U.S. Global System for Mobile communications carriers took a financial beating in 1998, but analysts
expect 1999 to look brighter for these carriers as they look to butter up their bottom lines and find strategic
partners.
Tight financing, high churn levels and a general under-performance in small capitalized stocks hurt GSM
carriers in 1998, say analysts. From March 1998 to mid-December, Warburg Dillon Read’s North American personal
communications services carriers’ index fell more than 30 percent, with the price performance of Omnipoint
Communications Inc. and Aerial Communications weighing heavily on the sector’s performance. Those companies’
shares fell 69 percent and 43 percent, respectively, from Dec. 31, 1997, to December 1998. Though WDR’s PCS index
climbed during December 1998, the firm believes it was driven largely by an advance in the shares of Sprint PCS,
which has significant market weighting.
PCS churn rates ran about twice the 2.5-percent monthly rate experienced
in the cellular industry during 1998, said Kevin Condon, wireless analyst with WDR. Aerial, Powertel Inc. and
Omnipoint reported high churn levels during the year, with Omnipoint experiencing a number of setbacks, including a
$10 million charge for international fraud expenses and a reduction in its subscriber base to account for inactive prepaid
customers during the third quarter. Generally, investors have been concerned about increased competition and its effect
on carrier profitability.
And it seems deep-pocketed entities, domestic and international, have been concerned about
the financial health of these companies as well, which is likely why consolidation and equity partnership schemes have
been slow to grip the PCS industry.
“The people who are looking to buy these companies are afraid of their
reputations,” said one analyst who decline to be named. “They are bleeding money. These carriers don’t
have national coverage, and there is limited roaming in place.”
Omnipoint, which owns the lucrative New
York PCS market, has been unsuccessful in its search for a strategic equity partner. The company has been searching
since late 1997 and recently announced it has begun a second round of serious discussions with 15 to 20 different
entities. Omnipoint said discussions revolve around selling at least 20 percent of the company, although financial
advisers are considering all options, including the sale of the entire company.
“Two parties came to us, and we
reached terms on all the major points,” said Omnipoint Corp. Chairman and Chief Executive Officer Douglas
Smith. “For reasons beyond our control, neither party could consummate the deal (by mid-1998), and they asked
us to wait until the fall. Then the debt markets melted down generally and particularly for us.”
Omnipoint,
which recently received additional vendor financing from Siemens and Nortel Networks, needs to find a strategic
investor by the spring as it is in danger of running out of money by the summer, said David Freedman, wireless analyst
with Bear, Stearns & Co. Inc. in New York.
But 1999 should be the year for strong subscriber growth and looser
financing, predict analysts.
“We’re seeing a re-acceleration of subscriber growth, and that bodes well for PCS
and cellular carriers,” said Condon. “We saw 13 million net new subscribers in 1998. We’ll see close to 14
million net additions in 1999.”
Airadigm Communications Inc., a privately held C-block PCS provider in
Wisconsin that offers GSM services to the business market, said it now is aggressively looking for financing to fund its
second round of network buildout. George Benson, CEO of Airadigm, said his company is looking at three areas:
the vendor community, strategic partners and European and Pacific Rim GSM operators.
“It’s
certainly a better market than it was, but it’s hard to get people to have full confidence yet,” said Benson.
“There is more European and Asian interest in GSM. Money appears to be loosening up, and vendors are starting
to loosen up … We’ve been contacted by a couple (of entities) really seriously, and some of my GSM compatriots are
getting calls.”
Christopher Larsen, senior wireless analyst with Prudential Securities Inc. in New York, said
his firm’s average PCS stock index is up 9 percent in 1999. Of the 12 North American PCS stocks, eight are
outperforming the market year-to-date. Condon said WDR’s PCS stock index has been a mixed bag, with Sprint PCS
continuing to push the stocks index up.
