This from the AFCI thread, FWIW. Author noted, but not publication or date. Anything new here? Recognize the piece? I remember there was some heavy dissection of the LU A/R practices by Mr. Fun and others some time back. I'm LONG LU via Ascend.
To: lml who wrote (2992)
From: elmatador
Sunday, Apr 30, 2000 3:14 AM ET
Reply # of 2995
AFCI and lots of others smallish vendors can't do that. Slowly you'll understand, lml.
If you think investing on Wall Street is already scary, take a look at what Lucent, Cisco and the other telecom equipment makers are doing to get
sales. Funny Money
By Seth Lubove
CONVERGENCE COMMUNICATIONS, a moneylosing Salt Lake City-based operator of broadband networks in Latin America, was in a
bind in the fall of 1998. The company had to raise money for expansion, but the Russian and Asian financial crises had spooked Wall Street away
from the fledgling company's proposed junk bonds. The background of the founders probably didn't help. Their last company, which once ran an
adult phone service, had tumbled into bankruptcy.
Solution: Convergence got vendor financing of $175 million from France's Alcatel, see ("Laggard") for a turnkey broadband network in a 17-city
territory that includes such Third World garden spots as Guatemala, El Salvador and the Dominican Republic. "Now we share the risk with them,"
boasts Convergence's senior vice president, Troy D'Ambrosio, who adds that as many as four companies were in a "heated contest" to finance his
equipment needs.
There's a lot of risk-sharing going around these days in the fast-moving telecommunications business. In a trend that could become a ticking time
bomb for high-multiple growth stocks in the telecom equipment sector, companies including Lucent, Cisco, Qualcomm and Nortel Networks are
fighting each other to offer billions of dollars in equipment financing to start-ups that would otherwise have a hard time getting funded. It's not just
bootstrap ventures. Vendor financing has become such an expectation in the communications industry that deep-pocketed telco tycoons such as
Craig McCaw and Ronald Lauder are getting it as well.
Vendor financing is a godsend to both sides of the deal--if the borrower stays afloat. If it doesn't, the damage shows up on the lender's quarterly
statement.
"You bet vendor financing has become a critical competitive tool," says William Frezza, a telecommunications venture capitalist with Adams
Capital Management and former director of marketing and business development at Ericsson, another big lender. "Just like rebates from auto
manufacturers, buyers have come to expect it." Frezza complains that one of his investments, AirNet Communications, has to offer the financing
deals just to compete with Nortel in wireless network equipment.
Lucent, one of the few companies that openly discloses its exposure in filings, had extended $7.2 billion in credit or financing commitments as of
Mar. 31, a 65% increase from a year earlier. Qualcomm disclosed in its most recent quarterly filing that notes receivable, the way companies
typically account for their customer financing, had ballooned 482% to $146 million. Sales were up 19%. Amount collected on those notes: zero.
"We are not necessarily wanting to be in the banking business," acknowledges Lucent's treasurer, William Viqueira. But he has no choice if he
wants the business.
One borrower contributing to Lucent's receivables is Fidelity Holdings. Not the blue-chip mutual fund company, this Fidelity is a Queens, N.Y.,
outfit whose largest business is a string of New York car dealerships, along with other curiosities that include a sludge treatment venture. It also
owns something called IG2, a service that bundles Internet access, telephone service, videoconferencing and television programming over existing
phone wires. The fact that the little division had barely $1.3 million in sales last year didn't dissuade Lucent from agreeing in March to sell IG2
$400 million worth of equipment over three years in return for a stack of IOUs and a bit of equity.
Next page >
Continued from Funny Money
Better yet--for IG2 at least--is the generous debt-to-equity ratio. "I put in $15 million in cash, and we get $30 million to $40 million in capital
equipment we can finance through Lucent," gushes KimberlyPeacock, IG2's vice chairman. Peacock says vendor financing was the only way she
could get affordable financing, since venture capital would cost too much in equity, and institutional lenders didn't want to gamble on her business.
She adds that Lucent also provides soft dollars in the form of promotions and advertising.
In theory, equipment sellers who do business on the cuff can syndicate the loans and pass them off to institutional investors and insurance
companies, who shoulder some of the risk and do the collecting. But don't kid yourself that there isn't the potential for trouble. Included in the
multibillion-dollar bath that Motorola is taking from its investment in the bankrupt Iridium is $400 million in vendor financing. And Lucent buried in
a recent financial filing that it had taken back $408 million out of $625 million in accounts receivable that it had already sold, though it managed to
sell the receivables a second time.
At a smaller vendor, such as $76 million (1999 sales)LCCInternational, a busted deal can wreak havoc on the balance sheet. The McLean, Va.
provider of network engineering and design services was an eager backer of companies angling in 1996 for a piece of the so-called C-Block slice
of the radio wave spectrum set aside for cellular calls. In order to win purchase commitments for a total of $115 million in services, LCCagreed to
provide capital to two C-Block speculators. It made a $6.5 million convertible loan to Pocket Communications and bought $5 million worth of
equity in NextWave Telecom.
A year later Pocket was in bankruptcy court, trailed by NextWave. LCC took a pretax charge of $29 million for the debacle, a devastating hit for
a company that produced net income of only $7.6 million in its best year as a public company. Before it went bust, Pocket had managed to
convince Ericsson, Nortel and Siemens to provide it with $646 million in vendor financing. And NextWave, even though it's a ward of the
bankruptcy court, still managed last summer to get Ericsson, Lucent, Nortel and four other vendors to offer competing vendor financing proposals
to fund part of the company's $1 billion resurrection plan.
Bankruptcy is a stigma in the stuffy world of banking, but not in the telecom financing business. Consider the good fortune of Heartland Wireless
Communications, which calls itself a "provider of wireless broadband network and multichannel subscription television services." The company
lurched into Chapter 11 in October 1998, then re-emerged in April of last year, defending itself from various lawsuits and renaming itself
Nucentrix Broadband Networks. Then, in February, Nucentrix bragged of a new "strategic alliance" with Cisco, in which Nucentrix agreed to buy
$13 million in equipment, but got $16 million in Cisco financing to pay for it and for other things.
Net2000 Communications, a moneylosing Herndon, Va. company aiming to compete against Bell utilities in the local phone business, had
problems getting anyone to buy into a planned junk bond deal in the fall of 1998. But Lucent and Nortel were competing fiercely to fund the
company. The winner: Nortel, which clinched the $180 million deal when it also offered to buy $30 million of Net2000's convertible preferred
stock.
It could be a Pyrrhic victory. |
