Pathnet Raises Profile With IPO Plan

Pathnet Raises Profile With IPO Plan

By Richard McCaffery
Staff Writer

Pathnet Inc., a Washington-based telecommunications company that plans to raise $100 million in an initial public offering, has chosen a good time to test the water but faces stiff competition in the sizzling telecom field, according to analysts.

The fledgling company, which has not yet disclosed the number of shares it plans to offer or how much they will cost, will use money from the offering mainly for general purposes, according to its May 8 Securities and Exchange Commission filing.

Pathnet's planned network has a total capital requirement of more than $2 billion over the next six years, company officials said last year. Pathnet plans to upgrade existing microwave networks owned by other telecommunications carriers or large companies, then lease the added capacity to its own customers, sharing the revenue with the network owners.

"The market seems to be very receptive to any kind of company offering local telecommunications services," said David Heger, a telecommunications analyst at A.G. Edwards Inc., St. Louis. But the cup is getting full, he said.

Pathnet's stock is likely to fetch anywhere from $15 to $22 a share, as long as the company properly defines its niche, according to Heger.

"The stock market for communications is extremely hot. It's one of the fastest growing sectors," said Mark Langner, a telecommunications services analyst at Hambrecht & Quist, San Francisco.

Richard Jalkut, Pathnet's president and chief executive officer, and other company officials declined comment on the company's plans. The company has picked Merrill Lynch & Co. Inc., Morgan Stanley Dean Witter and Bear Stearns & Co. Inc., all of New York, to manage the stock offering.

Pathnet has been successful raising capital so far. On April 8, it raised $376 million in debt and private equity. That amount is just about what it needs to build the first 29,000 miles of its wireless network, according to the SEC filing.

Pathnet is targeting cities with populations ranging from 100,000 to about 2 million. Its high-end networks will allow telecom companies to supply quality services to parts of the country that are not currently accessible by fiber-optic lines. Ultimately, Pathnet's wireless network will crisscross the United States, covering more than 100,000 miles.

So far, the company has incurred a net loss of $8.8 million from operating expenses, and losses are expected to continue for the next several years, according to the filing.

Pathnet has "a very interesting strategy" but will have to clear some tough hurdles, Langner said.

The biggest challenge, he said, will be execution on the business end.

"Putting together a common carrier [is difficult], they have a lot of moving parts, from network engineering to marketing and sales," he said. "It has to be clicking on all eight cylinders. It comes down to management. How good are they at setting and meeting their goals?"

Founded in 1995 by local entrepreneur David Schaeffer, Pathnet tapped Jalkut for the top post last September. Schaeffer has said Jalkut, the former president of Nynex Corp., brought to the table considerable operational experience and a 31-year career with the Bell system.

Jalkut stands to do well if the stock offering is a success. He has options to purchase 1,480,610 shares of stock at 66 cents a share. His holdings would be worth about $22 million if the stock debuts at $15 a share.

"We're seeing a new area of telecommunication companies going public that are leasing network capacity instead of building their own," said Dan Dykens, an analyst at Renaissance Capital's IPO fund. Leasing helps companies reduce costs and better compete against established players, Dykens said. Renaissance Capital is a Greenwich, Conn.-based investment fund focusing on IPOs.

By integrating the existing networks of incumbents, Pathnet expects "to obtain the equivalent of a nationwide spectrum license at minimal licensing cost," the company said in its May prospectus.

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