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Analysis: Don’t Count On Vonage’s IPO Any Time Soon
[December 19, 2005]

Analysis: Don’t Count On Vonage’s IPO Any Time Soon

TMCnet Wireless and Technology Columnist


What’s the significance of Vonage Holdings raising $250 million in its latest round of financing? My sources tell me it doesn’t entirely discount the chances of a Vonage initial public offering but it certainly puts one off indefinitely.


Rumors of a possible Vonage IPO have been circulating since the dog days of summer, leaving many in the telecom industry on the edge of their seats waiting for the watershed moment when the nation’s leading pure-play VoIP provider will disclose its financial data and important key metrics like customer information.


“I think Vonage's S-1 [SEC filing] is going to be one of the most well-read documents just because everyone has been waiting for it,” explained Will Stofega, VoIP analyst at IDC.


Prior to Monday, the last time Vonage tapped the capital markets for financing was last May. And, in fact, Monday’s press release detailing the newest round of financing is remarkably similar to Vonage’s May 9 press release describing the last round. At that time, total investments into the company amounted to $408 million. But if you read between the lines in the latest press release, two critical points in particular are indicative of a seismic shift with Vonage.


The first point is that the newest round of financing was structured as five-year convertible debt – convertible into equity. While the terms of the debentures will likely never become public (as with the case in standard private placements), we can safely assume the debt holders may eventually end up with an equity stake in the company. That should increase the likelihood of an IPO, because those creditors will probably want to see a publicly traded market for the stock in order to get the best price when time comes to cash out.


But why in the world would Vonage and the investors want to file an IPO amid the current climate for telecom offerings? Consider two comparables: PaeTec and Eschelon Telecom. (Granted, competitive local exchange carriers aren’t entirely comparable but CLECs are the closest thing to a pure-play VoIP provider like Vonage.) 


Eschelon Telecom filed its S-1 registration statement with the SEC on May 6 to sell its IPO and in early August raised roughly $75 million by pricing its shares at $14 apiece. Since then, however, the stock has been languishing, never trading above the initial offering price. Meanwhile, PaeTec filed its S-1 in April to raise $175 million but never even made it out of the starting gate. The company withdrew its registration statement on September 16 “due to unfavorable market conditions,” according to an SEC filing.


Of course, Vonage’s creditors can also bypass the IPO route entirely and choose divestiture as an exit strategy depending on how much equity control they have gained. And that explains the second critical point of the press release: “Vonage senior management also participated in the round.”


In short, management had to participate in the round in order to retain some more of the equity control. How much control depends on how the deal was structured – again, the terms of which remain unknown. Can investors now force Vonage into an M&A transaction? How all this plays out, we will have to wait and see. Either way, though, Vonage has certainly found a way to buy time while remaining one step ahead of the game in the fiercely competitive VoIP market.


“Vonage has to invest in their marketing efforts to stay ahead in the game,” Stofega said. “It's not cheap to do all those ads. They need some sort of money to keep it going.”


That’s not to say these are the days of wine and roses at Vonage. The company still has the hefty tab of becoming e911 compliant to fund. Plus, all VoIP competitors are likely to feel the pinch next year from cable giants, which plan to step up their encroachment into their turf. And Vonage recently lost out to competitor, 8x8, as the official VoIP partner to BellSouth. “I think Packet 8 does get kudos for working with a major bell company with their VoIP strategy,” Stofega added.




Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.

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