When I was a kid and my family would drive between Minneapolis and Duluth to visit relatives, my stepfather, a high school math teacher, would give me and my sisters problems to solve. We knew he was just trying to keep us quiet for a few minutes, but we were always drawn in anyway. Here's an example. Let's say you had a house that was worth $190,000 and it dropped in value by 37%. How much is it worth now? No calculators, that's cheating. The right answer is just less than $120,000. Now that I've grown up, I've discovered that after working out the math there's a far trickier question: Would you sell the house at the lower price, or would you wait in hopes the price would rise again?
That's the dilemma confronting Dennis Strigl, president and CEO of Verizon Wireless, and his two biggest shareholders, Verizon Communications (VZ) and Vodafone Group (VOD). Strigl filed with the Securities & Exchange Commission to take his company public this summer, and Verizon Wireless says it expects to complete the initial public offering by the end of the year. But a steep drop in wireless stocks means that Strigl is going to get much less for his shares than he would have a few months ago. Some investors think he may delay the deal. "It's a pretty horrible time to go public," says Jeffrey Heil, director of equity investments for the Regents of the University of California, which holds many telecom stocks. "I wouldn't be surprised if they held off."
Here's why a delay may make sense. Back in April, AT&T Wireless, Sprint PCS (PCS), and other major mobile companies were valued at about $7,400 per subscriber--which would have made Verizon Wireless worth about $190 billion. Now, that figure has fallen to $4,700 per subscriber, so the company would be valued at about $120 billion if it were priced at the same multiple as its rivals. Since Strigl is trying to sell 10% of the company, he may be looking at getting $12 billion instead of $19 billion.
Although Strigl can't talk about the offering because Verizon Wireless is in a quiet period, he's showing no signs of holding off. He is expected to file his second round of IPO documents with a tentative pricing in mid-October. And he recently scheduled the Verizon Wireless road show, which will include meetings with investors in the U.S. and Europe.
At the road show, Strigl is likely to make the case that Verizon Wireless deserves to be valued at a premium to the rest of the players. Formed by the combination of Vodafone's AirTouch Communications properties in the U.S. and the wireless operations of Bell Atlantic Corp. (BEL) and GTE Corp. (GTE), it's the largest provider of wireless services in the country, with 25.4 million subscribers. It's also the most profitable. The company reported net income of $1.4 billion last year, on revenues of $13.5 billion. The other major independent wireless companies lost money.
Verizon Wireless also appears to have fewer big expenses looming ahead. Its cellular towers cover about 203 million people in the country now, compared with about 178 million for Sprint. "They don't have massive capital expenditures ahead and they don't need to make big acquisitions," says Liam D. Burke, co-manager of Flag Investors Communications Fund Inc. The company says it expects to spend $4.3 billion in capital expenditures in 2001.
Still, Strigl may be facing a pretty tough crowd. Institutional investors have been much less willing to buy telecom IPOs recently because of concerns that too much capital is being invested in the industry. Such telecom offerings raised $197 million in September, down from an average of $2.3 billion per month in 2000, according to Thomson Financial Securities Data. And those companies that have gone public have taken it on the chin. Asia Global Crossing Ltd., which plans to provide telecom services throughout Asia, was only able to complete its offering on Oct. 6 after dropping the price to $7, from an original $14-to-$16 range. Even then, underwriters Goldman, Sachs & Co. and Salomon Smith Barney wound up having to buy one-quarter of the stock for their own accounts.
Perhaps more important, Verizon Wireless is just one of several huge wireless offerings in the wings. Bell South (BLS) and SBC Communications (SBC) are combining their wireless operations and plan to take the new entity public in the next few months. Asian and European wireless companies are expected to raise tens of billions of dollars over the next year. "There's a lot of telecom paper in the pipeline," says Brian B. Hayward, manager of the Invesco Telecommunications Fund. "It's not clear how the market is going to absorb all that. I don't think [money] managers will increase their weighting in wireless."
Strigl may feel he has little choice but to plunge ahead with the offering. The federal government plans to auction off radio spectrum over the next few months for new 3G--for third-generation--services. Verizon Wireless has been aggressively rolling out mobile phones that let people grab news clips, stock quotes, and weather reports off the Net, and it plans to be a big player in using 3G to provide more extensive wireless access to the Web. If the company bids for licenses in most of the country as expected, it may have to pay as much as $15 billion.
Which brings up another math problem: How much would their stocks fall if Verizon and Vodafone(POGSX) had to pony up $15 billion in cash that their shareholders hadn't planned on them spending? We may find out the answer soon. /
Quokka Sports, the subject of last month's column, raised $76 million on Sept. 18 to avoid a cash crunch. For an update, check out ebiz.businessweek.com.