MetroPCS Communications Inc will attempt to raise half a billion dollars next week in an initial public offering that comes as deals are consistently pricing below expectations.
The wireless services provider, which offers mobile phone services in four US markets, has filed for a 24 million share offering and estimated its shares would price between $20 and $22 each. MetroPCS plans to sell 12 million shares and holders will sell another 12 million shares, according to regulatory filings.
While the number of deals this year has zoomed past year- ago levels, the beginning-of-the-year enthusiasm for IPOs is fading into mid-year fatigue.
In the first quarter, 26 percent of IPOs priced below initial expectations. In the second quarter that rose to 38 percent and, so far in the third quarter, roughly 50 percent have priced below estimates, according to Thomson Financial.
"There's nothing that I see out there which is going to change the current dynamic in the near term," said Quinten Stevens, co-head of equity capital markets at J.P. Morgan Chase & Co. "The market for IPOs is open, but investors are very price sensitive." That sensitivity has been reflected in deals the entire month.
The 22 initial public offerings that have come to market in July through Thursday originally filed to raise $7.33 billion, but ended up raising $5.61 billion, according to Dealogic.
MetroPCS, which emerged from bankruptcy in 1998, will now be confronting a market favouring buyers.
"When that supply-demand imbalance tilts like it has, the level of discounts investors require in order to take the price discovery risk on an IPO goes up," Stevens said.
The company was formed in 1994 as General Wireless Inc, but in January of 1998 it filed for bankruptcy protection as it struggled with the telecom downturn and difficulty raising funds to pay for wireless telephone licenses it won at government auction. It emerged from Chapter 11 bankruptcy later that year.
MetroPCS has found a niche sector in the fiercely competitive US mobile market dominated by six national US wireless operators that compete fiercely for new customers by offering ever cheaper phone calls.
It only offers mobile phone services in four US markets, but has signed up 1.15 million customers since January 2002 by providing an unlimited number of phone calls at a set price to people who tend not to travel far from their home-town.
"As long as the nation-wide operators don't address this market with similar pricing, there's good growth prospects in this segment," said wireless analyst Kevin Roe from Roe Equity Research.
But offering unlimited calls within local areas might not always prove to be cheaper than services offered by providers with much bigger networks Roe said.
"Every year the industry is offering larger and larger buckets of minutes that come closer to the unlimited model," he said.
Leap Wireless, another company with a business model similar to that of MetroPCS, collapsed into bankruptcy during the meltdown of the telecommunications market a few years ago.
While its service was popular it did not attract enough customers to be able to cope with its heavy debt load.
MetroPCS, which offers its wireless services in the San Francisco, Miami, Atlanta and Sacramento areas, said in regulatory filings that it wants to use proceeds from the deal to expand its networks in existing and new markets.
The company reported 2002 revenue of $125.6 million and net income applicable to common stock of $128.2 million. Its 2003 revenue rose to $459.5 million and it reported 2003 net income of $1.8 million applicable to common stock. In the first quarter of 2004 it posted revenue of $173 million and net income applicable to common stock of $6.1 million.
"It's got a high market cap and half of the stock comes from selling shareholders that you never like," said Francis Gaskins, who tracks IPOs for IPOdesktop.com. "But on the other hand, this company is profitable and a low cost provider. I like this deal."
The underwriters on the offering are Bear, Stearns & Co, Merrill Lynch & Co, UBS Investment Bank, J.P Morgan and Thomas Weisel Partners LLC.
MetroPCS has proposed listing on the Nasdaq under the symbol "MPCS".
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