NEW YORK-“The C-block is obviously dead, and we are waiting for the final nail to be put in the coffin-not because they overpaid or are late, but because the FCC debt is worth more than the value of the spectrum.”
That is the view of Brian O’Reilly, managing director of The Toronto-Dominion Bank, New York, about prospects for many C-block personal communications services start-up companies. With more than $1 billion in outstanding loans to wireless companies, Toronto-Dominion today is the single largest commercial bank lender to this industry sector.
O’Reilly joined other finance executives in discussions about the future of the industry at a recent conference sponsored by Kagan Seminars Inc., Carmel, Calif.
Toronto-Dominion’s investment in wireless telecommunications is quite large, but it is dwarfed by the $2 billion in vendor financing supplied by Northern Telecom North America, all of which went to Sprint Spectrum L.P., Western Wireless Corp. and Omnipoint Communications Inc.
“Reed Hundt (Federal Communications Commission chairman) has to make an embarrassing political decision” to write off the debt of the losers among the winning bidders in the FCC’s C-block auction, said Stephen Martin, vice president of customer finance for Nortel, Richardson, Texas. “The passage of time is working against the C-block, and it looks like the FCC is just punting for a while by switching from quarterly (to yearly) payments.”
Martin added that he believes the “punting” strategy is designed to last until January 1998 when the new World Trade Organization agreement is scheduled to go into effect and, “allows a slew of Asian investors to rush in, which they would have done before except for foreign ownership (restrictions).”
Cash-strapped winning C-block bidders can’t afford to pay the penalties the FCC imposed as a quid pro quo for its recent decision to extend licensee repayment obligations to yearly from quarterly. “But if they (the FCC) didn’t extract penalties, there would be challenges,” O’Reilly said. “Remember, the name of the game is to delay another competitor from entering your market.”
Even if the FCC were to forgive the C-block debt outright, “there would be objections and legal challenges and then a re-auction one to one-and-a-half years later,” Martin said. “What would be the value then? One of the opening questions for the FCC to ask should be, `What’s a reasonable price for taking this off our hands?’ “
Ultimately, licenses “will get surrendered to telecom companies,” said Frederick W. Moran, managing director of Furman Selz Inc., New York. “In the United States, the government was a bit haphazard and went a little bit overboard with auctions to operators without access to capital.”
After the shakeout, Moran said he believes there will be five wireless carriers left standing and healthy in the major cities, three-to-four in the medium-size cities and two to three in rural areas. “At that point, the pricing umbrella will stop collapsing,” he said.
The road leading to this impasse started early last year, the last period when any significant public equity capital was raised by wireless carriers, according to Norman Frost, managing director of Bear Stearns & Co. Inc., New York. “On the equities side, every sector of wireless has been depressed since early 1996, and in recent months, it has been similar on the high-yield (debt) side,” he said. “What’s going on is clearly a U.S. phenomenon.”
Investors are concerned about the uncertainties surrounding competition and price, about the magnitude of total financing requirements and the overall market environment, Frost said.
“$1.25 billion in equity and $2.75 billion in high-yield debt deals have been postponed,” he said. “Few of us admit the deals aren’t getting done, but they just drag on and on.”
Some of these wounds have been self-inflicted, said Douglas Conn, senior vice president, Lehman Brothers Inc., New York. “On the PCS side, there is the very specific issue of coverage. There never has been in the United States in this short a period of time a buildout of a national system,” Conn said. “Omnipoint’s coverage isn’t as good as people thought it would be, and Omnipoint understands that. When Sprint Spectrum comes into New York in May or June, we’ll also see coverage not as broad as people expect.”
Staying on plan for rollout and being as open and vocal about realistic expectations are important criteria for investors, said Conn, who specializes in the high-yield debt side of the public financing equation. “The C-block hasn’t done this,” he said. “Unfortunately, I think the time investors will return isn’t when they see who the winners are but who the losers are.”
Another potential for self-inflicted damage is “irrational competition,” said Moran of Furman Selz. “This usually gets unwound within six months, but we’re just at the beginning.”
