BTAB: NXTL: Microsoft And Nextel Team Up For Wireless Internet-Based Services
Bankers Trust Research/BT Alex. Brown Research
Jeffrey Hines, Bo Fifer
May 10, 1999
HIGHLIGHTS:
--Nextel and Microsoft announced an agreement on Monday (10-May) that will
enable Nextel subscribers to access Internet-based services through a co-
branded version of the MSN Internet portal.
--Microsoft will also purchase $600 million of Nextel stock at $36/share
(approximately 16.67 million or 4.4% share dilution).
--POSITIVE NEW NEWS:
1. Microsoft as a partner (and to think last week investors were excited
about the possibility of MCI WorldCom). The focus will be on utilizing the
MSN portal to provide an Internet platform for Nextel subscribers via the
company's Nextel Online offering. The focus is apparently threefold:
i) Internet-based customer services: Nextel Online subscribers will be
able to interact with Nextel via the Internet and terms of various customer
services (e.g., rate plans, coverage, purchase of phones and equipment,
etc.), billing services (viewing and paying), short messaging services,
etc.
ii) Co-branded services and applications: Nextel Online subscribers will
have access to various services through the co-branded MSN portal, e.g., E-
mail, calendar, address book, and Web-based content services such as stock
quotes, weather, news services and sports results.
iii) Applications developed by third parties: Nextel indicated that more
than 90 software developers/organizations have joined Nextel's Developers
Program. These developers will be developing specialized applications and
services for Nextel subscribers.
2. Validation of Nextel's wireless Internet strategy. We believe that the
fact that Microsoft is entering this alliance only reinforces Nextel's
position as a provider of wireless-based Internet services and the
capability of Motorola's iDEN technology. We note that Motorola is
committed to 2Q 1999 commercialization of the i1000plus, or Internet-
enabled phone.
3. $600 million of cash to Nextel. As part of the venture, Microsoft will
take a roughly 4.4% position in Nextel. While Nextel's U.S. business was
"fully-funded" for 1999 and 2000, Nextel International was not. We would
expect that some of these funds will be funnelled toward the build out of
Nextel International as well as perhaps a faster roll-out of Nextel's
wireless data services.
--NEGATIVE NEW NEWS: To the extent that it is negative, Nextel is seeing
a share dilution of approximately 4.4% more shares. With no changes
made to our underlying forecast for growth, revenues, churn, etc., our
12-month price objective based on our DCF has "fallen" to $46-50/share,
from $47-51/share. Certainly this is offset, in our view, by the
additional capital (less risk), a strong additional partner with
Microsoft, and likely increased probability of Nextel exceeding our
expectations.
--CONFERENCE CALL AT 14:30 EDT. THERE WILL BE A CONFERENCE CALL ON
MONDAY, 10-MAY, AT 14:30 EDT. THE CALL-IN NUMBER IS 1-888-955-8942.
THE PASS CODE IS "NEXTEL" OR "MICROSOFT."
--VALUATION: Reiterate "strong buy" investment rating on NXTL shares with
a 12-month price objective based on our DCF of $50/share. With an
additional $600 million of capital that could be used for, amongst other
things, Nextel International, we are no longer more heavily discounting
the International operations from the U.S. side and thus are using a
price objective of $50/share as opposed to a range of $46-50/share (the
lower part of the range had indicated the more heavily discounted
international operations). |
