NightWriter and thread,
Interesting article from TheStreet.com a few days ago. (pardon my electrons if this has already been posted)
Top Stories: Small Telcos Face a
Winter of Discontent
By Jeffrey Hoffman
Staff Reporter / TheStreet.com
10/9/98 4:06 PM ET
SAN FRANCISCO -- If Charles Darwin were around
today, he'd likely have something to say about the
future of the emerging telecom firms called
competitive local exchange carriers. A looming
shakeout in the sector will show soon enough
which ones are fittest for survival.
CLECs, which compete with the Baby Bells for
business customers, had been seen as a high-tech
bet because of the sore need for bandwidth. This
week, though, the stocks of even the largest,
strongest and most liquid CLECs have been
pounded into near oblivion.
Whether they have good news or bad, the Street
persists in punishing the CLECs. Last week, for
example, Tampa, Fla.-based Intermedia
(BNET:OTC BB) plunged on rumors the company
would preannounce poor third-quarter results. The
stock failed to rebound after the rumors proved
groundless. Thursday GST Telecommunications
(GSTX:Nasdaq) of Vancouver, Wash., announced it
installed 30,000 new lines in the third quarter, an
increase of over 40%. Its stock fell more than 15%
to 3 11/16 despite the news.
The CLECs are adding new access lines at twice
the speed of the Bells; they install state-of-the-art
fiber optic lines and digital switching equipment that
will yield returns on capital much higher than the
outdated RBOC systems, which are still heavily
laden with copper wire. The cream of the sector is
well managed and well capitalized. Yet the
bloodbath in share prices continues with no end in
sight.
What gives?
In a nutshell, the CLECs are suffering from the
malaise affecting nearly all growth stocks in the
run-for-cover market. Fundamental reappraisals of
risk and time horizons are going on in all financial
markets, and telecom investors are stating clearly
they don't want to buy rosy prospects, they want
earnings growth and dividends -- and they want
them now, not later. CLECs are mostly early-stage
ventures that still must spend heavily on
infrastructure and, while a few such as Intermedia
are going cash-flow positive, they are still years
from profits.
"People are sticky on fundamentals now," says
Liam Burke, co-manager of the Flag Investors
Communications fund, which held 225,000 shares
of New York-based WinStar (WCII:Nasdaq) as of
June 30. "Futures have less appeal than they did a
few months ago."
Vik Grover, telecom analyst at Kaufman Brothers,
puts it less subtly: "Anything with fiber or CLEC in it
is getting chopped to bits."
In contrast, defensive, interest-rate sensitive stocks
like the regional Bells, which have little or no
international exposure and a solid history of
earnings growth have "smelled like roses
throughout this turmoil," says Goldman Sachs
analyst Richard Klugman. BellSouth (BLS:NYSE)
saw its shares rise 3 5/16 to a record 82 1/8
Thursday after the Atlanta-based phone company
said it expected to post 12% to 14% earnings
growth in 1999, higher than analysts had expected.
In the meantime, how bad can things get for the
CLECs? A poster hanging in Grover's New York
office underscores the mood among those involved
in analyzing and financing the sector. The poster
depicts partying bears, dancing and eating meat in
a forest clearing - an image that hits a little close to home this week. "The bears are definitely dancing.
Maybe I should take the thing down," he says.
Looking forward, Bear Stearns telecom analyst
James Henry thinks the meltdown will lead soon to
a winnowing of the sector, with the weakest CLECs
being acquired or going bust and the strongest
emerging in a solid position to challenge the
RBOCs for local market share. CLEC survivors, he
says, will have not only strong management and
solid business plans but enough financing to ride
out what could be a long-term drought in the capital
markets.
"The equity and unsecured high-yield markets are
closed for the foreseeable future," said Tom Lord,
chief financial officer of Dallas-based Allegiance
Telecom (ALGX:Nasdaq). "If you're a cash-rich
CLEC, you're in a good position. If I were running a
company that needed cash in the next six months,
I'd put the company up for auction or find a partner
to take a 10% or 20% stake."
Lord says his company is sitting on $500 million in
cash, enough to finance its business plan for the
next two years.
Bear Stearns' analysis of the cash positions of
major CLECs at the end of the second quarter
shows that deep-pocketed NextLink
(NXLK:Nasdaq), which was founded by cellular
phone pioneer Craig McCaw, holds $1.341 billion
and is financed through the second quarter of 2000.
Intermedia, with $763 million, and WinStar, with
$703 million, can hold their own for the same
period. ICG (ICGX:Nasdaq), of Englewood, Colo.,
with $652 million also is financed through the
middle of 2000; while GST, at $558 million is set
through the first quarter of 2000.
Strapped CLECs could get reprieves, however,
from big telecom equipment makers, which
sometimes are willing to extend credit to their
customers. Recently, for example, Lucent
(LU:NYSE) said it would provide $150 million in
credit to Advanced Radio Telecom
(ARTT:Nasdaq). "If these equipment giants are
seeing slowdowns in capital spending at the high
end of the market, they have an incentive to help out
the new competitive players," says Henry of Bear
Stearns.
But even that source of relief may slow to a trickle.
Bob Ray, a senior vice president at Moody's who
tracks telecom debt securities, says he isn't so
sure that the practice will remain widespread if
financial institutions tighten credit. Typically,
equipment vendors sell credit paper to banks and
insurance companies.
Given growing uncertainty about the economy,
those institutions are "taking a closer look" at the
quality of the credit they buy, Ray says. "It doesn't
mean it's going to dry up and go away, but
anecdotal evidence shows it's getting harder to
quickly place that kind of paper."
And that's bad news for those CLECs that have but
a tenuous grasp on the evolutionary ladder.
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