NXTL: LAND GRAB FOR WIRELESS SPECTRUM CONTINUES
AS NEXTEL LOOKS TO AUGMENT...
Deutsche Banc Alex. Brown - US Equities
Bo Fifer,Jeffrey L. Hines
August 12, 1999
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NEXTEL COMMUNICATIONS INC. [NXTL] "STRONG BUY"
Land Grab for Wireless Spectrum Continues as Nextel Looks to Augment
Position
Through Massive Acquisition of PCS Licenses
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Date: 08/11/1999 EPS 1998A 1999E 2000E
Price: 48.0 1Q (1.53) (1.66) (0.81)
52-Wk Range: 58 - 15 2Q (1.94) (1.04)A (0.75)
Ann Dividend: 0.0 3Q (1.56) (1.07) (0.61)
Ann Div Yld: 0.00% 4Q (1.43) (0.96) (0.49)
Mkt Cap (mm): 18,912 FY(Dec.) (6.46) (4.73) (2.66)
3-Yr Growth: FY P/EPS NM NM NM
CY EPS (6.46) (4.73) (2.66)
Est. Changed No CY P/EPS NM NM NM
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Industry: COMMUNICATIONS
Shares Outstanding(Mil.): 394.0
Return On Equity (1998) : 0.0%
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HIGHLIGHTS:
--Wednesday (10-Aug) after the market's close the U.S. government endorsed
a Nextel plan that would lay the groundwork for Nextel to acquire
additional wireless licenses in major markets across the U.S.
NextWave, a company that entered bankruptcy proceedings a year ago,
currently claims the licenses.
--We believe that Nextel provides the constituencies involved (the
government and NextWave creditors and equity owners) perhaps the highest
NPV solution to the bankruptcy proceedings. Nextel's national all
digital network would benefit through significant added flexibility and
reduced costs by adding these wireless licenses that generally cover the
largest cities across the U.S.
--NET-NET: Nextel has been one of the most innovative and successful
companies in the wireless world. While the current attempt to acquire
these licenses is still unclear, the attempt amplifies Nextel's premium
position in the arena. Any additional spectrum that Nextel acquires
reduces risks, costs and generally causes us to upgrade our forecasts.
We also believe that if Nextel is successful in acquiring this and/or
other spectrum that investors may place a higher valuation on the stock.
--STOCK PRICE PERFORMANCE: NXTL is up 103% YTD, ahead of our PCS Index (up
94%) and the S&P500 (up 6%).
--VALUATION: Based on our DCF, our 12-month price objective on NXTLis
$70/share.
DETAILS:
Nextel disclosed Wednesday (10-Aug) after the market close that it had
reached an agreement with the Department of Justice (DOJ) and Federal
Communications Commission (FCC) regarding a Nextel proposed plan to obtain
additional wireless licenses from NextWave Personal Communications, Inc.
A little bit of background is probably required. NextWave, in our opinion,
was a major reason that the FCC's so-called C-Block auction for
wireless/PCS licenses held back in 1996 ended in such a "disaster." The
auction was for so-called "designated entities" (e.g., small businesses)
and companies like NextWave (mainly NextWave) bid up the prices two, three
and even more times what were paid in previous (and, it turns out in
subsequent) auctions for wireless licenses.
NextWave, the largest bidder in the so-called C-Block auction (as well as a
major bidder in subsequent D-, E-, and F-Block auctions) ended up with
licenses covering approximately 166 million people (over 60% of the U.S.
population). The licenses generally cover large metropolitan areas
(exactly where a wireless company would want additional licenses capacity)
and to our knowledge have basically been lying dormant (i.e., not built-
out, not turned "on"). NextWave spent ... oops, we mean bid ... over
$30/POP for these licenses, a sum that as was noted above has turned out to
be significantly more than what similar licenses went for in other
auctions. Major markets where NextWave was the higher bidder for wireless
licenses would include: New York, Los Angeles, Chicago, San Francisco-
Oakland-San Jose, Philadelphia, Detroit, Dallas, Boston, Washington D.C.,
Houston, Atlanta, Cleveland, Minneapolis, St. Louis, Seattle, Pittsburgh,
San Diego, Baltimore, Tampa-St. Petersburg, and Denver, to name a few.
NextWave entered voluntary bankruptcy proceedings under Chapter 11 in June
1998 after failing to make required payments to the FCC for the licenses.
The proceedings are currently pending. While Nextel has reached an
agreement with both the DOJ and FCC (the two parties with the most to
gain/lose), we note that Nextel will still likely need to reach an
agreement with representatives of NextWave's creditor and equity groups.
