Pre-IPO Sprint PCS Affiliates Suffer From Stage Fright

The initial public offerings of three Sprint PCS(PCS Quote) affiliates are in doubt due to a downturn among similar companies that are already public, and general weakness among telecom shares.

Of the three affiliates, Horizon PCS has scrapped its plans for an initial public offering, turning instead to the high-yield and private-equity markets for financing. The largest of Sprint PCS' affiliates in terms of potential customers, it filed for an IPO in May. It shied away from a public flotation after watching valuations of public peers such as Alamosa(APCS Quote) and AirGate PCS(PCSA Quote) plummet in recent weeks, say people close to the company.

A Horizon PCS spokeswoman confirmed the private-equity and high-yield deals but could not comment on them in regard to the IPO. Others with stage fright include Independent Wireless One and Illinois PCS. They may also forego their IPO plans in the hopes of securing better valuations by being acquired, telecom analysts say.

An Independent Wireless One official declined to comment because the company is in a quiet period, but telecom analysts say the company is speaking with more than one potential acquirer, including AirGate PCS. AirGate officials could not be reached for comment. Illinois PCS officials did not return calls.

The irony of the three companies' hesitation in going public is that they are now trapped in a vicious circle. The affiliates want to go public, but the valuations they would likely receive in an IPO are tied to the current valuations of their post-IPO peers. But these companies have seen their share prices fall because of the possible IPOs and the potential for more supply of similar companies coming to the market. In addition, Sprint PCS' announcement last week that third-quarter customer additions will be below expectations hasn't helped matters. (Sprint affiliates are local, mobile-phone operators that have an agreement with Sprint allowing them to market their service under the Sprint name. However, they are responsible for building out their own networks and for financing this development. The major difference between a Sprint PCS affiliate and an AT&T Wireless(AWE Quote) affiliate is that Sprint PCS owns the licenses that its affiliates use, while AT&T Wireless' affiliates own their own licenses.)

An affiliate now going public could expect to receive a lower valuation than its peers because of the drop in their share prices. Typically, the companies are valued based on a 15% discount to the enterprise value per potential subscriber of the last affiliate to have floated. In this case, the benchmark would be Ubiquitel(UPCS Quote). Since its share price is now below its IPO listing price of $8 per share, Horizon, for example, could expect to see an enterprise value per potential subscriber of less than $62, compared to Ubiquitel's enterprise value of $74 per potential subscriber when it went public earlier this summer.

Existing affiliates such as Ubiquitel have a hard time when newcomers enter the market because investors often assign similar values to each of the Sprint PCS affiliates. This causes many investors to sell out of older affiliate shares to move into the new issue for a cheaper price. For instance, AirGate shares dropped 50% in the month before Ubiquitel went public, but then rebounded five weeks later.

"The market keeps killing" private PCS affiliates that want to go public, says Bill Benton, a telecom analyst with William Blair & Co.. Share prices for Alamosa and AirGate, Sprint PCS' two largest affiliates, are each down about 30%, while prices for the smaller affiliates -- Shenandoah, Ubiquitel and US Unwired -- have dropped between 10% to 20%. "Both stocks recovered [after similar drops before] and I expect they will again," Benton says of AirGate and Alamosa. Both stocks experienced severe price declines when the first wave of smaller affiliates went public.

Independent Wireless One will find a better valuation in a takeout scenario, helping to raise its investor status and thereby increasing its capital-raising capabilities, Benton explains.

But the now-private affiliates also can't wait forever for market conditions to improve. They each have Sprint PCS-imposed deadlines for the buildout of their networks, so better access to capital is a key element in meeting construction demands. And this could lead to companies putting themselves up for sale.

"Everyone is talking to everyone," Benton says about consolidation among the affiliates.