NEW YORK- The media and telecommunications industry was pronounced “generally healthy” by a panel of Wall Street officials discussing new equity and debt issues at an Institute for International Research conference, Jan. 29.
The clean bill of health isn’t without qualification, however.
“Certain sectors have fallen out of favor from time to time,” said Michael E. Anderson, managing director of Smith Barney Inc. “The industry taking it on the chin hardest (in 1996) was paging, which was decimated by MobileMedia’s problems.”
As in many other aspects of life, good timing also is critical to a successful initial public offering. “It makes a big difference when you try to access the capital markets,” Anderson said. “By December, investors were exhausted and the mutual funds had closed their books. If you tried to do a deal in December and got it done, my hat’s off to you.”
Mark Kastan, a Merrill Lynch & Co. equities research analyst specializing in new entrants into telecommunications, said the type of investor interest today can be characterized as one of “selective receptivity, notwithstanding the recent choppy environment in the stock market.”
The past two years were marked by a less critical “field of dreams” mentality on the part of the investment community, he said. The current attitude no longer is “give us your business plan and we will fund it,” but rather, “if we fund it, you will build it.”
One of the most important things a company planning to go public can do is to “under-promise and over-deliver,” said Wayne G. Fox, treasurer of Teleport Communications Group, a New York-based competitive local exchange carrier.
Teleport-which counts among its customers AirTouch Communications Inc., AT&T Corp. and LDDS WorldCom Inc.-went public in 1996. Teleport stock more than doubled in price by year end, while the share price increase for the next-place IPO issuer, Lucent Technologies Inc., increased by 89 percent at year end, Cox said. “We were the first CLEC to go cash flow positive.”
Largely due to telecommunications deregulation in the United States, the high-yield debt investor market was willing last year for the first time to, “go into negative cash flow companies,” said Jim Kuster, managing director, Chase Securities Inc. He cited as examples the $2 billion and $1.6 billion public debt offerings by, respectively, Sprint Spectrum PCS and Nextel Communications Inc.
“A lot of (telecommunications equipment) vendors are trying to lay off their debt, used to finance (personal communications services),” Kuster said. “I expect several billion dollars worth of vendor deals will be done in 1997.”
The problem, however, is that American telecommunications companies will be competing for capital with similar companies in Europe, Latin America and Southeast Asia. “This will put pressure on the U.S. high yield market because there is no other market like it in the world,” Kuster said.
There also was “somewhat surprising receptivity” to recent private placements of debt issued in January by Esat Holdings Ltd. of Ireland and Colt Telecom Group of the United Kingdom. Those deals were issued under Securities and Exchange Commission Rule 144A, which permits sale of unregistered securities to large institutional investors in the United States.
“McCaw International also is waiting out there with a large 144A deal to finance Nextel’s wireless buildout in Argentina, Brazil, the Philippines,” Kuster said.
He also predicted that some PCS players will be success stories when it comes to selling senior debt, which is higher-rated and therefore lower-interest because its holders have priority repayment status over other bond holders.
