NEW ORLEANS-The bankruptcies of certain C-block and mobile satellite companies, coupled with mutual fund outflows, rising interest rates and other macro-economic trends, have aligned like planets in a bad omen for wireless companies that cannot get financing before Halloween.
This year, there remains a window of up to six weeks for carriers seeking public equity and debt to get their deals done, said Melissa Glass, managing director of Toronto Dominion Bank’s media and communications group, and Robert Stewart, managing director of global telecom for CIBC Oppenheimer Group. They were among the panelists at the Personal Communications Showcase ’99 conference session on financing for wireless carriers.
Furthermore, in order to get their deals completed, issuers may have to sweeten the premiums they pay investors.
“Price talk used to be final, but now it’s just a basis for discussion, and unfortunately things go up from there,” Glass said.
AirGate PCS, which sold a $156 million bond issue concurrently with its initial public offering Sept. 27, proved to be an example of this phenomenon. Price talk for the interest rate on the 10-year debt deal during the pre-sale road show was in the range of 13 percent to 13.25 percent, Glass said.
Although investor demand allowed AirGate to sell $6 million more in debt than the $150 million anticipated, it also had to raise the coupon to 13.5 percent when the deal was priced and sold Sept. 27.
Even in ideal capital markets, Sprint’s wireless affiliates are more problematic to finance than those of AT&T Corp. because the Sprint affiliations are essentially “long leasing arrangements,” Glass said.
“CIBC’s did three AT&T agreement deals. These affiliations are much more substantive, not just branding arrangements,” Stewart said.
“We’ve gotten over the hurdle with AT&T, but not with Sprint.”
CIBC global telecoms group has a dozen IPOs “in the backlog in our shop,” Stewart said. These will be a tough sell before year-end, but the first and second quarters of 2000 look promising, he added.
For companies that won C-block personal communications services licenses in re-auctions after initial bidders went bankrupt and returned them, Gross offered this advice.
“If the funding window is open, over-finance, hit the market for enough to complete the buildout,” she said.
“But don’t get greedy. A piece of the pie is better than none, so affiliate if necessary.”
F-block license winners must somehow resolve a big stumbling block created by Federal Communications Commission rules that place the federal agency in a senior repayment position to banks and other potential lenders, Stewart said.
As to the paging sector, CIBC “is comfortable at the low end, the low cost, cheap beeps that preserve market share,” he said.
“Those paging companies transitioning to two-way and moving up the value chain present a different business case that bears watching.”
Despite problems of the satellite industry lately, investors warm to good management, so Craig McCaw’s Teledesic, for example, may provide the exception that proves the rule and turns things around for the sector.
Another potential bright spot for capital sources is the private equity market in which CIBC has identified 47 venture capital funds that have earmarked the telecommunications industry as a desirable sector for investment. These venture capital funds include those of large telecommunications carriers themselves, like AT&T and MCI WorldCom Inc.
“There is a tremendous amount of money out there, but most private equity is not going into wireless,” Stewart said.
“NextWave (Telecom Inc.) makes me twitch because we were a leader in its initial round of financing … Another consequence of the recent bankruptcies is that private equity financings used to take 12 to 16 weeks. Now there are round after round of additional questions.”
NextWave is a C-block player involved in a bankruptcy restructuring approved by its creditors but contested by the Federal Communications Commission. Despite Stewart’s remarks Sept. 21, NextWave announced the same day it had secured about $700 million in new private equity financing commitments from Texas Pacific Group, Oak Investment Partners and BFD Equity Associates.
Industry consolidation also concerns CIBC, Stewart added.
“My greatest fear is that we will end up with one customer,” he said.
“We are in business to get deals done, and a good story can still get financed.”
Although Gross of Toronto Dominion said she believes independents, particularly PCS carriers, will have a tough time obtaining financing other than vendor financing as industry consolidation continues, other bankers disagreed.
“There is a market for good quality management in single-market Rural Service Areas, and we are pushing our customers to own carriers with a wireless strategy,” said Joe Savage, executive vice president for CoBank’s rural utility banking group.
Gross predicted that, within six months, many private cellular companies will be acquired by wireline carriers acting as strategic investors in a bundled-services play.
Despite the conventional wisdom that bigger is always better, David Freedman, senior managing director of Bear, Stearns & Co. Inc., said “economies of scale are local in wireless.” It is better to have a million customers in one city than spread out across the country.
“Regional providers can exist and play well to local businesses, like the local insurance broker,” he said.
Although it is not the only capital source, vendor financing has played a crucial role in CoOp Bank’s financing packages, particularly for PCS carriers in rural areas, Savage said.
“But we are very wary of PCS transactions (by newcomers) without some existing market presence because the lower number of customers makes new rollouts difficult.”
“We’re in the debt-to-[cash flow] business. [PCS and local multipoint distribution services] are more like project financings, a combination of equity capital and vendor financing … We wouldn’t be in the PCS business if it weren’t for vendor financing.”
Equipment manufacturers are under the gun from their auditors about reigning in their debt-to-equity ratios to clean up their balance sheets, CIBC’s Stewart said.
“The thing I find dangerous with respect to vendors is they say they don’t want to be a bank,” he said.
“Their auditors are concerned about contingent liability, so they are getting aggressive about laying off their debt … We’re buying the debt on terms that put them into competition with banks.”
Despite the hard luck stories about some paging, PCS and satellite companies, the news about PCS and cellular generally is positive, Bear, Stearns’ Freedman said.
Over-the-air customer activations have held carrier compensation to retailers steady. Buckets of minutes plans have added new subscribers. Lower airtime rates have increased usage. These two factors contribute to enhanced loyalty not least because the more a customer gives out his or her wireless phone number, the more reluctant he or she becomes to change it in order to get a slightly better deal elsewhere.
Mathematical models indicate that individual customers churn most after three and 13 months of service, he added.
“As the (customer) base grows, the number of people hitting three and 13 months becomes a smaller percentage of the mix.”
All of these factors are helping improve average revenue per unit.
Of the investment community’s cautious approach to wireless these days, Freedman said, “I wouldn’t accuse Wall Street but (rather) investors who are momentum players.
“And you have to consider ARPU because it drives cash flow.”
