CSFB on WCII-MFNX
John D. Doughty
WinStar Communications (WCII)
WinStar Signs 20-Year Dark Fiber Agreement with Metromedia Fiber Network;
Reiterate Buy Rating
Summary
WinStar announced that it has entered into an agreement to obtain dark fiber
capacity in 38 domestic and 3 international markets from Metromedia Fiber
Network. WCII will pay approximately $300 million (which includes imputed
interest) over 20 years.
As a result, WinStar will have dark fiber rings in a total of 50 of the 60 U.S
. markets that it plans to serve. In addition, the agreement includes dark
fiber capacity on Metromedia's German long haul network, providing intercity
connectivity between the major German markets.
In addition, the agreement provides that Metromedia will deploy fiber into
buildings designated by WinStar in each market, including WinStar hub sites.
Importantly, the agreement will allow WinStar to reduce its network costs and
expand its number of on-net buildings.
Net/Net: WinStar is in a unique position to capitalize on the demand for
local broadband. Today's agreement takes them one step closer. Point-to-
multipoint services are on schedule to be rolled out in the fourth quarter.
We continue to view WCII as a core holding in the CLEC group and reiterate our
Buy rating.
Price Target Mkt.Value 52-Week
10/04/991 (12mo.) Div. Yield (MM) Price Range
40.19 $70 None $2,801.2 $10-64
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
12/00 (11.65)
12/99E (13.45) NA NA (5.85)
12/98A (11.94) NA NA (5.52)
March June Sept. Dec. FY End
1999E (3.72)A (3.53)A (3.29) (2.97) Dec. 31
1998A (2.54) (2.77) (2.83) (3.80)
ROIC (6/99) (23.6%) Total Debt (6/99) $2.5 Bil Book Value/Share (6/99) NM
WACC (6/99) 12.3% Debt/Total Capital (6/99) 107% Common Shares3 69.7mil.
EP Trend2 Est. 5-Yr EPS Growth NM Est. 5-Yr. Div. Growth NM
1On 10/04/99 DJIA closed at 10401.23 and S&P 500 at 1304.6.
2Economic profit trend. 3Shares outstanding reflect fully diluted shares.
WinStar is a competitive local exchange provider using 38 GHz technology to
build out local telecom networks in major markets throughout the country.
Executive Summary
WinStar Significant Expands Fiber Capacity with MFN Agreement
WinStar announced that it has entered into a 20-year agreement to obtain dark
fiber capacity in 38 major markets in the U.S. (including: Boston, Atlanta,
Dallas/Fort Worth, Los Angeles, Seattle, and Houston) and 3 major
international markets (including: London, Cologne, and Amsterdam) from
Metromedia Fiber Network (MFNX). Under the terms of the agreement, WinStar
will pay MFN approximately $300 million over 20 years (which includes imputed
interest), beginning upon delivery of the dark fiber.
As a result of the agreement that extends WinStar's previous agreement with
MFN in 12 markets, WinStar will now have dark fiber capacity in 50 of the 60 U
.S. markets that it plans to serve. According to WinStar, the remaining 10
markets will be secured by the end of 2000. In addition, the agreement
includes dark fiber on MFN's German long haul intercity network, which
connects the major German markets. Under the terms of the agreement, MFN
will deploy fiber into select buildings in each market as designated by
WinStar. The company will utilize its $2 billion vendor financing pact with
Lucent to finance the optronics to light the dark fiber.
According to the company, the agreements will add approximately 500 basis
points to gross margins in 2000 from a fourth quarter 1999 estimated gross
margin of 35% as the company will be able to reduce third party intercity
expenses. As we had previously factored this into our model, our 2000
estimates remain unchanged. Our 2000YE revenue estimate is $652 million and
our EBITDA loss estimate is approximately $148 million.
Outlook
WinStar is in a unique position to capitalize on the demand for local
broadband. The company is making solid progress in its market expansion and
marketing of multiple services and on-net lines. Point-to-multipoint
services are on schedule to be rolled out in the fourth quarter. We continue
to view WCII as a core holding in the CLEC group and reiterate our Buy rating
. Our twelve-month price target is $70. |
