AG Edward's (more conservative) Dave Heger:
[aside - since CSFB is restricted, AND since Reingold/Kastan have not yet opened coverage on their universe, nothing yet out of them - but as WCII's banker, suspect positive comments. Likewise w/Grubman, also not out as yet. Also, Renegar is gone from BofA and Tanner can't publish externally until they bring in someone - w/rumors of DBAB's Conrad being spoken with. Zito purportedly gone from Legg, possibly winding up at Lehman, and Merrill feeling a BIG vacuum]
WINSTAR ANNOUNCES $900 MILLION INVESTMENT BY MICROSOFT & OTHERS
------------------------------------------------------------------------------
WinStar Communications, Inc. (WCII/72 9/16)
BUY/SPECULATIVE
-----------------------------------------------------------------------------
Winstar announced today that Microsoft, Credit Suisse First Boston Equity Partners, Welsh, Carson, Anderson and Stowe, and Cascade Investments will invest $900 million in new capital into the company in the form of convertible preferred stock. By our estimates, this investment, plus previous equipment financing commitments from Lucent Technologies, will fund Winstar's business plan through 2003. Besides eliminating near term funding issues, we feel the investment represents a strong "seal of approval" regarding Winstar's broadband wireless technology and its more recent efforts to enter the application service provider arena. We are reviewing our valuation on Winstar shares since the capital infusion will decrease the investment risk associated with the stock. We will assume a slightly lower cost of equity capital in our discounted cash flow model. Winstar can further decrease its cost of capital if some of the cash is used to pay off a portion of its debt that pays annual interest of 14 - 15%. Our preliminary analysis yields a valuation of $76 per share, but this could increase with the inclusion of an additional year in our discounted cash flow model. We recommend investors hold off buying shares for now, however, until the initial exuberance surrounding today's announcement settles.
Microsoft and Winstar have entered a strategic relationship to deliver and promote broadband applications. The two companies will collectively market e-commerce and other business applications that will help small and medium size businesses use the Internet in their daily operations. Also, Microsoft will license its software solutions on an applications service provider (ASP) basis, meaning that Winstar will host Microsoft applications on its servers on behalf of end user customers. When a customer needs to use an application, he accesses the application via Winstar's network. As a result, small businesses have access to advanced applications at a reasonable cost and do not have the expense of purchasing and maintaining their own software and servers.
Microsoft and Winstar will also jointly develop additional services that use Winstar's broadband network. Winstar will participate in the Microsoft Partner Solution Center and will concentrate on high bandwidth services, such as IP videoconferencing. The two companies will also develop other applications, such as e-commerce and media streaming.
The new investment provides cash for Winstar at a relatively low cost. The $900 million in convertible preferred stock converts to common stock at $67.50 per share and pays a dividend of 5 3/4%. The dividend is payable in cash or Winstar common shares, at the discretion of Winstar management. The stock is not callable for three years, but after that time, Winstar can force conversion at 155% of the conversion price. The convertible preferred will add about 13.3 million shares to Winstar's fully diluted share count, increasing total diluted shares of 99 million.
Winstar can use the capital to fund operations, as well as pay down some of its existing debt. We had been projecting that Winstar would need to raise additional capital at the end of next year to fund its operating cash flow losses. The $2 billion in Lucent financing that Winstar secured in 1998 is only applicable to network investments and cannot be used to fund operating losses. Winstar may choose to apply some of the cash to pay down some of its existing debt, which would lower its cost of capital.
We feel that the investment reduces WCII's investment risk and cost of equity capital. Up until today, we calculated Winstar's historical cost of equity capital at 22%. If this cost of capital drops to 19%, our valuation on WCII shares in our discounted cash flow model increases to $76. We are in the process of further assessing the value of Winstar shares, as we are extending all of our CLEC models out to include estimates for year 2009 since we are approaching the end of the current year. We anticipate this analysis will further increase our valuation on Winstar shares.
We recommend that new investors stand on the sidelines for right now. Although we continue to like the long-term outlook for Winstar, we feel that the initial market exuberance following the announcement today is not the time that investors should be adding to their positions. Instead shares may settle back a little more over time, offering a more favorable opportunity. We will soon follow up with additional thoughts on our valuation of WCII shares. Our initial view is that it could be in the low $80 range.
|
