In my eye the financial liability is less of an issue than the bookkeeping issues and the perception that QC is competing with its customers. As you probably know, cellular operators typically incur several years of start-up losses before the network inflects to profitability. Since the operator must purchase a license from the governmental authority, build out the network infrastructure and spend heavily to get customers all before it has any customers to speak of, the high fixed cost structure charged against a nascent revenue base creates these large bookkeeping loses. Therefore, investors typically value start-up cellular operations first on the "pops" controlled, then by subscriber growth rates, followed by EBDITA (gross cash flow) margin and, only after several years, are there any expectations of reported profits.
Now consider that QC would have owned just under 50% of the Mexican network with an equity investment of something around $150mm. Generally Accepted Accounting Principles (GAAP) would have required QC to amortize the system's start-up losses through the company's P&L until the entire $150mm was written off (i.e. for a ridiculous example, if the Mexican system lost $300mm in its first year of operation, QC would have incurred a $150mm charge to its P&L (at the Equity Investments line). In a cellular operator such losses are not only accepted, they are EXPECTED. For example, my firm is a large holder of 360 Communications (a large cellular operator) that was roundly criticized by the Street earlier this year for reducing its marketing expenditures, accepting slower subscriber growth and reporting TOO MUCH PROFIT.
So QC management faced conflicting objectives. The Mexican investment is strategically important to the spread of CDMA throughout the Americas and tactically important to the infrastructure effort from a revenue and credibility standpoint. On the other hand, a good network operator needs to spend heavily, and incur substantial start-up losses, to properly launch the business. Within this context, what would Wall Street's reaction be? If past is prologue, the Street could not be counted on to understand anything more complicated than reported earnings per share. From this perspective, management's new vehicle seems like a brilliant solution. Particularly when one considers that the spin-off itself may prove to be an excellent investment.
Think about it. Previously these assets would be lost inside QC. Now, we will get to own a portfolio of wireless operators in a number of rapidly developing markets. While we will need to understand "little" details like the company's capitalization, who our partners are, and the competitive dynamics of the specific local markets, I am certainly very intrigued by the whole opportunity. Moreover, I don't suspect that Harvey White volunteered to spend the balance of his professional career bailing water out of a sinking ship.
Best Regards,
Gregg |