“1999 is looking better for financing, but churn is still an issue for a
couple of providers,” said Freedman. “In 1999, we’ll see (earnings before interest, taxes, depreciation and
amortization) losses diminishing, and we expect EBITDA to break even in the year 2000 … The new entrants to
wireless telephony posted higher EBITDA losses, mainly because the expense associated with rolling out new markets
and other efforts to accelerate growth. With the vast majority of start-ups launched, we expect these new players to
witness significant flow-through of growing revenues to their EBITDA lines … This has typically attracted a flock of
new investors and boosted stock prices in the past.”
A decline in capital spending also will drive up stock
prices, said Freedman. Having launched most of their planned markets, new entrants will likely report lower capital
expenditures this year, though financing will remain an issue if subscriber growth stays
strong.
Consolidation
Ultimately, analysts believe the only way U.S. GSM operators can survive is through
consolidation. The competitive nature of the wireless business and strong nationwide offerings from carriers are
making regional players obsolete.
“Economies of scale, cost and revenue generation are requiring companies
to create a national brand along with a national geographical footprint,” said Richard Siber, associate partner with
Andersen Consulting in Boston. “The perception is that customers benefit from one-rate plans from Sprint PCS
and AT&T. Many other carriers feel it’s necessary to respond to these. The buying power of base stations and handsets
is obvious when you are targeting a much larger population.”
Analysts say GSM carriers now are in a better
position to join forces, with Western Wireless Corp. and Telephone and Data Systems spinning off their PCS
businesses to make them independent companies.
VoiceStream Wireless, the personal communications services arm
of Western Wireless Corp., could be the catalyst for consolidation of the GSM footprint in the United States, say
analysts. Western Wireless has hinted to analysts that VoiceStream will be for sale once the company spins off its 80.1-
percent interest in the division during the second quarter.
Western has received a favorable ruling from the Internal
Revenue Service to spin off the division tax free to stockholders, and Western stockholders have approved the spinoff
plan. Western management could not comment by press time.
Analysts say VoiceStream will be one of the best
financed new entrants in the wireless industry, followed by Powertel, which will be funded through positive free cash
flow once it sells its towers. VoiceStream may look to join forces with Omnipoint, some analysts
believe.
“We’re seeing VoiceStream prove itself,” said Perry Walter, wireless analyst with Robinson-
Humphrey Co. in Atlanta. “It has lower churn, strong cash-flow growth and the ability to grow net adds at strong
rates. Frankly, a lot of others can’t say that.”
But, GSM cons
olidation probably may take a deep-pocketed
third party to pull everything together, said Condon. SBC Communications Inc., which already owns GSM operator
Pacific Bell Wireless in California, has hinted it is interested in purch
asing more GSM operators to fill in its wireless
footprint nationwide. The company plans to use a protocol converter to roam between GSM networks and its Time
Division Multiple Access networks.
Analysts say the recent agreement between the Universal Wireless
Communications Consortium and the North American GSM Alliance to work on network interoperability and roaming
between TDMA and GSM networks will help allay fears over lack of roaming. GSM service today isn’t offered in
several key U.S. markets, including Chicago and Dallas.
A host of international operators may be in the running to
consolidate GSM carriers, including Hong Kong’s Hutchison Telecommunications, which already owns a 20-percent
interest in VoiceStream and reportedly is interested in taking a stake in Omnipoint, Sonera of Finland and Telecom
Italia Mobile. The recent merger announcement between Vodafone plc and AirTouch Communications Inc. has
changed the landscape of the wireless industry, say some analysts, making the wireless playing field a global
one.
Uncertainty over third-generation technology also has been a fear for those companies looking to purchase
GSM operators, say analysts. Though some progress has been made in recent weeks, operators and vendors remain
separated over the issue of harmonizing Code Division Multiple Access 3G standards.
“If there is
harmonization of the standard, there would be a migration path for both (GSM and CDMA), and we could see
AirTouch and Vodafone going in and snagging them all,” said one analyst.
