CSFB: WCOM: Demise Of Nextel Talks Reflects Mgmt's Financial Discipline
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research Americas
Telecom Services/Wireline
U.S. Telecom Research Team
Frank J. Governali, CFA
Kathryn D. Littlefield
John D. Doughty
Robert Pomeroy
STRONG BUY
MCI WorldCom (WCOM)
Demise of Nextel Talks Reflects WCOM's Strong Bargaining
Position and Financial Discipline.
Summary
Reports that WCOM has terminated merger talks with NXTL
because of price is consistent with recent conversation with
WCOM's CFO. He was dead set against any deal creating greater
than mid-single digit dilution.
WCOM's view, which I share, was that there was no other
effective bidder for Nextel and therefore if they could not
agree on price now, by pushing off any deal the economics
would only improve for WorldCom.
Our est of the synergies of a merger suggests that if WCOM
would announce a deal with Nextel in 12 mos, with a 1/1/01
closing, 2001 dilution could be as low as 5 %, reflecting a
benefit of delaying a deal.
We're pleased with this apparent outcome, but because of the
obvious appeal of wireless wouldn't be surprised to see
discussions resume in the future with WorldCom in an even
stronger bargaining position.
Price Target Mkt.Value 52-Week
05/5/991 (12mo.) Div. Yield (MM) Price Range
89.625 $110 $0 None $172,259.3 $39-94
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
12/00E $2.86 31.3X 115% 12.96 $7.68
12/99E 2.00 44.8 158% 16.26 6.12
12/98A 0.82 109.3 317% 24.94 3.99
March June Sept. Dec. FY End
1999E $0.36A $0.44 $0.55 $0.65 DEC. 31
1998A 0.17 0.21 0.21 0.23
1997A 0.00 0.02 0.05 0.08
ROIC (12/98) 5.2%
Total Debt (3/99) $19.0BIL
Book Value/Share (3/99) $23.41
WACC (12/98)
Debt/Total Capital (3/99) 29.7%
Common Shares 1,922
EP Trend2 Positive
Est. 5-Yr. EPS Growth 30%
Est. 5-Yr. Div. Growth NA
1On 05/5/99 DJIA closed at 10955.4 and S&P 500 at 1347.3.
2Economic profit trend.
MCI WorldCom is the second-largest long-distance carrier in
the United States, the largest Internet service provider, and
the largest Competitive Local Exchange Carrier (CLEC).
Investment Summary
Reports that WorldCom and Nextel have terminated discussions
because of price are consistent with our conversations with
WorldCom's CFO, Scott Sullivan, a couple of weeks ago. Scott
was adamant that there was no deal at this time that was so
strategic that WorldCom would be willing to tolerate greater
than mid-single digit dilution.
WorldCom's view, which we share, was that there was no other
effective bidder for Nextel and therefore if they could not
agree on price now, by pushing off any deal the economics
would only improve for WorldCom.
Based on reasonable estimates of synergy, and the prices that
have been talked about in the market, it would be a push for
WorldCom to do a deal with Nextel for 1/1/2000 closing that
would allow mid-single digit dilution. In contrast, it would
not be too difficult to hit 5% dilution, for 1/1/2001 closing
. The synergy numbers we've used to draw this conclusion
would be $150 million in revenue, $175 million in SG&A and COS
, $250 million in interest expense, and $250 million in NOLs
. Assuming a merger were done at $110 for WorldCom shares,
and $45 for NexTel, about 5% dilution results.
So, we're pleased with this apparent outcome, and because of
the obvious appeal of obtaining a wireless capability,
wouldn't be at all surprised to see discussions resume again
in the future with WorldCom in an even stronger bargaining
position.
Trading at the relatively low multiple of 2000 earnings and
cash flow that it is at now, WorldCom's stock should produce
nice upside potential. It is also worth noting that the
company should be able to produce significant increases in
ROIC now that it can expand revenues on a slower growing
asset base. Data and Internet growth in particular are very
high asset turnover businesses, and should help bring the
ROIC into the low to mid-teens in the coming years. Our
price target of $110 by yearend assumes multiple expansion
based on the sustainability of revenue cash flow and earnings
growth, combined with expanding returns on capital.
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