From DLJ
RSL COMMUNICATIONS (RSLC: $20.89)* 01/27/2000
European Expansion Continues; Updated 4Q Guidance
Rating: BUY Change: None 12-Mo. Target: $--
We rate RSL Communications buy because the company
represents a solid play on a "hot" international market
undergoing rapid opportunity-opening deregulation. We view
favorably RSL's aggressive global network strategy and
retail focus, with nearly 1 million small business and
residential customers. More than half of the company's
revenue and nearly all of its revenue growth comes from
Europe, arguably the most attractive region worldwide due
to the rapid pace of deregulation. RSL shares trade at a
low 1.2 times estimated year 2000 revenue (or an even lower
0.7x adjusted to reflect the value of publicly traded
deltathree.com). We see strong upside in the shares,
especially as the company shows improving positive EBITDA,
restructures its struggling U.S. business, and continues
rapid growth in Europe. While we believe RSL is attractive
on a stand-alone basis, we recognize the likelihood that
the company's unique position and customer base makes it
ripe for consolidation. Financially, the company would
benefit from the scale of merging with a larger player,
because it now incurs a substantial $400 million free cash
flow negative annually and is running up against
constraints on its borrowing power. If such a takeout were
to occur, it is worth noting that Viatel recently closed
its purchase of Destia, a comparable European-based retail
reseller, which, like RSL, also includes lower margin
prepaid and calling card services, at a valuation of 2.5
times 1999 revenue, well-above RSL's current 1.2 times
multiple on our $1.9 billion revenue estimate for 2000.
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