don't remember if I posted this Merrill comment here from last month:
Investment Highlights:
· We view this morning's announced merger between US WEST (USW, B-2-
2-7, $62.25) and Global Crossing (GBLX, 6-6, $61.38) as having important
implications for the CLEC sector. Key implications this deal include: 1)
improved prospects for CLEC consolidation -- both by USW/GBLX as well
as the new long haul network companies; 2) increased resistance by
USW/GBLX to in-region local market share losses; and, 3) increased
competitive risks for the pure play data CLECs.
· As a result of significantly enhanced prospects for consolidation as well as
increased visibility for improving 2H99 fundamental performance at
Intermedia, we have upgraded our intermediate term opinions to
Accumulate and long term Buy on both Intermedia Communications
(ICIX, D-3-2-9 to D-2-1-9, $27.75) and ICG Communications (ICGX, D-3-2-
9 to D-2-1-9, $20.50). Our 12-18 month price objectives are $45 for
Intermedia, or 62% upside and $31 for ICG or 51% upside. These price
objectives are derived from our YE'00 DCF-based private market value
estimate which assume a 15% discount rate, a 9.0x multiple on terminal
year EBITDA and no public market discount.
· On the plus side, we view the USW/GBLX combination as enhancing the
probability for CLEC sector consolidation – especially those CLECs with
last mile infrastructure -- as a result of the following two factors: 1)
USW/GBLX itself may look to move -- possibly quite aggressively as part of
a "grand consolidator" strategy -- out of region to extend the reach of its
global long haul network deeper into the US local market, leverage
Frontier's existing CLEC operation (230,000 local access lines) as well as to
bulk up its data product offerings. In our view, possible targets include
Intermedia, Teligent (TGNT, D-2-1-9, $50.88), WinStar (WCII, not rated,
$52.25) and to a lesser extent ICG due to the need for USW/GBLX to divest
ICG's in-region operations (primarily in CO); and, 2) significant
competitive threat posed by the USW/GBLX deal may prompt the other
new large long haul network companies such as Qwest, Level 3 and
Williams to buy CLECs with last mile infrastructure to accelerate local
market entry in order to stay competitive on an "end-to-end" broadband
network basis with USW/GBLX. We see possible targets including Electric
Lightwave (ELIX, D-3-2-9, $11.69), ICG, Intermedia, NEXTLINK (NXLK,
RSTR, $82.13), Teligent and WinStar.
· On the negative side, we expect a combined USW/GBLX to offer stiffer
resistance to in-region local market share loss to CLECs due to both a
strengthened product portfolio -- USW's !nterprise data ops. (frame
relay
and ATM services), DSL and PCS offerings combined with GBLX's
long
haul network and GlobalCenter ops. -- as well as an increased willingness to
fund in-region data initiatives as the new USW/GBLX internet/data
tracking stock won't be constrained by EPS considerations. CLECs most
exposed to a tougher in-region competition from USW/GLBX would be
Electric Lightwave and GST and to a much lesser extent, McLeodUSA.
Although McLeod, like the other two, is heavily exposed to USW territory,
the company has such an impressive long term track record of market
share gains and is so entrenched in a number of upper Midwest markets
that new competitive pressures from USW/GBLX should not prove too
damaging.
· Additionally, we view the USW/GBLX combination as a negative for the
pure play data-CLECs such as Rhythms NetConnections (RTHM, D-2-1-9,
$67.25), Covad (COVD, not rated, $82.72) and Northpoint (NPNT, not
rated, $42.44) as we expect the new entity to aggressively push DSL-based
data services both in and out of region. These data services will include
both internet access as well as high value-added regional, national and
international data services to business customers by leveraging off of the
USW regional and GBLX/Frontier long haul network. Therefore, given the
strong global reach and broad product set, we think USW/GBLX could
become an even more important player in this product segment.
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