WASHINGTON-If the Securities and Exchange Commission approves S-1 paperwork it filed June 12, NextWave Telecom Inc. could move forward with a planned stock and senior discounted notes sale in the near future. What may garner the carrier some unwanted questions in the process are a few risks it had to attribute to its early-on adoption of Code Division Multiple Access technology.
NextWave, which aspires to build a nationwide “carriers’ carrier” personal communications services network by the end of 1998, hopes to raise $400 million through sales of the notes plus $300 million from an undetermined number of series B common shares (Nasdaq symbol “SURF”). It then would join the few pure-play PCS carriers available on Wall Street.
A portion of the anticipated note proceeds have been earmarked to pay down $130 million worth of bridge notes that were used to pay NextWave’s 5 percent downpayment commitment following its successful run for PCS licenses in 56 basic trading areas. From May 1996 through December 1997, NextWave has projected capital requirements of $1.3 billion, including costs for expenses, working capital, interest payments and its Federal Communications Commission downpayment of $210 million; this should be covered, the company said, by proceeds from this offering combined with private capital, vendor financing and cash on hand. NextWave also anticipates paying about $3.8 billion in government-financed interest debt during the next 10 years; the principal kicks in during 2003.
Net losses of approximately $2.2 million have been reported by NextWave through March 31, and the company believes losses will continue for the next several years while it is in start-up mode. In particular, NextWave pointed out that if contracts for wholesale minutes of use with several large resellers could not be signed, the carrier would have to revamp its whole marketing system to accommodate becoming a PCS network carrier in its own right on the retail front.
The S-1 addressed the same risks as do most filings for initial public offerings: engineering and buildout failures, hiring failures, little or no site acquisition, possible CDMA shortcomings, lack of infrastructure and subscriber equipment, competition and lack of consumer appeal. Potential risks attributable to NextWave in particular include: a possible investigation into its “small business” status and into its foreign-ownership percentages.
Despite continuing to tout CDMA as the superior and most cost-effective PCS access technology, NextWave did indicate in several parts of its S-1 filing problems with the technology that could contribute to the licensee’s ultimate failure as a PCS carrier, such as:
“Certain networks implementing CDMA have experienced problems in their early trials, including poor handoffs and problems with analog interference with dual-mode CDMA handsets for 800 MHz cellular operations*…*There can be no assurance that the company will not encounter the same or other technological problems.”
There can be no assurance that dual-mode handsets will be available in 1997 from manufacturers at a price consumers will pay.
Handsets that are not interoperable with other systems may be a deterrent to garnering a sufficient number of resellers.
One sentence in the S-1 also alluded that CDMA may not perform in urban areas as well as it might in rural areas, which could cause some consternation for investors, resellers and major CDMA carriers like Sprint Spectrum and PrimeCo Personal Communications L.P. because many CDMA markets are in heavily populated areas; NextWave’s target cities, for example, are New York City, Washington, D.C., Los Angeles/San Diego, Houston and Boston. “Networks using CDMA are able to achieve a greater radius of coverage and therefore require fewer cells than analog, Time Division Multiple Access or Global System for Mobile when the system is lightly loaded.”
If more CDMA cells are needed to serve urban customers, the cost of network buildout will increase incrementally. Not only would this affect NextWave and the other top CDMA licensees, which have had exceptional luck in raising needed funds, it could prove to be an insurmountable challenge for those smaller PCS licensees who have chosen CDMA because of its long-purported cheaper price.
Underwriters of the proposed offering include Merrill Lynch & Co.; Bear, Stearns and Co. Inc.; Lehman Brothers; CIBC Wood Gundy Securities Corp.; Prudential Securities Inc. and ING Barings, which completed a private placement for NextWave earlier this spring.
