A year ago, if a company was looking for a few million dollars in investment money, all it needed to do was call on Wall Street and wait for the flood of dollars to come. But in the past year, Wall Street financing has dried up. Investors are looking for viable returns on their investments, forcing many companies to postpone stock offerings due to “adverse market conditions.”
“Last year we were looking at enterprise value, which is air,” Edmund Cashman, senior executive vice president at brokerage firm Legg Mason Wood Walker Inc., told Reuters. “Now we’re back to looking at the normal funds of investing related to profits.”
The difficulty of raising cash has not passed over the wireless telecommunications market. While the industry is still seen as a sound, long-term investment, many investors are wary of wireless companies’ plans to make money, eventually.
“There could be a potential oversupply of wireless services stock coming onto the market during the year,” noted Peter Friedman, wireless analyst with W.R. Hambrecht & Co.
While Sprint PCS continues to be the darling of the wireless industry, questions have been raised about how the country’s largest personal communications services operator will continue to finance its rapid expansion.
Sprint PCS’ parent company, Sprint Corp., has said it intends to raise $5 billion this year through a $3-billion equity offering in Sprint PCS and $2 billion in debt from its Sprint FON unit. Unfortunately, if Sprint goes ahead with raising funds this way, its ratings with investors is expected to drop.
Analysts are concerned the equity offering in Sprint PCS would further dilute the company’s stock, which has already fallen from its 52-week high of almost $67 per share. It trades at the mid-$20 range today.
“If they raise more debt, their credit rating will probably be downgraded. If they make an equity offering, they are going to dilute the hell out of their shares,” Frank Marsala, vice president of wireless telecom at ING Barings L.L.C., told CNET.com.
Standard & Poor’s noted if the company does not issue the expected $3 billion of new equity this year to offset the expected $2 billion of new debt to fund 2001 capital requirements, it was likely to downgrade its rating from its current triple-B-plus rating.
Most analysts currently rate Sprint PCS a “strong buy” due to the company’s continued strong customer additions and industry-leading wireless Internet service offerings. But, as with the rest of the wireless industry, Sprint PCS has to be careful in how it manages its debt. The company has yet to post a profit for its services and is not expected to do so for some time.
Marsala noted that Sprint could improve its financial situation on its own. Sprint recently raised the level of its planned $2 billion debt offering to $2.4 billion, reducing the size of the expected equity offering. In addition, if Sprint sold off its tower holdings, valued at about $1.6 billion, and filed a new registration statement to take on more debt, it could reduce possible dilution of its share price.
“The possibility exists, therefore, that Sprint could raise the entire $5 billion without issuing any new equity,” Marsala said.
While Sprint grapples with raising money, other carriers have recently issued new notes to raise money or filed statements to do so, including Nextel Communications Inc.
Nextel completed the sale of 9.5-percent 10-year senior notes valued at $1.25 billion in an attempt to build up adequate cash for the upcoming FCC 700 MHz auction. Many analysts expected Nextel to be active in the FCC’s 1.9 GHz PCS auction because of its spectrum needs for a national footprint and the $6.4 billion in cash the company had. When Nextel opted out of the auction in the first week, emphasis was shifted to the 700 MHz license.
Moody’s Investor Service assigned a B1 rating to Nextel’s $1.25 billion issue, but remained cautious the company would have enough money for future growth.
“There is considerable uncertainty regarding Nextel’s plans to expand its business plan in order to provide robust, `3G-type’ wireless data services, and it appears that the company is pre-funding its possible business plan expansions,” Moody’s said in a report. “Thus the company’s current liquidity position is likely to be consumed over time.”
Those concerns include Nextel’s current average nationwide spectrum position of approximately 18 megahertz, which is seen as inadequate to roll out third-generation services.
With 2001 being looked upon as a critical period for wireless operators to solidify their financial standings, investors will keep a close eye on their cash raising plans. The key for carriers will be to show realistic growth projections providing a solid financial base for supporting future infrastructure requirements.