The combination would then likely have to submit a plan to the bankruptcy
judge for approval.
Nextel, in our opinion, has been one of the most successful and one of the
most innovative wireless companies anywhere in the world, and we believe
the fact that the government is backing a Nextel proposal to acquire such
licenses somewhat validates our belief. Moreover, we believe that the
transfer of NextWave's massive license position to a national carrier like
Nextel is likely the highest NPV solution for such licenses. Thus, we are
"hopeful" regarding Nextel and the government's attempts to work out a deal
with the other creditors and equity holders behind NextWave but are not yet
willing to place any probability on such an event happening. While Nextel
has not indicated where any dealings currently stand with the various other
creditors and equity backers of NextWave we would be surprised if
preliminary discussions had not already taken place (and are likely taking
place).
Again, we emphasize that the agreement with the FCC and DOJ does not in
anyway ensure that Nextel will acquire these licenses. However, we note
that should Nextel obtain, for a reasonable price, the wireless licenses
that were originally purchased by NextWave that we (and we believe the
market) would view such an event as extremely positive event for Nextel the
Company and likely NXTL the stock. In our view, additional licenses would:
1. Lower Nextel's future capital expenditure requirements. Generally
speaking, the cheapest way to add capacity to a wireless network is add
additional radio channels. Additional licenses allow more channels per
cell-site and thus are not only the cheapest, but also the easiest way to
add capacity to a wireless network.
2. Remove a perceived risk to the Nextel story. While Nextel has ample
licenses capacity today and will likely for the foreseeable future
(generally 15 MHz per market), the Company has less that most cellular (25-
35 MHz typical) and PCS (10-40 MHz typical) operators. Some investors have
argued (incorrectly, we believe) that Nextel does not have enough spectrum
breadth. The addition of NextWave's license position (10-30 MHz) would
remove this perceived risk as well (as was noted in point one above) allows
for a more efficient network build.
3. Offer tremendous flexibility for Nextel going forward. What Nextel
would do with this licenses is still anyone's guess, but we'd certainly
note the most obvious:
a) Build-out additional capacity with iDEN equipment from Motorola. Nextel
could certainly use the additional licenses to lower build-out costs as was
described above. This would mean building-out using Motorola's iDEN
equipment as the Company has already done in its nationwide wireless
network.
b) Build-out using GSM. Nextel could conceivably build-out using a GSM
network as iDEN already has significant similarities to the GSM platform.
Nextel could then, for example, migrate "cellular" traffic to this network
while keeping DirectConnect (i.e., Nextel's digital dispatch) and data
offerings on the packet ready iDEN platform.
c) Third Generation network or 3G. Nextel could likely be the first
wireless company in the U.S. to build-out a so-called 3G network based on
next generation wireless systems. With a national wireless network already
in place, Nextel would garner significant synergies in building out this
network much as Clearnet has demonstrated in Canada in its build-out of a
national iDEN network and national CDMA network.
4. Makes Nextel an even more attractive partner. We note that are not much
of a believer in integrating a wireless business with a wireline business,
i.e., we like the current Vodafone and Nextel models of global wireless
dominance without a significant wireline business. However, we do believe
that should Nextel garner additional spectrum that this would only increase
the attractiveness of Nextel to an outside party.
We note that today our modeling of Nextel anticipates roughly 20% higher
capital expenditures (on a per subscriber basis) than we model for a
typical PCS company and roughly 20% lower market penetration (due to
Nextel's smaller market focus, i.e., business). When Nextel garners
additional licenses (and we believe it is a "when" not a "if", and it may
or may not be through a deal with NextWave), we would anticipate
considering increasing our financial and operating forecast for Nextel. We
note that Nextel currently is operating better than Sprint PCS, has a
significantly higher value subscriber base than Sprint PCS, and yet Sprint
PCS trades at significantly higher valuation:
Relative valuation: Nextel versus Sprint PCS
Metric Nextel Sprint PCS
EV/POP $95 $162
EV/SUB $5,125 $6,960
EV = Enterprise Value = Equity value plus Net Debt. POP = Population. SUB
= Subscriber.
Source: Deutsche Banc Alex. Brown Estimates, Company documents.
We believe that Nextel's garnering of additional wireless licenses could go
along way toward closing such a valuation gap. In the meantime, we
certainly reiterate our STRONG BUY rating on the stock and note our 12-
month price objective, based on our DCF is $70/share. Stay tuned. We'll
note that if Nextel were to trade at either of the two multiples for Sprint
PCS shown above that the stock would be over $80/share today ... enough
said. |
