360Networks: Full steam ahead
upside.com
April 27, 2000
by Bob Beaty
These days, being linked to Microsoft (MSFT), even when there
is no real link, isn't the benefit it once was. Press reports about
Vancouver-based 360Networks (TSIX) -- n‚ Worldwide Fibre
-- constantly bring up the fact that CEO Greg Maffei is the past
CFO of Microsoft. Now that the Canadian fiber-optic company
has gone public, perhaps Maffei can shuck the Microsoft mantle --
or albatross -- and run his company.
It takes considerable guts to IPO in this market. It speaks well of
the company -- and augurs well for its future -- that it went to
market when it said it would, left a bit on the table with aggressive
pricing and generally damned the torpedoes.
It would have been easy to take a couple of months off -- the
fishing and golf are great on Canada's west coast -- and wait for
more welcoming market conditions. Evidently, this company is
focused on the long term, both for itself and its investors. That's the
way it should be.
Builds fiber-optics networks
360Networks builds fiber-optic networks and sells broadband
capacity to telecommunications companies, internet and application
service providers and enterprise networks for large corporations.
Its goal, by the end of 2001, is to complete a 56,000-mile network
spanning North America and Europe. Currently, its North
American network spans 17,000 miles.
Sporting 1999 revenues of US$360 million, the company's IPO
came at US$14 for 46 million shares, below the US$16-$18
originally expected. Added to the simultaneous bond sale, the total
financing proceeds injected US$1.44 billion. With a US$1 billion
loan also arranged, the company now has a significant war chest
that should fully fund its network, though it comes at a price.
Market cap of $14B
A slight pop from the offering price has left the company with a
market cap of US$14 billion, based on the total number of shares
outstanding -- 800 million. Private construction company Ledcor,
from which 360Networks was spun off a couple of years ago,
holds 90 percent of the voting shares. Canadian National Rail
(CNR:TSE) owns 10 million shares. Equity holders are impressive
and include Shaw Communications (SJR), Comcast (CMSCA),
and Michael Dell's MDS Capital among others. Dell graces 360's
advisory board as does Rupert Murdoch of News Corp. (NWS).
Nice pedigree. The company will need it, too.
360 views Qwest (Q), Global Crossing (GBLX), Level 3
(LVLT) and Williams Communications (WCG) as competitors.
Williams, though, is primarily U.S. in focus, while 360 takes a
global view. 360 ranks closest to Williams, which has a market cap
of US$16 billion. Larger concerns Global Crossing and Level 3
have market caps of US$22 billion and US$30 billion, respectively,
significantly lower than they were a few short weeks ago.
360 has its work cut out for it. There are concerns about a
fiber-optic glut, although McGraw Hill's newly launched
Bandwidth Market Report categorizes the overcapacity as an
illusion. Growth of the market is touted to be between 25 percent
and 40 percent annually, resulting, by 2005, in a trading market
worth more than US$400 billion.
Huge market in bandwidth
There is even the speculation by market participants such as Enron
(ENE) that bandwidth trading could exceed global oil markets in
size and liquidity. Nortel (NT) CEO John Roth also dismissed the
any fear of a glut Wednesday morning during a CNBC interview.
One Toronto analyst I spoke with is slightly wary of the company
based on all the hype surrounding broadband. While he thinks 360
is still expensive -- he classed it as a startup -- he felt the company
could prosper as long as there were no technical problems as it
built out its network, something only time will resolve.
He likened the hoopla to that surrounding the heyday of satellite
technology when stocks such as Iridium were screaming. He's
waiting to see the sector mature before he jumps in.
Williams reported 1999 revenues of US$2 billion, five times that of
360. The latter will have to show significant top-line growth fairly
quickly to challenge the competition. Finally, the US$800 million
eight-year note sale accompanying 360's IPO carried a 13 percent
coupon. Pretty high -- a 7-point plus premium when compared to
U.S. treasuries. The issue's size was cut from an initial US$1 billion.
Crowded sector
360Networks looks to be a viable player in the somewhat
crowded fiber-optics/broadband sector. While the IPO timing was
courageous, the honeymoon's already over; the company will now
have to prove to investors that it can gain market share and hold its
own against some worthy competitors. The management is there,
but it may be a matter of a couple of quarters before the growth is
quantifiable.
The rub is this: Is there a risk for investors in waiting? Maybe. The
sector moves quickly, and as all the constituents are significantly off
their highs, 360 may have a better shot than it would have had a
mere few weeks ago. Better to be priced in a fallen market than
watch your opportunistic price vapor in a correction.
For those wishing exposure to the sector, 360Networks is one to
grow along with. Although it's still finding a level, perhaps a little
now and a little later would be prudent.
Bob Beaty worked in the investment industry for 20 years in
Canada and the UK. Since 1995, he has been writing and
producing content for some of the best financial sites on the
Internet. He lives with his wife and three children on an island
off the coast of British Columbia. His column, Due North, will
appear every Thursday.
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