Telecom: Up From The IPO Ashes

Maybe it's not 1999, but an offering from MetroPCS could fetch $1.2 billion

It doesn't exactly have the makings of a hot IPO. Back in the 1990s, Dallas-based MetroPCS Wireless Inc. filed for bankruptcy after getting caught up in the industrywide land grab for network licenses. Then it had to cancel plans to go public in 2004 when company auditors found accounting problems. Still, if MetroPCS raises $1.2 billion from the equity markets in the next couple of months, as it hopes, the deal would be the biggest U.S. telecom initial public offering since 2000.

It's little wonder why telecom IPOs have dried up. In the mad rush to expand in the late 1990s, most players overpaid for their licenses and constructed networks that were too big for the existing pool of customers. When the bubble burst in 2000, the companies crashed, sending many into Chapter 11. After that, telecom became a dirty word on Wall Street. In 1999 and 2000, 62 telecoms raised roughly $22 billion, including the $10.6 billion IPO of AT&T Wireless Group (T ) in April, 2000. But over the next five years there were only 21 IPOs in the sector, totaling $5.6 billion, according to Thomson Financial (TOC ).

Yet analysts think investors will embrace MetroPCS. For one thing, telecom stocks, led by mobile players, gained 35% in 2006, compared with 15% for the Standard & Poor's 500-stock index ((MORN) ). And among fast-growing wireless companies, MetroPCS stacks up nicely. The company, which serves seven metropolitan regions including Atlanta and San Francisco, doubled its customer base in a year, to 2.6 million as of September, 2006. Revenues jumped 46%, to $1.1 billion, for the first nine months of 2006. Its accounting problems have also been resolved: The company restated its revenues and income modestly for 2003 and 2004, while overhauling its accounting procedures and replacing some of its top finance people.

In this crowded market, MetroPCS has also managed to distinguish itself from the big boys like Verizon Wireless Inc. (VZ ) and Cingular Wireless. Rather than offering calling plans with bundled minutes, hefty overage fees, and annual contracts, MetroPCS charges customers a flat, prepaid rate of $30 to $45 a month for unlimited calling. Its phones are cheaper, too. "It may seem like every man, woman, and child has a cell phone, but the next leg of growth will be with the lower-income, younger people, and the undocumented," says Ric Prentiss, an analyst with Raymond James & Associates ((RJF) ). "You need a unique way to do that [like the MetroPCS plans]." It also keeps marketing costs down by relying largely on word of mouth and local advertising. Last year, MetroPCS spent just $116 to add a new customer, less than half what big carriers pay.


It's a similar model to that of San Diego-based Leap Wireless International Inc. ((LEAP) ). Although the two have been locked in legal battles over a patent since the summer, there's room for both to thrive, says Christopher Watts, an analyst with Atlantic Equities. If Leap's 79% stock gain over the past year is any indication, it's a model that investors should like. "These are growth stocks with straightforward expansion plans," Watts says.

That expansion is the reason MetroPCS founder and Chief Executive Officer Roger D. Linquist is reaching out to the equity markets. MetroPCS was one of the most aggressive bidders at the Federal Communication Commission's spectrum auction back in November. The company picked up licenses for eight areas, including New York, Las Vegas, and San Diego--representing 117 million potential new customers. MetroPCS raised $1 billion in the bond market to help pay the $1.4 billion tab for new licenses. It plans to use the proceeds from the stock offering to build out services in those new regions, according to IPO filings. MetroPCS executives declined to comment.

Last year's big telecom IPO, Vonage Holdings Corp. (VG ), was a dud, with the money-losing Net telephony outfit down 70% since its May debut. But with growing revenues and profits, MetroPCS should fare much better.

By Aaron Pressman

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