ARTT: RECEIVES $251 MM IN EQUITY INFUSION LED BY QWEST--STRONG BUY
Bankers Trust Research/BT Alex. Brown Research
Bo Fifer,Jeffrey Hines
June 02, 1999
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ADVANCED RADIO TELECOM CORP. [ARTT] "STRONG BUY"
Receives $251 MM In Equity Infusion Led By Qwest
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Date: 06/01/1999 EPS 1998A 1999E 2000E
Price: 12.25 1Q (0.50) (0.87)A (0.53)
52-Wk Range: 15 - 2 2Q (0.42) (0.56) (0.61)
Ann Dividend: 0.0 3Q (0.56) (65.00) (0.78)
Ann Div Yld: 0.00% 4Q (0.57) (0.54) (0.54)
Mkt Cap (mm): 780 FY(Dec.) (2.06) (2.61) (2.46)
3-Yr Growth: FY P/EPS NM NM NM
CY EPS (2.06) (2.61) (2.46)
Est. Changed Yes CY P/EPS NM NM NM
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HIGHLIGHTS:
--On Tuesday (1-June) Advanced Radio Telecom (ART) received $251 million
in equity from a group of strategic investors led by Qwest
Communications (Qwest will effectively own 19% of ART). We believe the
funding represents three major positives for Advanced Radio Telecom:
1. Reduces/removes the financing risk that we had noted previously.
2. Allows ART to significantly accelerate their business plan as the
Company now plans to be in 40 markets by the end of 2002.
3. Through the addition of Qwest as a strategic partner/investor,
significantly lowers the risk associated with a "start-up"
telecommunications operation.
--PREFERRED STOCK SPECIFICS: Advanced Radio Telecom is issuing
approximately $251 million of preferred stock at a common stock
equivalent price of $8/share (while ARTT closed Friday at $11 5/16, the
company noted that ARTT average price over the last six months through
the end of 1Q is $6.44/share). There is no dividend associated with the
Preferred stock. We do not view the per share price as a negative (or a
positive, seems quite fair all things considered), but we certainly view
the $251 million as a tremendous positive and endorsement from some
major telecom backers.
--WHY IS QWEST IMPORTANT: Qwest/ART can now integrate Qwest's inter-city
IP based fiber optic network with ART's local broadband wireless
networks. Qwest will become an exclusive provider of ART's
backbone/backhaul needs. Also, Advanced Radio Telecom will not only be
utilizing Qwest's inter-city IP based backbone network but will also see
the Qwest salesforce selling an entire end-to-end package to customers.
--STOCK PRICE PERFORMANCE: YTD ARTT is up 63%, ahead of our CLEC Index (up
54%) and ahead of the S&P500 (up 5%).
--VALUATION: We have incorporated a more aggressive build now possible
due to the $251 million of equity into our model. We are also using our
standard 20% equity discount rate as the financing risk has been
mitigated. Our new 12-month price objective is $19/share based on our
DCF. We are raising our rating to "Strong Buy" on ARTT.
DETAILS:
Advanced Radio Telecom received $251 MM in equity from a group of strategic
investors led by Qwest Communications, who will own 19% of ART, on Tuesday
(1-June). We believe the funding represents three major positives for ART:
1. Reduces/removes the financing risk that we had noted previously.
Not only does the Company receive $251 million in equity, but the equity
frees up $502 million of vendor financing from Lucent, and, we believe,
will allow ART to tap other public and private markets (e.g., high yield)
as needed. On a conference call with investors the Company indicated that
it could now see spending up to $440 million over the next several years
(through 2002) to accelerate its business into 40 markets (up from 3 today,
Seattle, Portland and Phoenix).
2. Allows ART to significantly accelerate their business plan.
As noted above, ART is now looking to be in 40 markets by the end 2002. We
had been forecasting the Company to be in 30 by 2001, although until
Tuesday's announcement the Company did not have enough funds to complete
1999, let alone get into a forecasted 30 markets by 2001.
