After Reshaping Bookselling, Amazon.Com Turns To Bond Mkt
By PALLAVI GOGOI
Dow Jones Newswires
NEW YORK -- Wall Street analysts may have to unlearn their business school lessons to assess a new breed of companies that the internet has spawned.
At the helm of this new era is Amazon.com, which is expecting to price next week a $275 million bond offering via Morgan Stanley Dean Witter.
Analysts have found it difficult to identify the assets of the Seattle-based pioneer of online bookselling. They agree that the conventional definition of a tangible asset no longer stands and that Amazon's assets - like its business - are more in the virtual realm.
'A stumbling block for internet companies has been identifying their assets,' said Carolyn Katz, high-yield analyst at Goldman Sachs & Co. 'But this market has been rethinking what constitutes an asset and intellectual property, which is what this company has, seems acceptable.'
Amazon claims to be the third largest book seller in the U.S. with a fast-increasing customer base.
But the company has no physical store that one can count as an asset.
'The company exists on the internet. There's no real office space or building that you can count as an asset,' said Lise Buyer, an analyst at Deutsche Morgan Grenfell. 'The real assets are the people and its valuable brand name.'
One of the characteristics the bond market uses to assess a company is its assets, traditionally something like buildings, industrial equipment or the like that noteholders can take charge of and sell in the event of bankruptcy.
Amazon may not be a company in the traditional mold, but the equity market has given Amazon its vote of confidence. After issuing an initial public offering last year at $18 per share, its stock price has run up to as high as $100 and is now trading around $93. This, despite the fact that the company has continued to post losses.
The four-year old company's internet site had lured 2.3 million customers by the end of the first quarter, a 50% growth from last year.
Amazon's trailblazing performance has attracted even traditional names into the internet business who are trying to mimic its commerce.
'This company in effect created that market, it is a pioneer in internet retailing,' said Edward Mally, managing director of high-yield research at CIBC Oppenheimer. 'And mainstream big name retailers recognize the importance of the new medium. Barnes and Noble entered the fray and so did Egghead Software, which became an exclusive online retailer.'
Amazon's revenue grew fivefold in the first quarter compared to a year earlier. In fact in terms of market capitalization Amazon has in the recent past surpassed Barnes and Noble's. Friday, it was a hair behind at $2.1 billion to Barnes and Noble's $2.4 billion.
Its net sales increased to $87.4 million in the first quarter, a leap of over five times from $16 million in the previous year.
However, its net loss per share also increased coincidentally to 40 cents a share from 16 cents a share in the same quarter last year.
The company attributes its losses to heavy investing in expanding and marketing its service and has said it will continue to do so.
Some analysts said they were confident that volume will drive margins of profitability finally, though the company will sustain losses while penetrating the market.
Analysts said investors get attracted by the potential of the company. They point to the fact that Amazon has made headway in a new area that many see as the future of retailing.
Buyer of Deutsche Morgan pointed out that the company is already a leader in the game that many are yet to learn.
'They're already down the learning curve. Now they're entering the realm of music which is a great strategy. They've already attracted customers, now they'll lead them to buy more. The object of the game is to generate more revenue.'
Buyer was referring to Amazon's recent announcement that it would begin selling music products, including compact disks, over the internet.
Amazon is now courting the bond market because analysts say the management, bullish about the company's future, is loath to part with more equity.
Observers said the company will retire a $75 million convertible note and also some bank debt with the proceeds.
Amazon's decision to tap the current high-yield bond market's rich resources is apt, according to market watchers.
'It is the high-yield market's characteristic to fund new ideas and be a catalyst for young companies in new areas,' CIBC's Mally said, adding: 'The internet is a hot area and I think investors are excited about that.'
The bond market has already given its stamp of approval to internet companies in recent months. Psinet Inc., Level 3 Communications Inc. and Verio Inc. have all tapped the junk bond market in the last three months and all of them have been extremely successful. All increased the size of their bond issues and obtained attractive rates.
'The market understands that the internet is not just a fad, it's here to stay,' said Edward Mally, managing director of high-yield research at CIBC Oppenheimer. 'Communications and commerce are headed in that direction and Amazon is very different from a traditional manufacturing company.'
However, analysts are quick to point out Amazon's uniqueness and difference from the rest of the internet companies. It is a successful retail company and it has no tangible assets, unlike previous high-yield internet issuers which have been raising money to fund projects such as laying optical fiber cables.
'This company is a very effective retailer of books and audio tapes,' said Les Levi, telecommunications analyst at Chase Securities. 'The internet medium is an extremely effective vehicle to reach a broad buyer base as many other companies are realizing.'
Amazon is not being rated by either of the primary rating agencies - Moody's Investor Services or Standard & Poor's.
Analysts pointed out that the valuation given by investors could be higher than expected from agencies, which is why the company was unwilling to be rated. The company wouldn't comment due to the nature of its offering - a Rule 144a private placement.
-Pallavi Gogoi; 201 938 2122; Pallavi.Gogoi@cor.DowJones.com |
