WALL ST. HAS MORE BAD NEWS FOR CLECs
ORLANDO -- Investment bankers and analysts had more bad news for CLECs Wed. in panel discussion at CompTel’s annual convention here. Along with continued tight money for a year at least, they warned that regulatory environment for those companies could get worse with change in White House. “It’s going to be a hard road,” said Todd Scott, Morgan Stanley Dean Witter analyst. “It will be a year before the market opens broadly, even though some companies are still getting capital, he said.
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Adding to generally high cost of capital and CLECs’ lack of luster on Wall St., investment community is becoming more leery of investing in companies that include unbundled network element platforms (UNE-P) as part of their build-out strategy, Scott said. Investors think FCC under Chmn. Powell will target UNE-P as violation of Telecom Act, he said. “UNE-P is at significant risk” because Powell may see it as illegal alternative to resale with better margins, Scott said, saying chmn. had made it clear he would adhere more strictly to language of Telecom Act. He said FCC could effectively eliminate UNE-P by dropping switches from list of competitive elements that incumbent LECs had to share with competitors. FCC probably wouldn’t bar use of UNE-Ps under current contracts, such as those McLeod has with Qwest, Scott said.
Scott also predicted Bell companies would gain Sec. 271 entry more swiftly under Powell’s leadership, with FCC attaching fewer conditions, idea seconded by consultant Don Lynch, former MCI executive. “There’s “no incentive” for Bells to open their local markets because getting into long distance business no longer is as attractive as it once was, Lynch said. “I'd be concerned,” he told audience of CLECs and others. “To open local markets you need a regulatory scheme” and Powell isn’t regulatory minded, he said.
“Last year, we were throwing money at all of you” and now “the challenge is lack of liquidity,” said investment banker Prem Parameswaran of Goldman, Sachs. He said he was “cautiously bullish” on CLEC sector because there still was some opportunity for funding if company were well-managed and had “good execution.” That’s why Time Warner Telecom is trading favorably, he said: “They have not missed on their execution plans.” Companies have to get back to basics, Lynch said. “You have to run a business in an intelligent manner.” One success story involves CLECs run by smaller, non-Bell ILECs, Lynch said in response to question. Companies such as Citizens Communications and Broadwing have management teams that “know what’s going on,” he said.
Capital markets are “basically closed” to CLECs, Scott said. In “rah, rah days” last year, “capital was made available to anyone with a business plan,” he said. Then companies failed to meet their financial goals and Wall St. became skittish, he said. Scott predicted more bankruptcies this year, including e.Spire in March, Teligent in first half, Rhythms in 2nd half. He said investors now were focusing on “high-quality revenue,” which excludes reciprocal compensation, “extremely high access charges,” resale and other revenue streams that didn’t appear strong to Wall St. Investors also look for good management and broadband local assets, Scott said. He predicted that telecom IPOs would be “limited or nonexistent in 2001.” Rick Beatty, partner in merchant banking firm Thomas Weisel Partners, also cited “demise of superaggressive vendor finances” as another minus for CLECs.