NEW YORK-For strategic and financial investors, many domestic wireless carriers possess a strong desirability quotient because they own scarce spectrum in a huge and growing market.
Lehman Brothers Inc. projects that wireless penetration in the United States will reach 50 percent by 2002 and 70 percent by 2007, at which time monthly revenue per unit will average $40.
“The equity markets play the penetration game,” said Louis Friedman, managing director of the media and communications investment banking group at Donaldson, Lufkin & Jenrette Securities Corp.
“For bondholders, it’s not purely a matter of credit risk but also a lack of cash availability. That’s why (debt) deals are getting done, but at high prices.”
Lenders, whether bond buyers or bank loan officers, take comfort from the amount of public and private equity for which a company already has commitments or has in hand.
“There are new sources of early stage capital-(equipment) vendors, in certain cases,” said Robert Stuart, managing director of the global telecom group at CIBC World Markets Corp.
“[Vendors] will deny it, but you heard it here. They will put in equity or quasi equity. That’s very positive from a bank standpoint because you’re laying senior debt on top of quasi-equity.”
The desire for scale and bundled service offerings in the United States is driving a variety of corporate combinations, which in turn are driving up the value of wireless stocks.
“This is an interesting time to be an investment banker providing financing to the industry because of what is going on,” DLJ’s Friedman said.
“The ability of VoiceStream to consolidate [Global System for Mobile communications] providers and create a national [personal communications services] alternative with some holes in it underscores the scarcity of vehicles to invest in. And that is why … AirGate’s [initial public offering] received that kind of (good) reception.”
The Oct. 5 announcement of MCI WorldCom’s mammoth $129 billion agreement to acquire Sprint Corp., of which Sprint PCS comprises nearly half the enterprise’s value, underscored with an exclamation point the importance of wireless to telecommunications carriers.
“Consolidation is still the primary driver of valuations. There are only so many ways to achieve a national footprint, and wireless is a very important part of the telecommunications bundle,” said Harvey Liu, a director of CIBC World Markets.
“Huge premiums are being paid because of the scarcity value. There are a lot of reasons to own wireless, both voice and data.”
Likewise, the Vodafone AirTouch plc combination and its joint-venture agreement with the Bell Atlantic Mobile-GTE Corp. duet, coupled with the MCI WorldCom-Sprint merger announcement are putting pressure on other overseas carriers seeking entree into the American market. France Telecom, Deutsche Telekom and Nippon Telephone and Telegraph Corp. “have to decide what their strategy will be,” said CIBC’s Stuart.
“Sooner rather than later, there will be six or seven global providers of service. Any European or Asian player that wants to be one of them has to be in North America.”
MCI WorldCom’s offering price for Sprint translates into a value of $200 for each covered wireless population equivalent, said John Bensche, Lehman’s senior wireless analyst.
“In 1995 when (valuations of) $200 a pop were a stretch for mature cellular companies, I had D-C-F (block) models with 100-percent upside, and I couldn’t sell the stock,” he said.
“But we’re in a heady time for (wireless) stocks. They are at the high end of the trading band, the easy money has been made and there are probably better places to put money if you want to make a killing.”
Because of network buildouts, fill-ins and pending next-generation upgrades, stocks in the wireless infrastructure sector have strong appreciation potential, Bensche said.
DLJ’s Friedman said he likes the newly public Aether Systems Inc., a middleware company, saying that such “broad-based providers of wireless infrastructure will be the sexy part of the wireless industry.”
Friedman also described the paging sector as “an interesting equity opportunity.” However, he cautioned that because “Conxus went straight from the bondholder portfolio to the bankruptcy court,” paging carriers seeking debt financing must pay sky-high interest rates.
In 2001, data users will account for 8 million of the 129 million wireless subscribers, according to projections by Paul Kagan Associates Inc., Carmel, Calif. In 2009, data customers will comprise 75 million of the 235 million wireless customers.
“Data is real and potentially will significantly enhance long-term growth rates,” said Peter Friedland, a wireless analyst for ING Barings L.L.C.
“If you believe data is a key swing factor, valuations are not ridiculous. This should continue, barring a spike in interest rates or an overall down stock market.”
If data takes off as a key driver of wireless telecommunications growth, the scarcity of spectrum will be amplified and the value of those who own it enhanced.
“Sprint PCS only has 10 (megahertz) to 25 (megahertz) through much of the southeast. BellSouth says lay those tens on top of my 25, but the [U.S. Department of Justice] says you’re eliminating competition if you do,” Bensche said.
“I smell desperation from the RF-constrained Bells. The nationals will smack their heads into the ceiling.”
Therein lies an opportunity for “investment bankers looking to make trouble,” said DLJ’s Friedman. Although the Federal Communications Commission has not yet defined a rural carrier entitled to a 55 MHz spectrum cap, “there is a huge opportunity to consolidate rural markets to position a group of entities to make them attractive to bigger players in five to 15 years, as growth slows,” he added.
