Nextel Communications Revives After Shunning Bankruptcy Advice
By Tom Giles
Reston, Virginia, Feb. 24 (Bloomberg) -- A year ago, Nextel Communications Inc. Chief Financial Officer Paul Saleh and Chief Executive Officer Tim Donahue were urged by bankers to file for Chapter 11 bankruptcy protection.
``A lot of folks were really concerned about Nextel's ability to survive,'' Saleh said in an interview. The concerns: Nextel, the No. 5 U.S. mobile-phone company by subscribers, had too much debt, its international unit had missed a loan payment and customer growth was slowing.
The 46-year-old CFO and the 54-year-old CEO spurned the suggestion. Instead, Saleh used cash and shares to cut debt by $3.2 billion in 2002, while the number of customers grew 23 percent to 10.6 million. Donahue cut 5,300 jobs in the past two years and lowered capital spending by 38 percent.
The result: Nextel made a $1.4 billion 2002 profit, the first profit in its 15-year history, the company said last week.
Nextel stock, which fell as low as $2.50 in June from a March 2000 peak of $82.94, is reviving. The shares have almost tripled in the past year, rising 187 percent, to close Friday at $13.36. The next-largest increase in the Barclays Capital index of wireless companies was for the American depositary receipts of Russia's AO Vimpelcom, up 17 percent.
Nextel's ratio of debt to earnings dropped to 3.9 by the end of last year, from 7.3 a year earlier, Bloomberg data shows. That compares with 2.9 times earnings for AT&T Wireless Services Inc., the biggest publicly traded U.S. wireless carrier.
Lower Interest Costs
Investors have rewarded Nextel by accepting lower interest payments on its debt. Bonds maturing in 2009 on Friday were trading at 99 cents on the dollar, yielding 9.6 percent. In July, they traded as low as 50 cents, yielding 24 percent -- a level that suggests some investors were betting on default.
``They've done some significant repair to the balance sheet,'' said Eric Misenheimer, who holds Nextel debt among the $500 million in high-yield bonds he helps oversee at Northern Trust Corp. in Chicago.
One-quarter of Nextel's board seats are controlled by billionaire Craig McCaw, who with his family agreed in 1995 to invest as much as $1.1 billion in Nextel in succeeding years. McCaw's company, Digital Radio LLC, is the 11th-largest shareholder in Nextel, according to Bloomberg data.
The biggest risk for Saleh and Donahue may now be rival products rather than the weight of debt, investors said.
Nextel targets corporate clients: construction crews, public safety agencies and other businesses that communicate in groups. That has allowed it to charge the highest bills in the industry, averaging $69 a month.
Push-to-Talk
The company's mobile phones include a walkie-talkie device known as Direct Connect, designed by Motorola Inc., that allows customers to talk to groups of users at the push of a button. Verizon Communications Inc., the biggest U.S. mobile-phone company, plans to introduce a push-to-talk product by the end of the year.
Alltel Corp., the No. 7 U.S. wireless carrier, intends to test a similar product this year. And Sprint Corp.'s wireless division, Sprint PCS, the fourth-largest U.S. mobile phone company by customers, is working on push-to-talk phones. None of the companies has given much detail.
``Companies like Verizon Wireless will eventually get a service that's comparable,'' said Michael Mahoney, manager of the $150 million Communications and Technology Fund at EGM Capital in San Francisco, which sold its Nextel shares earlier this year. ``That may cause Nextel to lose some of its premium.''
Nokia Oyj, Ericsson AB and Siemens AG last week said they will jointly promote a standard that will let carriers offer a push-to-talk service over the so-called Global System for Mobile Communications, or GSM, and related networks.
`Something Similar'
That would pave the way for Cingular Wireless LLC and AT&T Wireless, the second- and third-largest U.S. mobile-phone service providers, to sell a walkie-talkie feature. Both use GSM technology.
``Nextel's push-to-talk solution will fade over time,'' said Kaufman Bros. analyst Vik Grover in a research note this month. ``We recommend investors exit positions in Nextel.''
In an attempt to stay ahead, Nextel is taking Direct Connect nationwide. Currently, the push-to-talk function works in local calling areas, and between a limited number of cities, such as New York and Boston. Later this year, Nextel customers will be able to talk to each other across the country. The company will also sell handsets with longer battery life and cameras attached.
Nextel's Donahue says it will take years for the competition to match the sound quality and speed of the company's product. ``There isn't anything on the horizon that we can see that's going to compete with us any time soon,'' he said in an interview.
For now, some investors agree.
Chapter 11
``I don't think Verizon and Alltel would be making all this noise if they weren't relatively close to having something similar,'' said John Maxwell, an analyst at Waddell & Reed Financial Inc., holder of 700,000 Nextel shares at the end of 2002. ``Just having it doesn't mean you can sell it. It's going to be a while before it hurts Nextel significantly.''
The walkie-talkie phones, introduced by Nextel in 1993, have boosted annual revenue 53 percent in the past two years, reaching $2.33 billion in the last three months of 2002. Profit reached a record $1.47 billion, the third consecutive quarter in the black.
While CEO Donahue and his team develop the products, former Walt Disney Co. executive Saleh has focused on reducing debt.
Though he rebuffed advice to seek bankruptcy for the whole company, Saleh put NII Holdings, the company's international division, into Chapter 11 in May. He bought back $3.2 billion in debt and preferred securities directly from bondholders in the last three quarters of last year, and said he may do more in coming months.
Moody's Investors Service analyst Marcus Jones last month raised his outlook on Nextel's debt to stable from negative, the first time in two years Moody's lifted a rating on a phone company. Moody's now ranks Nextel debt B3, six levels below investment grade. AT&T Wireless is at Baa2, two levels below investment grade. |
