WorldSpace Stumbles

By Jerry Knight
Monday, October 10, 2005

Judging from what happened before WorldSpace Inc. went public in August, the Silver Spring-based satellite radio service should have pulled off Washington's hottest initial public offering since the Roaring '90s.

WorldSpace aims to become the overseas equivalent of XM Satellite Radio, the nationwide pay-to-listen broadcaster based in the District that has signed up 5 million subscribers in only three years.

"The Next XM" was all some investors had to hear. They were so eager to put money into WorldSpace that the IPO was increased from fewer than 9 million shares to almost 12 million. The original $16 asking price for the stock was increased twice, first to $20 a share, then to $21.

Sure enough, WorldSpace shares traded as high as $25 on Aug. 4, the day of the IPO.

It's been downhill since. The stock skidded to just $14.47 a share at the close of Friday's trading.

In two months, WorldSpace investors have lost $80 million -- making it not the best local IPO of the year, but effectively tied for the worst.

A dozen companies based in the District, Maryland and Virginia have gone public this year. Five more are in the midst of the IPO process. The region is on track to roughly match the pace of 2004, when 16 companies sold shares for the first time.

As far as Washington investors are concerned, however, this year's IPO class is a bunch of underachievers. Only three have made serious money for IPO investors: NeuStar Inc., a Northern Virginia communications company whose stock is up 41 percent; Alpha Natural Resources Inc., a Southern Virginia coal company, up 39 percent; and DiamondRock Hospitality Co., a Bethesda hotel operator, up 12 percent.

Five other IPOs are trading a few cents above or below their offering price. Four are down more than 10 percent, with WorldSpace showing the biggest percentage decline and the biggest loss of investors' money.

While WorldSpace was a concept that investors could easily get their heads around, the region's top-performing IPO this year turned out to be an obscure business that few people can understand.

The hot IPO was NeuStar, a Sterling company that provides services to the communications business -- conventional telephone companies, cell phone companies and the new breed of Internet phone services.

"We are the hub of the telecommunications industry," said Chief Financial Officer Jeffrey A. Babka, because NeuStar helps route calls over different types of networks, different service providers, different communications technologies.

NeuStar's basic business is providing the behind-the-scenes phone book that makes it possible for any phone in North America to link up with any other phone -- even if a Vonage customer is making a call over the Internet to someone using a Nextel walkie-talkie phone. NeuStar is also why you can switch phone companies and keep your number.

In the old days, routing phone calls was easy. The three-digit area code directed your call to a telephone office in the right region of the country. The next three numbers put the call through to your neighborhood exchange. The final four numbers routed it to your house.

These days, Babka said, the first six digits of a phone number mean nothing.

A phone with a 301 area code can be on the network of any of a dozen companies that offer mobile phones and land lines in suburban Maryland. In fact, area codes have nothing to do with geography anymore because -- thanks to NeuStar -- phone companies can assign any area code, anywhere, to anyone who wants it.

When you call a number, your phone company checks with NeuStar to see which phone company is using that number and then routes the call to the right place on the right network.

The computer-to-computer consultation takes milliseconds. Callers never know it happens, and have no reason to know that NeuStar exists -- except as an investment.

The Sterling-based company went public on June 28 at $22 a share. The stock closed Friday at $31.12.

Revenue rose 53 percent in the first half of this year to $120 million, though profit slipped to $28.5 million from $32.2 million. The company recently told analysts that it expects to grow about 25 percent a year.

Besides running the call-routing clearinghouse, NeuStar makes money every time someone changes his phone number, collecting fees for something like 14 million transactions a month.

Because it is the hub of the system, NeuStar also helps communications companies plan and adjust their networks. New technology also means new business. For example General Motors' OnStar assistance program uses phone numbers to track vehicles, and NeuStar handles that.

The phone industry created what is now NeuStar, an independent clearinghouse serving all phone companies, to get calls to the right place. Originally NeuStar was part of Lockheed Martin Corp. of Bethesda. Independence was crucial, Babka said, because the highly competitive phone companies didn't trust each other to handle the sensitive work.

The company was shed by Lockheed Martin after the defense contractor bought communications satellite operator ComSat Corp., compromising its independence in the view of some in the telecom industry. NeuStar was spun off in 1999 in a management buyout lead by Chairman Jeffrey E. Ganek and financed by Warburg Pincus LLC, a big New York investment firm.

When NeuStar went public this summer, it was not for the usual reason of raising capital, but rather to cash out Warburg, other investors and company insiders. They got all of the almost $700 million generated by the stock sale.

Investors sometimes are leery about deals that generate no money for the company going public, but they were eager enough for NeuStar that the offering price was raised at the last minute. Instead of selling for $18 to $20 a share as first proposed, the stock went public at $22.

Since the IPO, NeuStar has attracted a strong following on Wall Street. The stock gets a "buy" rating from eight of the 10 analysts who follow the company.

In contrast, only two analysts are following WorldSpace, and the only one who rates the company "buy" is at UBS AG, the Swiss-owned investment firm than managed the WorldSpace IPO.

WorldSpace is smaller and slower-growing than NeuStar and has lost $2 billion since it was founded. Last month it reported second-quarter revenue of $2.3 million -- up 21 percent from $1.9 million in the comparable quarter last year -- and a loss of $22 million, compared with a loss of $52 million.

An unknown factor in the decline of WorldSpace stock is concern about two of its longtime investors -- Salah Idris, the owner of a plant in Sudan that the United States bombed in 1998 alleging that it had ties to Osama bin Laden, and Khalid Bin Mahfouz, a banker who settled allegations in the Bank of Credit and Commerce International scandal in the early 1990s and has since been accused in a lawsuit of backing bin Laden financially. In a filing with the Securities and Exchange Commission before the IPO, WorldSpace said that the two investors "have repeatedly denied all such allegations" and that they no longer have any "voting control rights" in the company.

WorldSpace has declined to elaborate on the unconventional investors. And, like most companies, it does not comment on its stock price.

Friday, in response to an inquiry, Judith Pryor, senior vice president for corporate affairs, said in a statement, "WorldSpace is pleased to have completed its successful initial public offering during Q2 2005." She added that it is "the only company positioned to offer [satellite radio] in its target markets of China, India and Western Europe.

"We are excited about our business and position," she said, "and will continue to execute against our strategic plans."

Jerry Knight can be contacted

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