CSFB Governali on WCOM/NXTL - "No Deal Before Its Time…And Price"
Investment Summary
A wireless asset would be a valuable addition to WorldCom's portfolio, but it is
not a necessary addition today. This is WorldCom's mantra. And, this belief is
embraced by WorldCom management. As a result, management has bargaining
leverage in negotiations with Nextel and time is on its side.
No Likelihood of A Wireless Deal With Major Dilution
Because of this view by WorldCom management, we do not see any possibility
that WorldCom will do a transaction with Nextel that will lead to dilution any where
near the 20% to 25% range that others are suggesting. Management is unwilling
to stomach anything more than mid-single digit dilution, even for the most strate-gic
asset. It is worth noting that the share price erosion that fear of dilution has
created is a major destroyer of shareholder value – WorldCom has lost nearly
$20 billion of market cap to this fear already. Management includes this cost as
part of its acquisition costs, which is why we are so confident of their discipline in
accessing this opportunity and all other investment opportunities.
Management Unwilling To Do A Deal With Significant Dilution
In our conversation with management we are reminded: that WorldCom's current
operations are hitting on all cylinders; there is no need today to do a wireless deal
to boost current growth; the company has a major distaste for dilution; wireless
deals are inherently difficult for wireline companies to do because of the absence
of operating synergies; and there is nothing so strategic to WorldCom at this
point that it is willing to absorb the 25% dilution that the press has sug-gested
from a Nextel deal. Finally, management reminds us that even mid-single
digit dilution is tough for them to swallow. WorldCom has looked at various
wireless investments for over a year and has consistently come away with the
view that so far the prices have been too high to justify the acquisitions.
The Major Synergies With Nextel Would Be Below the EBITDA Line
The primary synergies in a Nextel deal would be in below the EBITDA line since
there is not a whole lot of revenue, network, or SG&A benefits. Lower interest
expense, and cash savings on taxes would be meaningful however. Lower
GAAP taxes would be created if a pooling transaction were effected, which is the
likely way any deal would occur.
Outlook – Wireless Maybe, Big Dilution No
We don't expect a deal to be consummated near term with Nextel unless World-Com
is able to negotiate a price that leads to mid-single digit dilution. This would
seem to be at a price below what Craig McCaw and Nextel would be willing to
accept at this time. As a result, we're not putting a high probability on a deal be-ing
transacted quickly. Because we agree with WorldCom's perspective that they
are in the driver's seat here, a deal can occur over the next six to 18 months, but
it is likely to be on the terms that are acceptable to WorldCom, not to Nextel. We
do not see other likely buyers in the wings for Nextel, and therefore feel confident
in WorldCom's current bargaining position.
Does WorldCom have any alternatives? Well Sprint would likely to be more dilu-tive,
and Vodaphone isn't even in the picture. And consolidating disparate GSM
licensees is even further from the picture. So, Nextel is the likely candidate for
purchase. The only question is timing and price – the longer WorldCom waits,
the better its leverage on price.
Clearly there will be observers who disagree with this view. But the disagreement
is academic, because the only view that matters here is that of
WorldCom's management. As long as they see the asset as being
overvalued, they won't do a deal.
Is the Stock Dead Money With the Fear of a Deal Overhanging?
We don't see the stock being stuck at current levels because of the overhang of a
possible deal. In fact just the opposite should happen. The reason for this is
that if WorldCom walks away from this deal because of price, it will be sending a
very strong signal to the Street regarding its appetite for dilution. On the other
hand if it does this deal, it will be at a price that has relatively
small dilutive im-pacts,
and this would be positive. Either way WorldCom wins and so do share-holders,
thus creating a buying opportunity. |
