IPO Critic: AOL Latin America says hola to $400 million
redherring.com
By Tom Davey
Redherring.com, July 31, 2000
Will America Online (NYSE: AOL) become the Coke or Pepsi of consumer Internet services worldwide? The taste distinction between the two cola brands and their numerous competitors in foreign markets is subtle. Yet the duo has leveraged slick marketing campaigns to dominate virtually every market they enter.
With help from a pending initial public offering, America Online Latin America (Nasdaq: AOLA) is in the midst of attempting to turn AOL's subtly distinct brand of Internet service into the dominant provider in Mexico and Latin America. But AOL is late to the party. Other well-financed players such as Terra Networks (Nasdaq: TRRA) have considerably more market share and revenue than AOL does in Latin American markets.
AOL has a big ownership stake in AOL Latin America and sees the market south of the U.S. border as sizzling with opportunities. Led by two former PepsiCo executives, CEO Charles Herington and CFO Javier Aguirre, AOL Latin America plans to raise $400 million in an initial public offering managed by Salomon Smith Barney. AOL Latin America wants to sell 25 million shares, or 10 percent of the company, at about $16 a share in the offering slated for July 31 or August 1. This would give the fledgling concern a $4 billion market value right out of the gate.
Financial analysts I've talked to are bullish on the startup, which lost $51 million on $5.2 million in revenue during the nine-month period through March. They describe the Internet service provider business as one where a first-mover advantage is not as critical as it is in other Internet businesses. They argue that in fast-growing markets such as Latin America, there is room for several large ISPs.
HAPPY ANALYSTS
Analysts note that AOL Latin America benefits mightily from the Cisneros Group, AOL's joint venture partner, which has a big equity stake in the deal and a huge media presence in Latin America. They praise AOL's smarts at gaining market share and its ability to avoid costly outlays for infrastructure and equipment by leasing rather than owning networks. They gush over AOL's evolution to wireless Internet capabilities, a move that may offer a competitive advantage in developing countries where going wireless is cheaper than upgrading archaic wired phone infrastructure.
Why shouldn't analysts heap such praise on the startup? If they position the deal as a boon for stock buyers, there's plenty of money to be made from AOL and AOL Latin America in investment banking and brokerage commissions.
I agree opportunities for the new venture are great. But is this potential worth $4 billion on the opening bell? What's the best-case scenario for AOL Latin America over the next three years?
In its prospectus, the company quotes market researcher International Data Corporation that there'll be about 30 million Internet subscribers in Latin America in 2003, including business and consumer customers. Since at least half of all Internet use is in businesses and AOL serves mainly consumers, let's project a market for AOL Latin America of 15 million subscribers. After the company blankets the entire region with advertising and CD-ROMs, let's say it signs up a third of the market, or 5 million subscribers, despite the keen competition.
Let's also assume the company can maintain its current monthly $13 subscriber fee. This should prove challenging because that price is high by Latin American standards. Already, a significant number of AOL Latin America customers aren't paying the fee, and free Internet services have sprung up in the region. Furthermore, local phone charges in many parts of Latin America are metered rather than flat-rate, as they are in the United States, thus costing consumers considerably more than $13 a month.
BILLION-DOLLAR COMPANY?
Optimistically, the above numbers add up to $780 million in annual subscriber revenue in 2003. If future advertising revenue is about a quarter of total revenue, as is the case at the parent company, this would bring in additional $260 million, giving AOL Latin America slightly over $1 billion revenue in 2003. If all these ifs pan out, you're buying the stock now at four times 2003 revenue and with a questionable shot at earnings.
AOL, the parent company, trades at 111 times last year's earnings and 20 times sales. AOL's pending merger with Time Warner (NYSE: TWX) has depressed the stock price because earnings will slow from the torrid 99 percent compound annual earnings growth rate over the past five years. But analysts predict it will grow at about half in the years ahead, averaging 48 percent over the next five years. That gives AOL a current multiple of 34 times 2003 earnings for what should be even then a fast-growing company.
AOL can't go wrong with this deal. After the offering, AOL will own 39 percent of AOL Latin America, for which it paid 15 cents a share. AOL also has an option to buy more stock at the offering price, which would increase its ownership to more than half.
If AOL Latin America turns out to be a blockbuster, investors in the parent company will be well rewarded. But if it turns out to be a dud, they'll still be able to sleep at night. |
