2HRS2GO: No excitement about the Verizon Wireless IPO
You shouldn't fault Verizon (NYSE: VZ) for seeking wireless money from the public markets, but that doesn't mean you should go along with it.
I'm sufficiently Neanderthalish to lack a cell phone, but don't mistake me for a skeptic about the wireless industry as a whole. Only someone living on another planet would deny the size and untapped potential of the market.
Unfortunately for would-be buyers of Verizon Wireless, Wall Street believes it has already paid for that market opportunity. Consider the stocks of the best-known nationwide wireless providers in the United States:
Vodafone Group (NYSE: VOD) arguably shouldn't be there, because its U.S. business is run by none other than Verizon Wireless -- VOD owns 45 percent of Verizon Wireless; VZ owns the rest. Nonetheless, Vodafone remains one of the most prominent wireless stocks on the NYSE or Nasdaq, so it's included for comparison's sake.
In any case, only VoiceStream Wireless (Nasdaq: VSTR) currently trades above its level at the time AT&T Wireless (NYSE: AWE) went public in late April. And VoiceStream gained ground not because of any bullish Wall Street sentiment, but because Deutsche Telekom (NYSE: DT) agreed to acquire it.
Everyone else is trading lower, especially the tracking stocks of Sprint PCS Group (NYSE: PCS) and AT&T Wireless Group (NYSE: AWE). Those two offer the most useful comparison because Verizon Wireless, though it might not be a tracking stock, is essentially an extension of an old phone company. Two, actually.
Investors are keeping that trend in mind today. Shares of Verizon have barely budged following this morning's IPO filing for the wireless venture.
Wall Street's sentiment about the overall wireless service sector looks discouraging enough. The picture worsens further when you look at details of the Verizon Wireless offering.
Merrill Lynch (NYSE: MER) and Goldman Sachs (NYSE: GS) will oversee the Verizon Wireless offering. Always helps to get investment powerhouses on board, but remember this pair also worked on the not-so-AWEsome debut of AT&T Wireless.
The company registered to raise $5 billion. That dollar amount will change as the IPO date approaches, but one thing is clear: this won't be a small float, so you can't expect a big IPO pop. More likely, Verizon Wireless will see the same kind of performance registered by AWE.
Verizon Wireless is also pitching its IPO just as the wireless demand might be slacking off for the next few quarters, if the signals from handset makers are correct.
Buy-and-hold types will scoff at such short-term thinking. Yet the foreseeable future doesn't look great, either.
Verizon Wireless already stands as the largest revenue generator and broadest network in the United States, but those are liabilities as much as advantages.
Largest revenue base means it's also the most difficult one to expand at a rapid clip. The reach might extend into 49 states, but it also requires $6.6 billion in upgrades and expansions over the next two years. At the same time, the field of competitors won't be neglecting their own networks.
Ultimately, the real danger with this field is it's very nature. Providers in all forms of communication, whether old-fashioned voice, Internet access or transmission of corporate data, eventually see their margins plummet because the produce becomes inevitably commoditized. Unless you're in a monopoly situation, like a cable provider, it's almost impossible to maintain a premium price.
You might believe that won't happen for a long time, but given the rate of expansion for these networks, it might not take many years before wireless service becomes as ubiquitous -- and thus as cheap -- as regular long distance. Businesses that were cutting edge only three years ago, such as Internet backbone, are already facing price wars.
So with Verizon Wireless, you'll be facing a giant stock with poor near-term prospects, an uncertain long-term and a lot of shares floating around. Oh, I'm sure it will become a consistently profitable entity -- it's far too large to die.
But that doesn't mean it's the best place to put your money. 22GO>