3. Through the addition of Qwest as a strategic partner/investor,
significantly lowers the risk associated with a "start-up"
telecommunications operation.
Perhaps just as important as the funding itself, Qwest, who is in the midst
of building an IP based telecom network linking cities across the US, will
invest $90 MM of the $251 MM and take a 19% stake in the Company. We note
that Qwest will have 18,500 route miles in the U.S. completed by the middle
of 1999 and an additional 315 miles by the end of 1999. Qwest is also
building network in Europe through a joint venture with KPN, the Dutch
telecommunications company.
Today's announcement pushes ART into the category of nationwide data
network provider, from one with a regional (Western) focus and significant
financing risk.
In terms of this deal, Advanced Radio Telecom is issuing approximately $251
MM of preferred stock. The preferred stock is being issued at $80/share
and thus 3.14 million shares are being issued. The preferred stock carries
a dividend equivalent to that of the common stock (i.e., zero) and is
convertible into common stock at a 10-for-1 basis. Thus, the common stock
equivalent price of the issuance is $8/share and 31.4 million common stock
equivalent shares. While ARTT closed Friday at $11 5/16, the company noted
that ARTT average price over the last six months through the end of 1Q is
$6.44/share. We do not view the per share price as a negative (or a
positive, seems quite fair all things considered), but we certainly view
the $251 MM as a tremendous positive and endorsement from some major
telecom backers. Moreover, Qwest/ART can now integrate Qwest's inter-city
IP based fiber optic network with ART's local broadband wireless networks.
Qwest will become an exclusive provider of ART's backbone/backhaul needs.
While Qwest is the "known" investor, the $251 million is coming from a
world class group of strategic partners which include many of the major
telecom company backers from the venture capital (VC) world including:
Company Investment ($MM)
Qwest Communications $90
Oak Investment Partners $40
(syndicate leader)
Meritech Capital Partners $25
Advent International $20
Columbia Capital $20
Accel Partners $15
Brentwood Venture Capital $15
Bessemer Venture Partners $8
Adams Capital Management. $3
Total $251
Source: Company documents.
The "strategic-financial" partners also bring a wide ranging network of
telecom investments to the table for ART, from content to connectivity to
service providers. We note that the $251 million is significantly more
capital than we were anticipating. As noted above, the company now
believes that it can be in 40 markets by the end of 2002 (we had been
forecasting 30 by 2001).
If anything, we believe that Tuesday's event, when coupled with recent
announcements (see below) highlights the importance of broadband, data
capable local networks and perhaps the premium position of the wireless
CLECs (Advanced Radio Telecom, Teligent and WinStar) in providing such
services:
17-Dec-98: Williams, a major provider of inter-city fiber based
communications services, reaches a deal with WinStar to carry WinStar's
back-haul traffic and purchases 2% of WinStar's local network capacity for
$400 million.
14-Jan-99: Nextlink, Craig McCaw's fiber based CLEC and backbone inter-city
fiber provider through a venture with Level 3, purchases WNP's wireless
CLEC spectrum for $695 million.
1-June-99: Qwest leads a group of investors putting $251 million of equity
into Advanced Radio Telecom.
1-June-99: Liberty Media Group, owned by AT&T, purchases Associated Group
whose two assets consist of AT&T stock and roughly 40% of Teligent.
The fact remains, that with the technology advances being developed by the
likes of Hughes, Nortel, AT&T, Siemens, et. al. (e.g., point-to-multipoint)
that we believe that the wireless CLEC providers will prove capable of
being one of the key players in the local telecommunications market. We
note that the RBOCs and other ILECs (incumbent local exchange companies)
still have over 90% market share of what is a $100 billion per year market
and that the fiber based CLECs have connected roughly only 10,000 of the
750,000 commercial office buildings in the U.S. We believe that the
wireless CLECS, especially when "backed" by the likes of Williams, Qwest,
AT&T/Liberty, et. al., are in a strong position to bring the first
significant competition to this battlefield in the telecommunications
market. |
