Wall Street Crisis Expected to Hit Telecom

The crisis will make it harder for any new telecom players to raise money, including to win spectrum auctions, and in the longer term may deepen industry consolidation, analysts said. But none of the deals awaiting FCC approval seems jeopardized, they said, and the upheaval’s main effect on the industry probably will be from damage to the overall economy and the resulting drop in demand.

A sharp economic downturn from a credit crunch can put a “double whammy” on service providers’ capital investment plans, said Paul Glenchur, a telecom policy analyst at the Stanford Group: The projected rate of return must be reduced and financing is harder and more expensive to line up. Some providers have already reported tougher business in Q2, Glenchur said.

Credit problems have different effects on carriers, Glenchur said. AT&T and Verizon produce more cash flow and have more diverse customers than others, he said. “Small carriers, it could have a bigger impact … It could facilitate consolidation,” Glenchur said. Precursor President Scott Cleland agreed on the broad point: “The larger you are, the more options you have … New entrants with no free cash flow are going to be burned by the credit crunch. Those that don’t need credit because of free cash flow can get it, and those who desperately need it because they don’t have free cash flow will find this environment challenging.” Tech startups will be more dependent on venture capitalists and angel investors than they have been, Cleland said.

But in the short term, the crisis may slow takeovers, said Glenchur’s colleague Michael Nelson, who covers the financial side of some wireless and wireline carriers at Stanford. He and others expect consolidation among rural incumbent carriers -- specifically, Windstream to buy Frontier and CenturyTel to buy Consolidated Communications. But financing problems may hold up deals like that, Nelson said. Long-term consolidation is fueled by declines in lines, but for now the steadiness of the rural carriers makes them attractive defensive investments in a shaken market, he said. Broadband providers across telecom industries are among the better customers for loans because they tend to have strong free cash flow and room to cut their operating expenses, Cleland said.

Spokesmen for AT&T and Verizon said the companies wouldn’t discuss financial markets. But the Verizon representative noted that COO Denny Strigl is scheduled to speak Thursday at a Goldman Sachs conference in New York and said he probably will take up the matter. The cost of Verizon’s FiOS network buildout has alarmed investors. It’s being paid for from the carrier’s cash flow from operations, which last year was $26.3 billion, the spokesman said. The net capital expense for FiOS, reduced for avoided costs maintaining the copper network, is $18 billion, he said. “Our FiOS investment is on target to be EBITDA positive this year and operating income positive next year.”

The Time Warner spinoff, Verizon Wireless’ takeover of Alltel and the creation of a new Clearwire including Sprint spectrum and $3.2 billion for a national WiMAX business are all unlikely to fall through, said analyst Blair Levin of Stifel Nicolaus. Verizon Wireless is “looking at” the financing of the Alltel deal, said a spokeswoman for the buyer. She wouldn’t elaborate, except to say that Verizon Wireless hasn’t disclosed any financing information.

The money being put up for Clearwire comes from some of the biggest producers of cash flow around, Cleland said -- cable companies, Sprint, Intel and Google. It will last Clearwire until 2010, and the company can adjust its spending based on conditions and go into the market to raise more money when conditions are favorable, a spokeswoman said. “We are certainly monitoring the situations with the financial markets,” she said. “We don’t expect that it will have an effect on our pending transaction.” Clearwire’s stock price has held steady, mainly between $9 and $10 the past couple of months, after going just above $18 in February and May, its highs since fall 2007. The transaction looks like a “rock- solid done deal,” Nelson said.

Sprint Nextel’s difficulties competing against larger wireless players have raised worries about its future. But Sprint has “a relatively strong balance sheet,” said Nelson, who follows the company. “They don’t necessarily have a need to raise additional capital.”

The turmoil increases the uncertainty of the proposed Bell Canada buyout, Seaboard analyst Iain Grant said. BCE shares on Tuesday were more than 10 percent below the $42.75 a share that a consortium led by the Ontario Teachers Pension is scheduled to pay by Dec. 11.

FairPoint Communications cited Lehman’s fallout as it decided to borrow the remaining $100 million available under its $200 million delayed-draw term loan facility, as well as $100 million under its $200 million revolving-credit facility. The move was necessary because Lehman accounted for 30 percent of the loan commitments under FairPoint’s delay-draw and revolving-credit facilities, the carrier said. It will use the money for its network expansion plans in New England, it said. FairPoint’s dividend payments could be hurt by “business shocks such as greater than expected market share loss,” Bank of America said.

Meanwhile, demand for telecom gear bought by the financial service industry will dry up, said Robert Lati, a partner at TABB Group, a financial-markets research firm. Investment in telecom infrastructure investment will slow the next few years, Lati said. Bill Whyman, head of technology research at International Strategy & Investment Group, agreed.

Lehman had spent $921 million on technology and communications by the end of August, up from $834 million during the same period a year ago, an SEC filing said. Merrill Lynch had one of the largest IT budgets among investment banks, Lati said. It spent about $4 billion on technology each of the past few years, SEC filings said. Merrill Lynch budgeted $1.12 billion for communications and technology for the first half of the year, up from $961 million in the same period a year ago, its latest SEC filing said. AIG is also a big spender, Whyman said.