First, find your investors. That’s the basic rule of IR for an IPO like that of Clearnet, the Canadian wireless company which went public late in 1994. At the time it had a little over 100 employees and $30 mn in assets devoted to the commercial dispatch business. But with heterodyned chutzpah it wanted over C$375 mn to start building a retail wireless network.
Bob McFarlane, the CFO, took it personally – and still does after five years. The IPO gave him an acute insight into the care and maintenance of investors in general and analysts in particular. The business was originally using the same radio dispatching technology as Nextel, then known as Fleet Call, south of the border, so – as usual fixated on comparability – the analyst community scrutinized Nextel.
‘Our birth was at a very difficult time,’ McFarlane comments ruefully. In September 1994, the day Clearnet began its one-on-ones in Toronto and the team was on the way to the airport for the next round in Tokyo, the news came that MCI had pulled out of a $1.2 bn deal with Nextel. ‘Nextel’s stock dropped a dollar a day during the IPO.’
There was a lot of interest in Europe. In Canada, they were less entrepreneurial in their outlook and sought leadership from the US. Unfortunately, ‘The US people who were interested were those who had been interested in Nextel – and they just wanted to meet us so that they could rant and rave.’ Despite these bad auguries, Clearnet successfully completed its IPO and, in reparation, Nextel’s subsequent success has helped a lot.
McFarlane claims collateral benefit from the bruising IPO experience. ‘Since then we’ve never taken it for granted that money will be available,’ he says. ‘People won’t readily invest in us just because we show up and we’re a wireless firm.’
On the other hand, after the IPO things became easier. That’s because, McFarlane maintains, ‘Your first $100 mn is the hardest to raise.’ Since then, Clearnet has successfully completed three more equity issues, five public note issues, a senior bank facility and two vendor credit facilities. Analysts laud its corporate astuteness in playing the spreads between Canada and the US and in raising $2.8 bn for an entrepreneurial operation that still is not returning dividends.
In fact the company was as astute in looking after the analysts. Clearnet insisted on well-populated syndicates for the IPO, and since it was launched on Nasdaq and in Canada, that gave it eight analysts right from the start. McFarlane now counts over 40 analysts covering the firm. Although the company has grown large and important enough to merit coverage in its own right, he still takes pains to distribute Clearnet’s patronage for investor meetings. ‘Spread the work around – so that you’re not hosted by the same firm every time,’ he advises. ‘If analysts take the time to cover us and do a good job – where they’ve spent the time to do good research – then we’ll give them the opportunity to host us, which benefits them.’
Zero profit
Even after five years, Clearnet has a major problem to explain to new investors. ‘We’re a company without profits, and we’ll have a negative cash flow for the next year or so as we continue to build an infrastructure in advance of selling the service,’ McFarlane explains. In effect, each new customer costs up to $500 – in commission, marketing, and capital costs, including the handset. Hence too much success could drain capital resources in the early stages, although he points out that it’s almost like an annuity: once each customer is signed up, a revenue stream of $55 a month starts flowing in.
Selling the investment involves a two-pronged strategy. First, Clearnet decided to be active in going out to meet its investors, at conferences and one-on-ones. Second it chose to emphasize disclosure, to lay out its strategy clearly and reveal financial results. The company consciously ran the risk of giving away information to its rivals since, McFarlane says, ‘While we may be giving up some of our short-lived competitive advantage, in return we get the long-term benefits of a well-informed investor base.’
Almost an anomaly in the modern age of net IPOs, Clearnet needed to raise the capital to grow, not so the insiders could cash in their chips. It also had to work in a political environment where Ottawa decided who to issue licenses to. The stock price had halved since the IPO price by the time Canada began issuing PCS licenses (the same digital system that Sprint uses). And Clearnet still had a funding gap on the original Mike (radio dispatching) business. McFarlane recounts: ‘We wanted to turn a weakness into an advantage and so we completed a US$180 mn high-yield note issue only weeks before the government decision on the licenses.’
The company’s success at meeting operational objectives boosted management’s credibility; and the market’s great expectations of its chances of getting a license helped it raise the money. It paid 14 percent plus warrants. However, within a week it had won one of Canada’s only two PCS licenses awarded to new wireless companies and the notes traded up $10. ‘Clearly we had investors who were happy. It was the best returning high-yield investment of the year. Despite the cost of the debt, it was the right thing to do since it sealed the PCS bid by showing that we didn’t have a funding gap, and we’d shown ready access to the capital markets.’
However, this also complicated matters. The entry into PCS began to break the Nextel comparison, since that relied on the business-oriented iDEN technology, while Clearnet had now added the retail market-targeted PCS system, making the company the only hybrid. ‘It was like Nextel and Sprint combined in a Canadian context,’ is McFarlane’s analogy. Analysts can be obsessive in their focus and tend not to be ecstatic with hybrids. ‘So we decided that instead of releasing consolidated figures, we’d separate out PCS and Mike, and we disclosed capital expenditures separately, so that analysts could model on a sum-of-parts basis.’
