NEW YORK-“Show me the money!”
Flush with capital pouring in and looking for places to invest, that is exactly what Wall Street hopes to do for the wireless industry.
“There is a lot of money out there, so much money out there, more equity in stocks than in homes (according to some estimates),” said Sharon Armbrust, senior analyst for Paul Kagan Associates Inc., Carmel, Calif., at a recent Kagan conference on Wireless Telecom Values and Finance.
“How do the financial markets plan to play the next round of wireless? It’s opportunistic. If you give them the opportunity, they will invest,” said Robert Moore, managing director of media and communications for Donaldson, Lufkin & Jenrette Securities Corp., New York.
Wireless companies that will be successful in raising public and private capital can be those following either a niche or a big market strategy, he said.
“The key is a business plan that is easily understood and doesn’t require huge leaps of faith,” Moore said. “The more aggressive you get, the farther from industry models, the more outsized returns that will be required by stock buyers and the greater the percentage of equity participation that the bond markets will require.”
Moore called the level of activity in the high-yield bond markets where many wireless companies sell debt securities “unprecedented.”
“There are huge amounts of cash to put to work, and the (total) backlog is about $6 billion, which isn’t particularly high,” he said.
“In the communications sector, there’s about $1.2 billion in the backlog, which is why Metrocall (Inc.) was able to `upsize’ its offering.”
William L. Collins III, chief executive officer of Metrocall, said the paging carrier “anticipated doing a $150 million deal (this month), but sees demand for about $200 million.”
There also is about $1.8 billion in communications sector stock offerings waiting in the wings, Moore said. “There isn’t as shrill a demand on the equity side, but there was $21 billion in all equity funds in September.”
In the bank loan market, about $1 billion in wireless financings are in the pipeline to be completed later this year or early next year, said James L. Stone, managing director of Chase Securities Inc., New York. This year, Chase raised about $7.5 billion in bank loans and another $2 billion in high-yield debt financing for wireless companies.
“We’ve always been bullish on wireless, and have bought into consensus estimates of about 40-percent penetration in five years,” Stone said. “There has been a lot of talk about the C-block and the D-, E- and F-blocks and how they will get financed. The bank loan market is similar to the high-yield market. It’s as aggressive as it was in the 1980s, and [investors] are willing to do very long maturities.”
Brian O’Reilly, managing director of the communications finance group at The Toronto-Dominion Bank, New York, concurred with Stone’s positive assessment of the bank loan market for wireless companies. But he is less sanguine about prospects for all personal communications services players to get financing, despite the strong market conditions.
“We’re in the strongest market I’ve ever seen, and there is far more demand for PCS paper than there is supply,” O’Reilly said. “With a few notable exceptions, default rates are more akin to investment-grade companies.”
On the other hand, O’Reilly said he believes the Federal Communications Commission licensed more PCS players than can reasonably be expected to build out their networks and become full-fledged carriers.
“The C-block hasn’t gotten out of the box and isn’t likely to, but it will come back to the market in some form because the [Global System for Mobile communications] players are anxious to pick up spectrum,” he said.
The D- and F-block players acquired spectrum cheaply, but “will probably need some kind of affiliation, a brand identity, in order to go public,” DLJ’s Moore said.
On the other hand, going public may not be necessary, Kagan’s Armbrust commented. Sygnet Wireless, a cellular carrier based in Ohio, “got private money and decided not to go to the public market,” she said.
The recent announcement that Hutchison Telecommunications Ltd. will pay $248 million for a minority stake in Western PCS Corp., a Western Wireless Corp. subsidiary, “offers a new validation of value in the PCS world,” Toronto-Dominion’s O’Reilly said.
“The $248 million values built pops at about $50 each, a significant premium over the actual buildout cost to Western Wireless.”
However, O’Reilly was quick to add that he didn’t want to sound overly optimistic because problems remain that need resolution. “Price per minute is still in a free fall,” he said. “The churn rate is now too high to be sustainable and is unknown for the longer haul.”
