snippets from CSFB 3-30 WIRELESS update
Omnipoint
Although our current net adds estimate for Omnipoint is 50,000, based on recent guidance, we believe Omnipoint may deliver net adds of 75,000-80,000. We expect ARPU to be in line with our estimate of $45. If Omnipoint exceeds our net adds estimate, we would expect the operating cash flow loss to be somewhat larger than our current estimate of $65.7 million (by as much as $4-$5 million), which would likely cause the earnings per share loss to be higher (more negative) than our estimate of $3.21.
The C-block Reauction
The FCC reauction of returned and forfeited C-block PCS licenses began on March 22. Although 347 licenses are up for sale, the focal point of the auctions has, as expected, been on the Chicago (8.2 million POPs) and Dallas (4.3 million POPs) licenses. While 67 organizations were initially eligible to participate in the auction, five participants have been bidding aggressively for the Chicago and Dallas properties. These include GSM operators Western Wireless (via the joint venture between its VoiceStream PCS operation and Cook Inlet) and Omnipoint
(via OPCS), ConnectBid (a joint venture of billionaire Craig McCaw's Eagle River Investments), Beta Communications (an entity of veteran telecom investor Mario Gabelli), and ABC Wireless (Telecorp). To qualify for the auctions, bidders must have gross revenue of less than $125 million in each of the past two years, as well as assets of less than $500 million (unless they were participants in the original auction). Additionally, discounts will be given to winning bidders based on average gross revenue: bidders with a gross revenue of $15-$40 million for the preceding three years are entitled to a 15% discount, and bidders with less than $15 million in gross revenues receive a 25% discount. The bidding restrictions and discounts reflect the FCC's publicly stated interest in supporting small businesses, and also explain why all the major participants have established investment vehicles for the specific purpose of bidding in the auction. While it is probably foolish to speculate at this point who will take home the 30 MHz Chicago and Dallas licenses, the initial bidding suggests one of the five entities mentioned above will end up with them. As of the latest round of bidding (round 12), Omnipoint has the high bid for both Chicago ($111.3 million) and ABC Wireless has the high bid for Dallas ($56.3 million). The other available 30 MHz
licenses—St. Louis, Phoenix, and Detroit—have leading bids from Cook In-let/VoiceStream ($11.7 million), Beta Communications ($8.8 million) and Qualcomm's Leap Wireless ($8.1 million).
With a strategic investor in place and very successful PCS operations in a number of cities, Western Wireless has predictably been at the forefront of the bidding. Western is a logical favorite for either or both of the licenses, but we can envision a number of other potential scenarios unfolding. Although Omnipoint does not have a strategic investor in place, given the multiple proposals it states it has received and its vendor financing arrangements, it should have the resources to acquire and build-out at least one of these properties, with Chicago possibly being the more logical fit, given its eastern footprint. Further, there is no telling how much Craig McCaw and Mario Gabelli might be willing to pay for these licenses.
Based on his actions in the A and B PCS auctions back in 1995, we
wondered if Craig McCaw might simply be trying to ensure that the price for these wireless licenses remains high enough so that no one walks away with a steal. Presently, the leading bids in Chicago and Dallas equate to $13.57 per POP and $13.09 per POP, respectively. In the event other participants bid very aggressively for licenses, Western Wireless and Omnipoint, who have both stated that
they intend to take a very disciplined approach to bidding in the auction, may ultimately pull back.
While McCaw's interest in the licenses may well dissipate as the bidding escalates, should McCaw ultimately succeed in the auction, it could possibly be the first step in a more extensive GSM strategy. It is possible that McCaw could be a consolidator of GSM players, as operators like VoiceStream and Aerial are spun-off. The founding father of McCaw Cellular and major shareholder in Nextel, McCaw clearly has the experience, vision and capital to work toward the creation of a national GSM player. One potential impediment to this scenario, however, is that Nextel, as a competitor, has the right of first refusal on such an investment.
Another potential scenario is a strategy in which McCaw seeks to marry Nextel's iDEN network to GSM networks he builds or acquires. As iDEN and GSM move toward convergence—an iDEN/GSM world phone is already in the works combining Nextel with GSM begins to make sense. Like Craig McCaw, Mario Gabelli could also attempt to become a consolidator of GSM properties; alternatively, he could focus on creating a business within markets he acquires, and perhaps eventually sell these businesses to a GSM consolidator.
In general, we believe that, unless certain players severely overpay for licenses, which does not seem to be likely, the outcome of the auction will ultimately be favorable to GSM operators. Since Western Wireless's execution with VoiceStream has been excellent, we would look upon expansion into Chicago and Dallas as a great opportunity to create value. Given the interest of various investors, we also think that the awarding of the licenses (and conceivably, the outcome of the Omnipoint strategic investor in the near future) could spark the emergence of a consolidation strategy and set in motion the consolidation of the GSM carriers. Finally, we believe the strength of the bidding for these PCS licenses, and the presence of well-regarded high-profile investors, reflects positively on the inherent value and potential of the wireless sector. |
