Going it Alone vs. Affiliate
January 31, 2000
Alamosa PCS Holding Inc. is one of the latest in a long line of wireless communications providers to tap the capital markets. Its story is a familiar one: hammering out alliances with the behemoths of the industry whereby both the companies stand to benefit.
The Lubbock, Texas-based company will test the market's appetite for service providers as it attempts to raise $150 million in equity and debt with a Salomon Smith Barney and Lehman Brothers-led syndicate. While a handful of companies tied to telecom giants Sprint Corp. and AT&T Corp. have met with success, the capital-intensive personal communications services (PCS) marketplace has driven some of the loners into bankruptcy.
"The validation of the affiliate arrangement is really the reaction in the marketplace," commented William Benton of William Blair & Co. Fellow Sprint benefactor AirGate PCS Inc. as well as a trio of AT&T regional partners - TeleCorp PCS Inc., Triton PCS Holdings Inc., and Tritel Inc. - raised $646.7 million in 1999.
"What is important in the PCS arena is marketing skills, access to financing, and brand. [All] of the affiliates have access to a fantastic distribution system and a powerful brand. The market is rewarding them for that."
As an affiliate, Alamosa operates under a PCS license owned by Sprint. Conditions of the arrangement require the company to meet certain build-out benchmarks or forfeit the license. Focusing on secondary markets in Texas, New Mexico, Arizona, Colorado and Wisconsin, a territory encompassing more than 8.4 million residents, Alamosa expects to have approximately 65% of its area covered by 2001.
In exchange for the licenses, Sprint receives a portion of the company's subscriber revenue. Additionally, Sprint handles the billing, customer service and network maintenance costs of its affiliates.
"What we have done and what AT&T has done is offered small businesses a lot of advantages," commented John Chambers, vice president of regulatory affairs for Sprint PCS. "They get access to our nationwide network, they can negotiate for equipment as [we do], they have access to our expertise, and they get to deal with our people who've built out [networks] before them."
While Sprint affiliates siphon a portion of their revenue in return for usage of spectrum licenses, AT&T's arrangement with its affiliates is different. In exchange for an equity position, regional partners like Tritel and Telecorp are given a segment of a particular license. Although this arrangement allows the affiliate to retain all of its revenue, AT&T's stipulation that the companies market a portion of their services under a separate brand gives some analysts room for pause.
"I like the Sprint arrangement better," continued Benton. "I like it more because what happens is Sprint affiliates use the Sprint PCS brand name, and it is transparent to the customer. AT&T affiliates market themselves as SunCom, an affiliate of AT&T,' but the customer just sees it as a different company than AT&T."
While some have swallowed the mixture without ill effect, others have found it toxic. NextWave Inc. and Pocket Communications Inc., two companies that spurred affiliation agreements in order to acquire their own PCS license from the Federal Communications Commission, are the most notable examples. (See story on NextWave on page 2.)
"There were six PCS licenses that were bid. The first two, which AT&T and Sprint got a hold of, were the A and B blocks," said Dave Chamberlain, a senior analyst for Probe Research Inc. "The C blocks went to NextWave and Pocket. They paid way too much for them and then they couldn't make good on those commitments." Both companies currently are in bankruptcy.
In order to raise the massive amount of capital necessary to extend their network (and in some cases acquire an operating license), several recent IPOs, Alamosa included, have had to issue both debt and equity in order to meet performance expectations.
Debt issuance across the telecom industry has turned the sector into one of the largest corners of the junk-bond market. Last year, telecommunications issues accounted for $26.9 billion, or 26.1% of the primary market, according to Thomson Financial Securities Data, an increase of 16.8% over 1998s mark. By contrast, 1994 saw $3.4 billion in telecom new issues, or 10.2% of the market; and in 1993, there was just $1.4 billion, or 2.6% of the market.