Wireless Facilities, PacWest Hope to Plug Into Interest in Telecom

Telecommunications is big on Wall Street of late. That’s partly because a string of big-bucks mergers has showered telecom shareholders with huge gains. But it’s also because investors have figured out that behind every successful “dot-com” company is a telecom firm supplying the connections among computers, phones and other gadgets that deliver the Internet.

Several telecom companies have already tapped Wall Street’s growing interest with successful stock offerings this year. Now two California-based companies--Wireless Facilities Inc. and Pac-West Telecomm Inc.--hope to cash in.

Wireless Facilities, a San Diego-based consulting and network-management firm serving the booming wireless communications market, is gearing up to sell about 4 million shares in an initial public offering expected next week.

The shares are expected to be priced between $13 and $15 each. At $14, the company’s net proceeds could be as much as $59 million if underwriters exercise their option to sell extra shares.

Analysts believe the issue will receive a warm welcome from investors. Few industries are growing as fast as wireless communications, which has exploded in recent years because of strong demand overseas and new competitors in the U.S. market.

That growth has fueled a surge in network construction and expansion worldwide for mobile phones and wireless data applications.

Equipment sales for the wireless broadband market alone are expected to grow in North America to $901 million in 2002, up from just $91 million in 1998.

Wireless Facilities, founded in late 1994, offers a wide range of services to wireless operators and wireless equipment vendors.

WFI’s engineers and consultants help carriers such as Nextel Communications with market analysis and network planning, as well as with antenna siting, installation, testing and ongoing maintenance.

So far, the company has completed projects in more than 26 countries for more than 95 customers, including many well-known names in the wireless business.

In addition to PacBell Wireless, the company has worked for Sprint PCS, PageNet, AT&T; Wireless, AT&T; affiliate TeleCorp, NextLink and other carriers. Equipment firms ranging from Siemens and Motorola to Ericsson and Lucent Technologies have been clients.

Earlier this month, the company announced a deal with Metricom to help build that firm’s nationwide network for its growing Ricochet wireless mobile data service.

To help keep up with demand, WFI has acquired four companies and grown to more than 625 employees. Sales more than doubled to $51.9 million in 1998 and totaled $33.1 million in the first half of 1999.

Unlike many young companies, WFI already is profitable: Operating income was $7 million in 1997, nearly $11 million in 1998, and $5.6 million in the first six months of this year.

Pro forma net income was $2.8 million in the first half of 1999, or 7 cents a share, reflecting income tax changes that came with the company’s conversion from an “S” corporation to a standard corporation late last year.

Although the company’s potential seems strong, investors also face risks. For one, WFI has many competitors, ranging from the internal engineering staffs of its own customers to much larger firms that specialize in various aspects of its business (including giant engineering firms such as Bechtel Group).

WFI also must attract and retain key employees in an especially tight labor market. Already, WFI is showing some strain there, with 22% of its U.S. staff working under H-1 visas--special immigration permits that allow limited numbers of foreign citizens to hold specific jobs in this country.

In addition, as wireless phone companies merge or complete their network build-outs, demand for some of WFI’s services could wane, especially in the United States. The company also offers network management services, but so far that is just a fraction of sales.

WFI also relies heavily on a limited number of customers for the bulk of its revenue. In the first half of 1999, TeleCorp accounted for 18% of sales, and another 10% came from Siemens.

The company plans to use about $7 million of the offering’s proceeds to repay short-term debt (total debt was just $9.4 million at June 30), with the balance to be used for working capital and general corporate purposes. A portion could also be used to fund an acquisition, WFI says.

Principal stockholders include Masood Tayebi, WFI co-founder and president, with nearly 34% ownership; Massih Tayebi, co-founder and chief executive, with almost 30%; and the venture capital firm Oak Investment Partners, with more than 18%.

After the offering, the company’s executives, directors and their affiliates expect to own a combined 78.9% of the firm’s outstanding shares.

Credit Suisse First Boston, Hambrecht & Quist and Thomas Weisel Partners are underwriting the offering. The company’s Nasdaq ticker symbol will be WFII.

Pac-West Telecomm’s planned IPO might be a tougher sell on Wall Street, if only because it follows in the wake of IPOs from stronger companies in the same business, analysts said.

“This one does not get the juices flowing for investors because there is nothing really unique about this company,” said analyst David Menlow of the IPO Financial Network.

The Stockton-based company provides local connections and transport for 78 Internet service providers in California, including the likes of EarthLink Network, MindSpring Enterprises and Concentric Network. It owns three switches in the state and plans to expand into several other western states.

Pac-West has more than 76,000 lines in service and had 187 employees as of June 30, up from 53 a year earlier. Sales grew about 43% to $42.2 million in 1998, and were $30.3 million in the first half of 1999. The company lost $667,000 last year. Net income for the first half of 1999 totaled $804,000.

Pac-West is saddled with $150 million in long-term debt, requiring interest payments of $8.5 million in the first half of 1999 alone.

The company also is highly dependent on “reciprocal compensation,” a controversial regulatory payment system that is under attack by local carriers.

Pacific Bell and GTE have withheld payments to Pac-West totaling $11.2 million as of Sept. 30, and the company’s revenue could plummet if regulators substantially reduce or eliminate certain forms of reciprocal compensation.

PacBell, GTE and other major phone companies are direct competitors of PacWest, as are all other firms that have or can lease phone lines. The company is hoping to price 12.6 million common shares in the $10-to-$12 range. About 2.3 million of the registered shares are reserved for purchase by shareholders of Safeguard Scientifics Inc.

Safeguard, one of a group of venture capital firms that owns more than 86% of Pac-West’s shares, also will offer 1.2 million of its shares for sale to its own shareholders.

The expected net proceeds of between $115 million and $129 million will be used to purchase equipment and fiber capacity for planned expansion, as well as for general corporate purposes, among other things.

Bear Stearns & Co., Banc of America Securities and First Union Securities are underwriting the offering. Pac-West plans to trade on Nasdaq under the symbol PACW.

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Times staff writer Elizabeth Douglass can be reached at [email protected]