” said Peter A. Sokoloff, managing director of U.S.-based Peter A. Sokoloff & Co. in Denver, a boutique investment bank specializing in telecommunications finance.
Nevertheless, Lowenstein said he still sees “great opportunities” for investment over the longer run in Asia, particularly China. In the shorter run, the focus has shifted to the southeast and western portions of South America. There also are “country-specific” opportunities in Africa and the Middle East, he said.
“Wireless operators cite the promise of all these billions of people without phones,” Siderman said. ” But saying that all [they] need is 1 percent penetration, in contrast to 20 percent in the United States or 40 percent in Scandinavia, begs the question of what is the addressable market… At 2 (percent) to 3 percent penetration, do you get down to an income level where people can’t afford it?” Siderman questioned.
Paraphrasing a report by Erique Iglesias of the Inter-American Development Bank, Laurence Swasey, senior analyst for U.S.-based Allied Business Intelligence, said a third of Latin America’s population survives on less than US$2 per day, and “the region as a whole won’t be considered economically viable for 50-100 years.”
The marketing mantra of the wireless telecommunications industry is that it will provide a cheaper, faster, easier alternative to landline telecommunications in underserved markets. However, this conveniently ignores the need for a developed wireline infrastructure for efficient and effective wireless call origination and termination, Siderman and Swasey said.
In all the world’s developing markets, China stands out for the scale and seriousness of its government’s commitment to installation of landline infrastructure over the next several years, they said. And yet, China and the former Soviet Union, both large potential markets, are considered among the riskiest areas for foreign-capital investment because their legal systems offer scant protection to investors, analysts said.
“China is a real problem because it’s not afraid of the United States; it doesn’t care about us as much as it should,” Sokoloff said.
While much attention is paid to huge potential markets like China, even startup wireless carriers seeking to go commercial in small international venues can get financing, provided they meet two tests, he said. First, they must have a radio-frequency license or licenses from the local government, most likely obtained because of local partners with good connections but probably little or no telecommunications experience. Second, the foreign entity involved in holding the license must have “a solid track record in building out [networks] in international markets but doesn’t necessarily have to be a big company,” Sokoloff said.
Venture capital firms specializing in telecommunications “have taken the plunge, and a number have at least one third-world venture in their portfolio although it might be buried pretty deep,” he said.
Long-distance wireline carriers looking for more direct and efficient ways to route and land their international traffic also are players in developing wireless networks outside their domicile countries.
“There are actual wireless carriers in the United States, all of which have an international strategy, that are looking to maintain a high level of investment overseas,” Sokoloff said.
“In Africa especially and, to a lesser degree in Asia, organizations like the [Overseas Private Investment Corp.], which traditionally has been a lackey of large U.S. telcos, are for the first time getting serious about financing smaller telecom ventures … not as seed capital but for companies with cash flow.”
International organizations such as the World Bank and the International Monetary Fund also are bringing their considerable capital to bear on such projects, he said.
