re: The Wireless Bear
>> Lessons From The Last Bear Market
Margo McCall
July 3, 2002
Wireless Week
If history is to repeat itself, it may take a while for wireless stocks to regain their lost ground.
With shares continuing to fall, wireless issues are in the grip of a prolonged bear market. But this isn't the industry's first grapple with the sharp-clawed, yellow-fanged beast.
Back in the mid-'90s, when the digital mobile wireless industry was getting off the ground, investors gave mobile telephone carrier stocks a similar cold shoulder during a devastating period following the C-Block PCS license auctions.
Ironically, many of the fears that concern investors now are the same ones that kept them up at night then–uncertainties about changing technologies, growing competition, falling prices and wireless companies' ability to actually make money. What finally led to a turnaround and a 2-year-long run-up in stocks is what the industry is counting on this time around as well: consolidation.
During the bear market of 1995 and 1996, digital wireless services were in their infancy and penetration was low. PCS carriers had sprung to life in a series of expensive FCC spectrum auctions and were getting ready to compete with the established cellular carriers, which also were upgrading to digital.
Investors then were concerned about the PCS players' high network buildout costs, as well as whether markets with two cellular players could support as many as six or seven.
'The cause of the lack of investor confidence back then was that the market was not rational and had too many competitors,' recalls Tom Friedberg, an analyst with Brean, Murray & Co. 'There was worry the emerging PCS carriers would take share from cellular.'
As in the previous bear market, wireless stock prices remain depressed even though many carriers continue to hit their operating metrics. Most carriers then had slightly lower churn rates of 1.8 percent to 2.2 percent, operating cash flow margins in the high 30s to low 40s and most importantly, a better grasp of what the future held. One difference, says RBC Capital markets analyst Jonathan Atkin, is that carrier valuations now are well below 1996 levels.
In mid-1997, publicly traded issues included 13 PCS and cellular carriers; 10 paging carriers, four specialized mobile radio carriers and four mobile satellite operators.
The list of wireless carriers included InterCel Inc., Palmer Wireless, Vanguard Cellular Systems, Omnipoint Communications and Aerial Communications–companies that haven't existed now for years. In the frenzy of consolidation that was unleashed, Nextel Communications Inc. gobbled up many of the SMR carriers and national paging carriers linked up or went out of business.
The year 1998 saw a frantic level of wireless merger activity: Alltel Corp. bought 360 Communications, SBC Communications purchased Ameritech, AT&T Wireless picked up Vanguard Cellular and American Cellular acquired PriCellular Corp.
VoiceStream Wireless Corp. bought Aerial Communications as part of its consolidation of U.S. GSM carriers, which later included Omnipoint and PowerTel Inc. And in the Big Daddy of them all, Vodafone PLC bought AirTouch Communications for $62 billion in early 1999. A few months later, the combined entity snapped up CommNet Cellular for $1.5 billion.
Only five of the pure-play cellular and PCS providers publicly traded in 1997 still remain. The surge of investor confidence created by the great wave of consolidation turned into tremendous run-up in the stock of those survivors. Rural Cellular Corp., Western Wireless Corp., U.S. Cellular and Centennial Cellular Corp. all saw their shares shoot up in 1999 and continue trading high well into 2001.
The previous wave of consolidation didn't cause stocks to skyrocket overnight, however. It took nearly a full year of consolidation until shares started making major gains.
But consolidation isn't the only cure. Atkin foresees the current lack of confidence lasting until companies can generate sustained positive free cash flow. And because most national operators won't reach that point until the second half of 2003 at the earliest, Atkin believes the weakened investor interest will continue for some time.
Friedman Billings Ramsey analyst Alex Rygiel agrees, noting in a recent report that without free-cash-flow generation, 'this sector will never be exciting again.'
Thomas Huseby, managing partner at SeaPoint Ventures and the founder of smart antenna company Metawave Communications Inc., doesn't see value returning until after the shakeout has run its course. And mergers and acquisitions won't be the only type of consolidation activity. Some carriers also could go under, he warns.
But with fewer operators and less competition, carriers inevitably will start spending again, delivering a rebound to the software and equipment vendors. Huseby doesn't foresee the initial public offering market staging a comeback, however, until public wireless companies are performing well again. 'That will make an IPO look promising,' he says, adding that companies wishing to go public will have to meet high standards.
In some ways, wireless' previous lean years were easier to tolerate than the current situation because the industry then was still so young. 'We had yet to see any equity run-up or debt. We hadn't yet experienced the 'up' yet, so had no idea what 'down' felt like,' Huseby observes.
Despite the bargain-basement stock prices, Huseby remains upbeat about the industry's long- term prospects. 'People still need to talk. It would be a lot worse if someone came up with mental telephony,' he quips.
But as veterans of the last downturn can tell you, it's never easy to grapple with the bear.
Consolidation Survivors
* Rural Cellular Corp.
* Western Wireless Corp.
* U.S. Cellular
* Centennial Cellular Corp.
Wireless Carriers What Happened
360 Communications Acquired by Alltel Corp.
Aerial Communications Purchased by VoiceStream
AirTouch Communications Bought by Vodafone
Ameritech Acquired by SBC
CommNet Cellular Bought by Vodafone/AirTouch
InterCel Inc. Changed name to Powertel Inc.
Omnipoint Communications Acquired by VoiceStream
Palmer Wireless Bought by Price Communications
Powertel Inc. Acquired by VoiceStream/Deutsche Telecom
PriCellular Corp. Snagged by American Cellular
Price Cellular Pending acquisition by Verizon Wireless
Rural Cellular Corp. Still trading
U.S. Cellular Still trading
Vanguard Cellular Acquired by AT&T Wireless
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- Eric - |
