Silicon Valley: Global Crossing Seeks Safe Passage
By Jeffrey Hoffman
Staff Reporter
8/13/98 12:30 PM ET
SAN FRANCISCO -- It should come as no surprise that fiber is good for you. But a hot IPO is about to surprise a lot of U.S. fiber-optic analysts.
Bermuda-based Global Crossing is set to go public Friday, in an offering of 21 million shares that some savvy Street-watchers are calling the best fiber opportunity since Qwest Communications' (QWST:Nasdaq) June 1997 IPO. Global Crossing is expected to come out between $17 and $19. The deal is being co-led by Salomon Smith Barney and Merrill Lynch. It's expected to be priced late Thursday and begin trading on Friday, say people familiar with the deal.
Global Crossing plans to link North America to Asia and Europe with undersea fiber-optic lines, just as Denver-based Qwest is putting together a network linking major North American cities. Fiber-optic telecommunications, which carry massive amounts of data and voice traffic around the world, will be as important to the economy of the 21st century as railways were to the 19th and highways have been to the 20th. But U.S. analysts tend to focus on domestic investing opportunities, and this global IPO seems to have sneaked right by them.
Despite the company's low profile, demand for the stock is expected to be no less than that for Internet bandwidth. Bandwidth is what Global Crossing will sell to telecommunications companies as a "carriers' carrier," according to Vic Grover, telecom analyst at the New York high-tech investment bank Kaufman Bros. (Kaufman isn't participating in the offering.)
Grover, who recently attended Global's road show, said there's talk that high expectations have left the offering subscribed several times over. "It should do very well in the aftermarket," Grover said.
Global was founded in March 1997, and is now led by Chief Executive Jack Scanlon, the former head of the cellular network unit at Motorola (MOT:NYSE). Since then it has built a $750 million trans-Atlantic link that started offering service in May, carrying 40 billion bits a second. (40 billion bits will handle 600,000 phone calls. By way of comparison, the first trans-Atlantic cable laid in 1956 carried 1.2 million bits a second, or 36 phone conversations.) It's working on another three cables worth a total of $3 billion, including a joint venture with Japanese trading company Marubeni to build a $1.2 billion trans-Pacific line with 80 billion bits of capacity.
It's also lining up customers. Global has agreements with Qwest and Atlanta-based WorldPort Communications (WRDP:Nasdaq) to carry signals across land in the U.S. and Europe, respectively. As of June 30, Global Crossing said it had already signed $550 million in deals to use its U.S.-Europe connection with companies including Deutsche Telekom (DT:NYSE ADR), GTE (GTE:NYSE) and Swisscom.
"They're targeting high-speed data transmission as well as voice, but demand for data is the key driver," says Ken Fleming, an analyst at IPO specialist Renaissance Capital in Greenwich, Conn. "The growth in that area is huge and there isn't enough capacity out there right now."
While international voice traffic is expected to grow 13% annually between 1996 and 2000, data traffic will expand at an even faster rate due to demand for "broadband services," including Internet commerce, corporate intranets and video conferencing, Global said in its prospectus. By 2000, the company plans to have laid 32,000 miles of high-power fiber optics.
Global's lines are designed to exploit this demand. While standard phone lines send signals as electric pulses, optical fiber transmits data and voice calls as wavelengths, or colors of light. Using a promising new technology called dense wavelength division multiplexing, or DWDM, Global will be able to pack hundreds of signals onto a single fiber strand at high speeds.
To be sure, an investment in Global carries risks. For one thing, the company has yet to turn a profit. In the three months ended March 31, it posted a net loss of $14.5 million, or 13 cents per share, on a pro forma basis. The company is highly leveraged, carrying debt of nearly $1.12 billion, and it warned in the prospectus that it will need substantial further capital investment to pursue its plan of a global network.
Moreover, Global Crossing faces deep-pocketed competition, including Gemini, a trans-Atlantic cable system operated and marketed by WorldCom (WCOM:Nasdaq) and Cable & Wireless (CWP:NYSE ADR), as well as a China-to-North America line being developed by such companies as SBC (SBC:NYSE), MCI (MCIC:Nasdaq), AT&T (T:NYSE) and Sprint (FON:NYSE).
The IPO itself also could face a glitch in a market that has been hard on some of the bigger deals put forth this year. Global Crossing's offering would be worth $378 million, compared to a 1998 average of $120 million, according to Fleming at Renaissance Capital. "IPOs have been weak, especially the bigger deals," he said. "This is bigger than your average IPO."
Even so, Global's business is "a great business because it's a seller's market," said Grover, with Kaufman. "With deregulation and markets opening up all over the world ... there is massive pent-up demand."
In addition, telecom infrastructure stocks, such as Qwest, have held up extremely well in the recent market downturn. "The Street is paying up for facilities-based plays. Investors see clearly that there is a lack of infrastructure out there," said Grover. |
