The Cash Behind WISPs

ARTICLE

The Cash Behind WISPs

By Julien Regoli, Vice-president Operations
Contact the author at julien@maravedis-bwa.com

Following Clearwire’s recent announcement about securing US$1 billion of debt, I thought it would be appropriate to share some of the information Maravedis has on how Wireless Internet Service Providers (WISPs) are financing their operations. Clearwire’s announcement comes just a few months after their March IPO, which raised US$600 million. If we add the debt to Clearwire’s March 31, 2007 balance sheet, the company’s funds are derived from roughly 60% equity and 40% debt. This compares to 80% equity and 20% debt prior to the recently announced secured loan.

This begs the question: how are other WISPs being funded and is it enough to build WiMAX networks?

A leading question is, how will WiMAX develop: as pockets of broadband access connections that replace fixed-wired access or as portable-to-mobile access networks that necessitate wider areas of coverage and roaming agreements between operators? The latter requires a scaling up of capital to deploy, manage, and market networks to broader markets. A major competitive disadvantage of WiMAX compared to incumbent cellular mobile is the need to develop cash flow and access to capital. To compete on more equal terms, WiMAX operators must have access to capital that fits their aspirations for the type and area of coverage that allows them to compete in converged, multi-service markets.

To give a flavor for where WISPs obtain their funding, here are a few examples I picked among the many WISP operators tracked by Maravedis.

According to www.WiMAXCounts.com, Unwired Australia has commercially launched broadband wireless access in Sydney, with over 60,000 customers in Q1 2007. This WISP has been financed mainly through equity. To be more precise, sources of cash have been 90% from equity and 10% from debt. In their last cash report, Unwired proudly announced that operations were finally cash-flow positive. Unwired’s key sources of financing came from AU$100 million of equity raised through a public offering in 2003 and AU$37 million from Intel Capital in the form of secured convertible notes.

Irish Broadband is a subsidiary of NTR plc, which has an equity stake of 63%. It is also owned by Kilsaran Concrete Providers and the co-founders Jeremy Nel and Paul Doody. There are rumors that NTR is trying to sell Irish Broadband for EUR60 million.

Iberbanda, a company concentrating on deploying broadband wireless in Spain, is getting its funding from 100% equity as well. It is backed by four equity partners: Telefonica de Espana (51%), Grupo El Corte Ingles (21.69%), Grupo Prisa (21.69%), and Omega Capital (5.62%). One year ago, Telefonica paid €36.5 million for its stake.

Digitalbridge Communications, based in Virginia, USA, has a strategy to provide WiMAX services from the Pacific Northwest to the Midwest and Southeast. Since its inception in 2005, it raised US$11 million in a Series A venture financing and US$6.25 million in debt. Its cash source ratio is therefore 65% equity and 35% debt.

HDRR is a French WiMAX operator, which was backed by TDF (90%), LD Collectivités, and Axione. In November 2006, Caisse des Dépôts et des Consignations (CDQ) acquired 20% of the equity capital of HDRR for €9.6 million.

WISPs are still young, and they may still lack the assets needed to secure debt. Equity financing is still the most realistic and viable option for WISPs. This will likely continue until they either reach profitability or have more assets to show on their balance sheets. Among WISPs, Clearwire has the most subscribers, revenues, and financing.

This brings up the question of how WiMAX will accumulate funding as it emerges. One consideration prompting this question is availability of capital to compete in spectrum auctions, including a 700 MHz spectrum auction in the USA. Unless rules set aside lots for small, disadvantaged entities or use other mechanisms to promote minority-capital participation, auctions tend to favor entrenched competition. How is capital lined up by investment groups, consortia, and investment partners to help fund bidding for spectrum? How will this play out for new spectrum for IMT-Advanced in Europe? The difficulty is partly that nobody wishes to show their cards before the auction process requires it.

We routinely talk with many expected participants in the 700 MHz and other auctions, but have few conclusions except that the difference between the spectrum and capital “haves” and “have-nots” remains the central issue for WiMAX proliferation.

In Maravedis’ Clear Spectrum, WiMAXCounts, and Broadband Wireless market reports, we help provide answers to the rapidly evolving questions of spectrum availability and industry formation.