NEW YORK-Because of their relative scarcity, augmented by their growth history and potential, wireless carriers seeking financing enjoy elevated status in the eyes of investors, even in volatile capital markets.
Good timing still matters, particularly since the trickle of initial public offerings in this sector could soon become a flood, bankers said April 12 at the “Wireless Telecom Summit,” sponsored by Kagan Seminars Inc., Carmel, Calif.
The AT&T Corp. wireless tracking stock IPO, which could raise $11 billion to $13 billion, will break the record for size by any issuer. A pair of wireless transactions of comparable or greater size seems likely to follow suit-by Verizon Wireless, the Bell Atlantic Corp.-Vodafone AirTouch plc joint venture, and by the unnamed BellSouth Corp.-SBC Communications Inc. wireless joint venture.
“How is this wall of demand for equity capital affecting the market for hallmark trophy companies and the smaller companies that want to go public, especially in these newer, rockier markets?” asked Sharon Armbrust, vice president of Paul Kagan Associates Inc.
Among the smaller stars in this year’s wireless IPO constellation are several Sprint PCS affiliates and a number of application service providers focused on wireless communications.
“I assume the market will be able to absorb them, but we won’t know entirely until one or more of the mega-deals gets done,” said Stephen Winningham, a managing director in the Salomon Smith Barney global telecoms group.
“If I were a company thinking of an IPO, I would not leap headlong into an IPO coincident with AT&T Wireless, and I would have alternate sources of funding in case the market gets crushed under it.”
Across industries, there has been an upward trend in the size of stock sales the markets can and will absorb. Within the aggregate buy-side universe, there are different groups of investors who will be attracted to stock sold by carriers of varied size, said Stanley Holtz, a senior vice president of the media and communications investment banking group at Donaldson, Lufkin & Jenrette Securities Corp.
“Investors are familiar with wireless, and a lot of money has been made in this space,” he said. “An AT&T is more likely to have Blue Chip fund investors, while smaller IPOs will attract pure growth investors.”
A capital funding plan cannot rely on public equity alone, however. Fortunately, there also has been good news for wireless from several other vital financing sectors.
“The growth of the commercial bank (loan) market for entrepreneurial telecom generally and wireless in particular has created a meaningful relationship between high-yield (debt) markets and commercial banks,” Winningham said.
“This has been enormously helpful in getting the equity markets more comfortable that plans have been fully funded.”
The high-yield, or junk bond, markets have been choppy over the past 18 months and have experienced a net outflow of investment capital during the last six months, Holtz said. As a result, they have been “pretty much shut down for all but telecoms in the last three-to-four months,” he added.
Fixed-yield investments are disadvantaged when interest rates are rising, as they have been lately. Consequently, carriers like Leap Wireless International Inc. and UbiquiTel Inc. have had to sweeten their debt deals, offering bondholders warrants to buy stock.
“We’re in a bad part of the market. It’s seen a down draft, so companies have to give up more equity to let the high-yield investors see some of the upside potential,” said Nirav Parikh, vice president of the high-yield telecom group at Morgan Stanley Dean Witter.
Rather than be perceived as the borrower who could not get money, it is better to have the cash on hand to fund the plan, even if you pay a bit more for one part of a multilayered financing, Winningham said.