The idea was that Clearnet’s investor relations would be educational, using the analysts’ familiarity with one or the other side to establish a clearer picture of the whole. Even so, analysts are not only obsessive but insatiable as well, and several want even more disaggregated information – although they admit Clearnet has been a leader in the quality of its disclosure.
Three Bobs
These experiences led McFarlane and CEO George Cope to conclude that the IR program is more of a core finance function than a public relations one. ‘The nature of the audience and the skill sets are different [to PR].’ They also decided that it was a core part of senior executives’ job descriptions. ‘There aren’t too many firms as operational as we are where the CEO and CFO spend as much time as we do on IR. IR’s us,’ he says firmly, while acknowledging the importance of the rest of his team, Rob Gardner and Robert Mitchell.
Gardner has a treasury background and Mitchell came recently from a sell-side research background to help with Clearnet’s IR. Mitchell is fully dedicated to investor relations with ‘supportive help’ from Gardner. ‘Both are strong with financial modeling and valuation methodologies,’ comments a satisfied McFarlane.
Mitchell only joined in October 1999, and his arrival posed an immediate question. How do you cope with three Roberts in close proximity? Gardner explains: he’s Rob, McFarlane is Bob and Mitchell will be Robert. Their first names settled, one of Mitchell’s first tasks is to put his click on the company web site with a new IR section. ‘It used to be one of the better ones, but people have leapfrogged us there, so it’s just a passing grade now,’ he admits candidly. ‘We’re reconstructing it.’
McFarlane is much more positive about the annual report, in which Clearnet identifies its major business objectives for the following year, and reports on how it has delivered on the previous year’s targets. ‘We’re not shy about reporting if we didn’t make one, but we’re creating milestones for the investor public about whether we’re actually making the progress we hoped.’ McFarlane believes most companies avoid that level of detail because it makes their management very measurable. ‘And they prefer to avoid that level of specificity. Our view is that our business plan makes sense, so we say exactly what we expect to do.’
Do-it-yourself
Rather than outsourcing, the annual report is produced in-house and hands-on. ‘I write the bulk of it myself. After all, we’re a communications firm, and if we can’t get our message across ourselves, then we’re in trouble. We do it ourselves.’ And they do it well, as witnessed by several recent awards for the annual report. In the same flood of disclosure, the quarterly results are typically a 15-page press release with complete MD&A, simultaneously released to all investors. And the quarterly conference call is not just open to institutions but webcast.
The annual meeting is now also webcast, and also benefits from Clearnet’s IR philosophy. McFarlane poses the choice between the meeting where you have to go through the legal ritual as fast as possible and get out, or ‘you treat it as a forum to communicate, and that’s the choice we made. You have to make it worthwhile for people to attend your IR events, so you have to say something of importance. People come not just to hear about Clearnet but about developments in the industry, and Canada specifically.’ As a result, he points to attendances of around 200 who come to hear him and the CEO strut their stuff on the platform.
In addition, the two of them speak at over two dozen conferences a year, most of them outside Toronto. These are crowned by the company’s own day-long annual investor forum in Toronto each November, which brings about 150 analysts and institutions from all over. All of this is reinforced by frequent roadshows to harvest the capital markets with regular debt and equity issues. McFarlane advises, ‘Geographically, don’t visit one city too many times, and make sure you allocate the hosting fairly between various firms.’
The company now has a slight majority of US holders, although that includes other overseas owners who prefer the US market to Canada’s. With uncommon sensitivity, Clearnet hasn’t cultivated the retail sector, despite being a heavily advertised brand with a big presence in the media. ‘Being early on in a high risk, loss-making category, we didn’t want to emphasize or push the retail sector,’ McFarlane admits. ‘Even in our annual report, we put in disclosure of risk statements as if it were a prospectus, because we want people to realize that there is a risk involved in investing in our firm.’ The company is happy to provide information to retail investors, although McFarlane confesses to being happier still if they come with broker and research support.
Does he have time to target? ‘A good investor seldom has money to invest,’ he laughs, but despite the difficulties of identifying shareholders in Canada – where there is no 13F filing system like the SEC’s in the US – the company has been to see some of the larger organizations. And it gets less arduous after five years: ‘Now we have actual operating success, so it has become much easier now. Our achievements have begun to speak for themselves. The trough has been hit and we cross the break-even cash flow point in about a year,’ he says happily.
However, just as he’s a perfectionist with the web site, so McFarlane wants to raise IR to higher states. The next task now that Robert Mitchell is on board is ‘being more proactive, so that when investors change ownership, particularly when they’re selling, we give them a call to ask why. I’d say we could do a better job on that, and having more resources here will help us do it.’
It’s good to see that having help shouldn’t hinder Clearnet’s hyper-proactive IR.
