Vonage Falls 13% After IPO on Concern Over Losses (Update7)

May 24 (Bloomberg) -- Vonage Holdings Corp. shares fell 13 percent, the worst debut in six months, after the money-losing Internet phone company's $531.3 million initial public offering.

Vonage attracted 1.6 million subscribers by being among the first to offer Internet phone service, racking up $361.2 million in losses. The Holmdel, New Jersey-based company faces increased competition from larger companies such as AT&T Inc. and Comcast Corp., a threat analysts said may have concerned investors.

``This is a company that is losing a tremendous amount of money,'' said Kathleen Smith, founder and principal of Renaissance Capital, in an interview today. ``They're buying their way into the business.''

Vonage shares, trading under the symbol VG, fell $2.15 to $14.85 at 4:03 p.m. in New York Stock Exchange composite trading. Vonage yesterday sold 31.3 million shares, or 20 percent of its stock, for $17 each.

The decline was the biggest since China's Vimicro International Corp. dropped 16 percent in its November debut.

Citigroup Inc., Deutsche Bank Securities and UBS Investment Bank arranged the sale. Ted Meyer, a spokesman for Deutsche Bank, declined to comment. Kris Kagel, a spokesman for UBS had no immediate comment. Mary Ellen Hillery of Citigroup didn't immediately return a call seeking comment.

Strong IPO Market

Vonage sought to take advantage of the busiest U.S. market for new shares in six years. The company is one of 87 that have gone public in the U.S. in 2006, including MasterCard Inc.'s planned $2.84 billion sale today. The IPOs have raised about $21 billion so far this year, 59 percent more than in the same period last year. Bank of China Ltd. raised $9.73 billion today in the world's biggest IPO since 2000.

``The market is pretty brutal today for a company not making money,'' said Francis Gaskins, president of IPOdesktop.com. ``Vonage is losing too much money,'' he said. An analysis on Gaskins's Web site suggests that Vonage shares are overpriced at $17, because that values Vonage's customer lines at $1,657 each, eight times the cost of acquiring each one.

Analysts such as David Menlow, president of IPOFinancial.com, had predicted the shares may drop after the sale as investors become more concerned about competition and the company's losses.

Calls and e-mails sent to Vonage's Mitchell Slepian and Chris Murray, founder and Chairman Jeffrey Citron and Chief Financial Officer John Rego were not returned.

Competitive Risks

Vonage risks losing customers to rivals such as AT&T and Comcast because they own the high-speed networks Vonage service relies on and they sell similar phone plans, said Jon Arnold, principal at J. Arnold & Associates. To stay ahead of the larger businesses, Vonage is spending as much on marketing as it brings in as revenue, Smith said.

``They don't have a built-in subscriber base to go after to get business,'' Arnold said. Vonage must take customers away from telephone companies and fend off cable providers such as Time Warner Inc. that are also trying to win over phone company customers.

Costs to advertise Vonage's Web-based calling service jumped 59 percent to $88 million in the first quarter, regulatory filings show. The ad spending helped the company expand its customer base 19-fold over the past three years, a period during which it collected $367.6 million in revenue.

Growth Prospects

Vonage's subscriber base could grow to 6 million in a couple of years, while the industry grows to 15 million customers, Smith said.

Vonage, backed by 3i Group Plc and Bain Capital LLC, was started in 2001 by Citron, 35. Citron was replaced as chief executive officer in February by Mike Snyder, who joined the company from Tyco International Ltd. Citron remains Vonage's chairman and chief strategist.

After the offering, Vonage said 3i, Bain, Institutional Venture Partners, Meritech Capital Partners and New Enterprise Associates collectively owned 70.3 million shares, or about 45 percent of the company's common stock. Citron owned 48.4 million shares, or about 31 percent, the company said in a regulatory filing today. Vonage said the backers and Citron had invested $450.5 million in Vonage as of March 31.

How Vonage Works

Vonage customers use a regular telephone connected to an adapter and then to the Internet via a broadband connection such as a digital subscriber line or cable modem. Vonage doesn't provide the broadband connection.

For $25 a month, Vonage subscribers get unlimited calls anywhere in the U.S., Canada, Puerto Rico and parts of Europe, and for $15 a month, they get 500 minutes of service. Calls can be forwarded to mobile phones or other numbers and managed online. The company sells its services online and through retailers Best Buy Co., Circuit City Stores Inc., Wal-Mart Stores Inc. and Target Corp.

Vonage competes with broadband providers such as Verizon Communications Inc., the No. 2 U.S. telephone company. New York- based Verizon sells a 500-minute package of phone services over a high-speed Internet connection for $19.95 a month.

Time Warner's cable-television division, based in Stamford, Connecticut, sells unlimited calling in the U.S. and Canada for $39.95 a month, according to its Web site. Time Warner Cable has 1.4 million Internet phone subscribers, more than any other U.S. cable-TV provider.