DSL Prime: How Safe Is This Investment?

Wall Street is touting a telecom investment as safe and suitable for coupon clipping widows and orphans, but in fact it's a punt on the future of regulation, which is a very risky bet.

by Dave Burstein DSL Prime [August 20, 2004]

Iowa Telecom IDS: How Safe and Prudent?
Looks to raise $600 million at value over $4,000 line
The second largest telco in Iowa was created by a buyout of GTE Iowa, and now serves 267,000 lines in the state. The principals included locals from Iowa Networks, ING Furman Selz, BancBoston and TIAA-CREF, who are selling the majority of their stock. It's looking to IPO through the possibly tax-favored IDS certificates at a value of $1.1 billon. That's over $4,000 per line, when the Verizon Hawaii deal is for $2,100 per line. SBC has a market cap of $84 billon and debt of $16 billon, about $2,000 per access line, and has assets including part ownership of Cingular and Telmex. Verizon's market cap is $107 billon and debt is $40 billon, still less than $3,000 per landline and without including the value of Verizon Wireless, the Telus investment, and more. Comparables like this, of course, do not prove Iowa Telecom will not achieve the target price.

If the Iowa lines were valued at the same level as Verizon Hawaii or SBC, the entire worth of the company is less than the $600 million debt load and the equity could have minimal value.

There are certainly differences in the three companies, but the values of many telcos in the U.S. has dropped to similar levels. Access lines are flat to down, and Iowa Telecom faces the same problems as other telcos of competition from wireless, VoIP, and cable telephony. Mediacom, a cable competitor, will start offering telephony in the first half of next year. Many cable companies are winning 20 percent or more of the local phone lines. Mediacom across all its rural territories has a cable modem take rate twice Iowa Telecom's DSL subs, all of whom are candidates for VoIP.

The summary at the top of the prospectus includes "Our stable market and subscriber base, predictable capital expenditure requirements and our rural customers' high degree of reliance on basic wireline services have produced consistent financial results."

I believe that many telcos will not face a "stable market" and that competition will require an increase in "capital expenditure."

Bernard Simon in the N.Y. Times reports, "The best candidates for issuing investment deposit securities are companies with relatively secure and stable markets and low capital spending requirements." Merrill Lynch research notes that competition from wireless carriers, cable companies and other Internet telephony services providers may increase. Increases in capital expenditures could be needed for network upgrades, as well. There could be a decline in government subsidies or in access charges, The Deal reports, about a group of similar rural telco.

Reading deeper in the prospectus, I came across several other issues I am fact-checking carefully before printing. I'm a broadband reporter, and DSL Prime isn't a Wall Street pub. But this was too strong a story not to follow.

Copyright 2004 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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