Verizon Disguises a $10 Billion Offering

Fool me once, shame on you. Fool me twice, shame on me.

Is this what investors will say when Goldman Sachs and Merrill Lynch come a-knockin' with the $5 billion Verizon Wireless initial public offering? The lead underwriters are, after all, the same folks who hocked AT&T Wireless' (AWE Quote) $11.5 billion tracking-stock offering in April, which is down 17% from its offering price and 31% from its 52-week high.

Verizon Wireless, mindful of that poor performance and overall weakness in the telecom sector, is afraid of just such a reaction. So it's gingerly approaching the market with a seemingly "massive" $5 billion IPO announced earlier today. But the company, owned by Verizon Communications (VZ Quote), actually wants to raise far more -- at least $10 billion, according to a person familiar with the company's plans but not directly involved in the offering.

The reason for the softy-softy approach? It's easier, from a public relations standpoint, to file for a smaller offering now and increase it if demand looks strong during the roadshow, than to approach it the other way around, the person explains. Better to scale up than to scale back, the thinking goes.

The company's filing with the Securities and Exchange Commission leaves the door open to just such an increase by omitting how many shares it actually plans to offer.

Verizon Wireless officials declined to comment.

There's a good chance that such an approach will give the company room to maneuver once the jitters about wireless companies and the massive costs associated with new licenses subside.

Verizon said it plans to use the IPO proceeds to build its network and acquire additional spectrum and other wireless assets. If it can successfully raise more than $5 billion, this could also bode well for the shares, as Verizon will then have a sizable war chest in spectrum bidding wars.

And comparisons with AT&T Wireless ultimately may not be much of a problem. Industry observers differ on why AT&T Wireless' stock hasn't been the belle of the wireless ball, but they do agree that the company faces different issues than Verizon. Wireless telecom carriers are often judged on their operating-cash-flow margins as a proxy for their profitability, explains Peter Friedland, an analyst with WR Hambrecht & Co. Verizon Wireless posts an operating-cash-flow margin of about 40%, or about double that of AT&T Wireless.

While AT&T Wireless is launching service in new markets, which naturally start out unprofitable, Friedland says that investors expect better performance from a mature telecom company. AT&T Wireless is also facing a high level of capital expenditure to expand capacity in key markets, he says.

For instance, the company was so successful in adding customers in New York that it could not effectively service demand there, leaving it with a reputation for poor service in arguably the country's most important city for mobile-phone use.

Verizon Wireless, on the other hand, has an excellent reputation for service on the East Coast. "There are a lot fund managers based in New York. The buy-side guys have been unhappy with the quality of [AT&T Wireless'] service there. That bodes negative for its public equity," Friedland says. AT&T Wireless is expected to participate in a spectrum auction in November for licenses that will allow it to increase its service in New York.

In addition, Verizon Wireless is the No. 1 mobile-phone operator in terms of subscribers, network coverage, revenue and cash flow. As a result, Friedland says he expects a much higher valuation for its IPO. "They're two different companies. And I mean, really different," he says about AT&T Wireless and Verizon Wireless. (Friedland has a neutral rating on AT&T Wireless. WR Hambretch does not have an investment banking relationship with either company.)

Another possible point in Verizon's favor is that AT&T Wireless' share-price woes may not indicate investor dissatisfaction with the sector. "AT&T Wireless was not overpriced. I think there's a lot of value there," says one telecom banker, who didn't with to be named. "I think the big hold-back [on the stock] is the uncertainty surrounding the distribution. It's not clear when it's coming or exactly how much will be sold," he says, suggesting that the share price should hit at least the mid-30s afterward.