Interesting article on CLEC's ongoing search for money.
Bell Rivals Are Dialing For Big Funding Dollars
Investor's Business Daily -- 10/20/98
Author: Reinhardt Krause
Will phone industry upstarts have trouble getting the money to build out systems as planned?
As they attack the turf of powerful regional Bells, entrants in local phone markets face that question. They're racing to build networks that cost billions of dollars.
Stocks of most of these companies have nose-dived since midsummer, collectively falling about 45%. The drop exceeds the general market downturn. It shows, analysts say, that some investors worry that the upstarts may hit a funding snag.
The stock market's volatility may hinder upstarts' ability to raise capital. What's more, access to the high-yield junk-bond market has dried up amid global market turmoil.
Most analysts, though, say the companies have enough cash to last through late '99. By then, their financial outlook may be better.
''With a few exceptions, the (new entrants) are fairly well-endowed with cash,'' said James Henry, an analyst at Bear, Stearns & Co. in New York. ''They're also starting to hit business milestones.''
Some industry upstarts are close to generating positive operating cash flows, he says. That's a key measure for industries with heavy capital costs, such as phone companies. Positive cash flow could make it easier for the companies to get more bank loans.
Still, the telecommunications industry is marked by enormous capital needs.
New rivals of the regional Bells, called competitive local exchange carriers, are spending big bucks. They have grabbed some market share, but generally small amounts.
CLECs have raised more than $14 billion in capital since they emerged after passage of the Telecommunications Act of 1996, says Conrad Leifur, an analyst at Piper Jaffray Inc. in Minneapolis.
But CLECs, including units of leading long-distance carriers like AT&T Corp., will hold only about 5.5% of the $105 billion local phone market by year-end, according to Merrill Lynch & Co. in New York.
Though there are worries that CLECs will be squeezed financially, those concerns are overblown, says Thomas Lord, chief financial officer of Allegiance Telecom Inc., a CLEC.
''There are probably two or three CLECs that need to raise significant money over the next six to 12 months,'' he said. ''Most companies were very opportunistic in the first half of '98 at funding themselves with either debt, equity or convertible securities.''
Allegiance has raised enough money to enter 18 markets. It had about $450 million in cash on hand as of Sept. 30.
To build out in six more markets as planned, it needs to raise another $150 million to $200 million. Lord expects commercial banks to play a role in financing Allegiance and other CLECs.
''We're talking to a dozen financial institutions,'' he said.
Some CLECs are further ahead than others in building out systems. More-established rivals of the Bells include McLeodUSA Inc., Intermedia Communications Inc. and ICG Communications Inc.
Most observers say CLECs in early stages of building out networks have the biggest financing needs. Two such firms are Nextlink Communications Inc. and RCN Corp.
Nextlink requires $2.1 billion in additional capital, while RCN needs more than $6 billion, says Salomon Smith Barney Inc.
Both firms, though, have things in their favor. Nextlink is backed by billionaire cellular pioneer Craig McCaw.
Bellevue, Wash.-based Nextlink has about $1.3 billion in cash. It plans to reach most of the top 60 U.S. phone markets by '04.
As they take customers from the Bells, CLECs should be able to get funding even in tough times, says Nextlink CEO Wayne Perry.
''The small steps of our business plan are incredibly important for capital markets,'' said Perry, a McCaw Cellular Communications alumnus. ''They see how we do in early markets. This isn't roll the dice, get to the end and see if it works, like a cancer drug.''
Princeton, N.J.-based RCN is highly leveraged. Long-term debt of $1.2 billion represents about two-thirds of its funding.
RCN fields an experienced team that knows how to raise capital, analysts say.
RCN has ties to MFS Communications Co., a CLEC bought by MCI WorldCom Inc. for $12.2 billion in '96. Level 3 Communications Inc., which is building a national fiber- optic network, owns almost half of RCN.
Omaha, Neb.-based Level 3 was started by James Crowe, the former CEO of MFS. Level 3 raised $2 billion in high-yield bonds earlier this year.
Unlike most CLECs that serve small and midsize businesses, RCN is targeting big residential markets. It's building a fiber-optic network in the Northeast and a few Western states. RCN offers phone, cable TV and Internet services.
If financing is tight next year, some CLECs may slow network expansion.
Leifur expects capital spending by CLECs to rise about 20% in '99, down from 54% in '98. CLECs will spend about $5.62 billion in '98, up from $3.60 billion a year earlier, he says.
CLEC spending has fueled heady growth for telecom equipment makers, such as Lucent Technologies Inc. and Nortel Networks Ltd.
Financing by Lucent and Nortel is helping upstarts gain traction. They provide lines of credit to enable gear purchases.
In late September, Lucent provided financing to Advanced Radio Telecom Corp. Bellevue, Wash.-based ART is one of several CLECs attacking the Baby Bells by air.
Its wireless network employs rooftop antennae at customer sites. WinStar Communications Inc. and Teligent Inc. are following a similar strategy.
Spokesman Robert Stewart says Teligent has enough financing through '99. Vienna, Va.-based Teligent expects to be operating in 15 markets by year-end. It needs $1.67 billion to build out its wireless network through '04.
New York-based WinStar has amassed the most high-frequency radio spectrum among new entrants. It has about $500 million in cash, having raised about $1.7 billion.
That's enough to fund WinStar's push into another 10 markets, says Chief Executive William Rouhana. It's entered 30, and expects to be cash-flow positive by early '00. |
