Teligent Leaps on Lucrative Deal Richard McCaffery (TMF Gibson)
November 5, 1999
Local, long distance, and Internet communications provider Teligent (Nasdaq: TGNT) soared more than 30% this morning after an investment group led by Microsoft (Nasdaq: MSFT) took a 14% stake in the broadband wireless venture.
Seems it's good for business when a company with a $471 billion market value endorses your strategy. Go figure.
Under terms of the agreement, Microsoft, private equity firm Hicks, Muse, Tate & Furst, and other partners will invest $500 million to help Teligent expand its national network and jump-start its international business. Microsoft and Hicks will each receive $200 million worth of Teligent convertible preferred stock at a conversion price of $57.50, a 28% premium to Teligent's average closing price for the last five days.
The deal gives Teligent enough capital so that it won't have to worry about raising money until sometime in 2001, at which point it should be offering bundled communications services in over 700 cities in the U.S. The Vienna, Virginia-based company has raised over $2 billion so far and expanded its network to more than 520 cities across the country.
It's not Microsoft's first investment in a broadband communications company. In May, Microsoft invested $5 billion in AT&T (NYSE: T) in return for an agreement to supply software for millions of AT&T's latest cable set-top boxes.
Call it enlightened self-interest. More consumers on the Web means more action for Microsoft's search engine, and more eyeballs on its suite of websites. It's a Microsoft world.
But right now there isn't sufficient infrastructure to get everyone hooked up at high speed. That's where Teligent comes in. The company offers a full line of communications services by putting small antennas on rooftops that send and receive signals from local base stations.
The network offers connections at speeds up to 100 times faster than dial-up modems, and because the system is wireless it doesn't cost as much to deploy as fiber, or as much to upgrade and maintain as existing telephone lines. In many cases, Teligent offers services at a 30% discount to competitors, according to the company.
Teligent's strategy is to pursue the under-served small and mid-sized business market -- typically companies with 5 to 500 phone lines -- since these companies can't afford pricey broadband services. Within this segment, Teligent is focusing on local exchange services, a $51 billion slice of the $128 billion business communications market.
Formed in 1997 and faced with building out an extensive network, the company is losing money faster than day traders. Last year, it had sales of $1 million and reported a net loss of $281 million. This year, however, Standard & Poor's expects revenue of $35 million, and expects it to be cash flow positive by the beginning of 2001.
No question Teligent is a risky play. In addition to unprofitability and a limited operating history, it competes in a booming market with long distance carriers such as MCI WorldCom (Nasdaq: WCOM), incumbent local exchange carriers like Bell Atlantic (NYSE: BEL), competitive local exchange carriers like WinStar (Nasdaq: WCII), and even utilities.
It's also unclear at this point how well its technology will compete in the long run since innovations change the landscape. For example, many phone companies are enhancing copper telephone networks with digital subscriber line (DSL) technology. "We may not be able to compete effectively with these enhancements," the company said in its annual report.
Based on rapidly growing sales and its rate of entry into new markets, however, the results look promising. It's reasonable to assume, too, that investments from Microsoft as well as Nippon Telegraph and Telephone (NYSE: NTT) and other communications industry heavyweights give it an edge.
Let's be conservative and say Teligent captures 2% of the $51 billion local exchange market. This is no certainty, but it's possible. That would give the company annual sales in the $1 billion range, which means there's a boatload of upside potential.
Though the communications industry is a complicated, competitive business, it's worthwhile (in this Fool's opinion) for investors to brush up on at least the basics, not just as potential shareholders but as consumers.
As deregulation takes hold and competition increases, consumers get to choose which carriers provide local, long distance, Internet, cable, and even satellite communications services. The more you know, the better your choices. Did you know that a significant portion of Americans think AT&T currently provides their local phone service? Wrong. Ma Bell is just starting to move into local markets.
Start slow, get up to speed, save a few bucks, and maybe even find a good investment or two. Here are a few links to get you started.
What is ADSL?
A Glossary of Telecommunications Terms