IPO Watch: Make your portfolio smile

Ann C. Logue | Oct 23, 2007 6:20am EDT | Comment

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012 Smile.Communications LTD
www.012.net
NASDAQ: SMLC
Scheduled for Oct. 29
$375.7 million post-money valuation

Is it 1999 all over again? No matter how mature the Internet seems, investors want stock in it. Hence, Internet Gold - Golden Lines Ltd. (Nasdaq: IGLD), an Israeli telecommunications and Internet company, is spinning off its 012 Smile.Communications subsidiary, which operates a broadband Internet service, VoIP-based telephone and business services, and a network of Wi-Fi Internet access spots throughout Israel. After the deal closes, Internet Gold will own 73.3% of the 012 Smile.Communications business and all of its Smile.Media business, which provides online content, advertising, commerce and search services.

Internet Gold hopes to net about $91.3 million from the offering of 6,675,000 shares at a price between $14 and $16 per share. (All numbers are in U.S. dollars on U.S. GAAP.) Of the proceeds from the offering, $41.0 million will go to pay off debt, debentures, and a contingent payment stemming from its December 2006 acquisition of 012 Golden Lines, an Internet service provider (ISP) that was rolled into Smile.Communications. The rest of the funds will go to general corporate purposes, possibly including acquisitions. Acquisitions aside, the big source of growth will be telephone services. Israel is a tiny country. Its citizens come from all over the world, and its businesses (including Internet Gold) rely on customers and partners all over the place. Hence, it’s easy for people to run up big long-distance bills, and that makes alternatives attractive. Already, the company captures 34% of incoming and outgoing international call minutes within Israel.

Although 012 Smile.Communications is the second largest ISP in Israel with about a third of the market, it generated just $244.4 million in revenue from one million residential and business customers in 2006 on a pro-forma basis. To put that in perspective, Comcast Corporation (Nasdaq: CMCSA), which is the second largest ISP in the United States with about 12% of the market, brought in over $24.9 billion in total revenue last year, although the company did not break down how much of those sales came from its 11 million Internet subscribers and how much came from customers using television and telephone services.

Unlike the dot com stocks of yore, 012 Smile.Communications is profitable on an operating basis. In 2006, it generated operating income of $12.2 million (when looked at pro forma for the 012 Golden Lines acquisition); for the first half of 2007, the company had operating income of $13.5 million on $129.7 million in revenue. Then, it spent $16.5 million on financing costs last year and $6.2 million for the first half of this year. Thus, there’s a nice return to the bottom line once the debt is paid off with the deal proceeds. For the first six months of 2007, 012 Smile.Communications earned $0.27 per share with about $0.34 per share in pre-tax interest expenses, based on the shares outstanding before the deal closes. Assuming that the management can generate more Wi-Fi and telephony business, with an acquisition or two, the valuation appears to be attractive. It’s not like owning Time-Warner when AOL bought it, but it’s not Webvan, either.

Note: Internet Gold is in the portfolio of Growth Report, an independent investment advisory published by Business Financial Publishing, the publisher of SmallCapInvestor.com.

Recent IPOs:

Rodman & Renshaw Capital (Nasdaq: RODM); Oct. 15; $150.1 million post-money valuation. Rodman & Renshaw is a small investment bank that specializes in private placements of public equity (PIPEs), especially in the biotechnology industry. These types of investment deals help companies raise money without the expense or potential dilution of a full-scale stock offering.

Virgin Mobile USA (NYSE: VM); Oct. 10; $860.0 million post-money valuation. Virgin Mobile markets prepaid cell phone services, which appeal to younger people who either can’t commit to or don’t have the credit for long-term contracts. One of the company’s nifty sources of revenue is Sugar Mama, a service that gives users free airtime if they listen to ads or take surveys. The network itself is provided by Sprint, saving Virgin the expenses of infrastructure.

Upcoming IPOs:

Akela Pharma (Nasdaq: AKLA); week of Oct. 29; $119.1 million post-money valuation. This Canadian company, with shares already traded in Toronto, is offering U.S. investors 5.3 million shares priced between $6 and $8. Akela is developing an inhaler technology used to deliver fentanyl, which is used to manage breakthrough pain in cancer patients. For the six months ended June 30, Akela reduced its net loss to $14.3 million, on an adjusted basis, from $34.2 million in the year ago period. Over the same period, the company's revenue fell to $5.1 million from $11.8 million.

Deltek (Nasdaq: PROJ); week of Oct. 29; $829.1 million post-money valuation. Deltek has been in business since 1983, but it is just going public now. It makes business management software especially for consulting firms, engineering companies and others that tend to operate on a project basis. For the six months ended June 30, net income increased by 48% to $9.6 million, from $6.5 million during the first half of 2006.