Wireless Has Capital Ideas

Regional wireless carriers are gaining a national presence by affiliating with brand names such as AT&T Wireless and Sprint PCS, and Wall Street apparently likes the idea.

Case in point: Sprint PCS affiliate US Unwired raised $209 million in October with high-yield, 10-year bonds in the private-placement debt market. The same day, AT&T Wireless affiliate Triton PCS raised $192 million with its initial public offering (IPO).

"Wireless is just going crazy," said Richelle Elberg, Paul Kagan and Associates senior analyst.

Elberg credits rampant merger-and-acquisition activity and forecasts of 80% penetration in 10 years. Investors see brand-name affiliates as a safer bet than independents, she said.

"Suddenly, each individual carrier has a lot more revenue potential," Elberg said. "So they're bidding prices up much closer to private-market value than they might under other circumstances."

US Unwired chose high-yield bonds to raise capital because it's the most expensive equity, said Robert Piper, CEO. Bank debt runs 9% to 10%, he said, but high-yield money runs up to 13% and 14%. The company gets 13.37% on the bonds.

US Unwired owns 2.5 million commercially launched POPs and has PCS licenses in areas such as Houston and New Orleans. It will have 3.5 million POPs with build-outs in Alabama, Mississippi and Florida's panhandle, and the Sprint PCS affiliation adds 10 million more POPs. The debt-capital windfall will fund the build-out of the 40 licenses US Unwired will operate as a Sprint PCS affiliate for the next 50 years, Piper said. Sprint owns the licenses, but Piper said the Sprint PCS brand, along with profitable roaming agreements, makes spectrum ownership irrelevant.

"When we go into a market, we look, feel and smell like Sprint," he said.

Affiliates pay Sprint PCS franchise fees of about 8% to 10%. That plus Triton PCS' desire for license ownership prevented an affiliation with Sprint PCS, said Triton CEO Mike Kalogris. In exchange for an 18% equity stake in Triton PCS, AT&T Wireless gave PCS licenses covering about 11 million POPs. Private-backed equity came to about $200 million, Kalogris said, and it was complemented with bank debt and junk bonds. Triton also sold 187 towers to American Tower for $71 million, and it got an additional multiple-bank credit of $175 million just before the IPO.

"What we did was put together a really interesting capital structure to launch the AT&T affiliate program," Kalogris said.

Affiliations and IPOs appear to be a win for all involved. In the past 12 months, AT&T Wireless' four affiliates have launched more than 30 markets covering more than 30 million POPs, said Ken Woo, AT&T Wireless spokesman.

"It's the third leg of our footprint stool: build, buy and buddy," Woo said.