NXTL: Microsoft Invests $600 Million In NXTL To Develop Internet Services
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Wireless Telecommunications Services
Cynthia M. Motz, CFA
Robert J. Hordon
BUY
LARGE CAP
Nextel Communications (NXTL)
Microsoft makes $600 million equity investment in Nextel; the
two companies agree to work together to offer wireless
Internet services.
Summary
Microsoft committed to pay $36 per share for an approximate 5%
stake in Nextel; the funds will be used to develop and
deploy wireless data services. Nextel and Microsoft will co-
brand the service.
Nextel plans to use Microsoft's MSN portal as a "web-computing
" platform for its Nextel Online offering, which will provide
subscribers with an array of Internet services, such as email
and information services.
We view Microsoft as an excellent partner for Nextel as it
pursues an aggressive wireless data strategy. We believe the
Microsoft affiliation a) enhances Nextel's ability to
penetrate a broader market, b) further validates the Nextel
technology, and c) makes Nextel more attractive as a merger
partner.
Price Target Mkt.Value 52-Week
5/10/991 (12mo.) Div. Yield (MM) Price Range
$36.94 $41 NA NA $10,771.7 $42.50-15.38
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share2
12/99E $(4.80) NM NM 36.4X $1.68
12/98A $(5.80) NM NM NM $(0.79)
12/97A $(4.78) NM NM NM $(1.65)
March June Sept. Dec. FY End
1999E $(1.51) $(1.33)$(1.13) $(0.83) Dec.31
1998A $(1.53) $(1.45)$(1.39) $(1.43)
1997A $(0.93) $(1.08)$(1.26) $(1.48)
ROIC (12/99) (3.5)%
Total Debt (3/98)3 $8.0B
Book Value/Share (3/98) $(1.18)
WACC (12/99) 9.2%
Debt/Total Capital (3/98) 104%
Common Shares 291.6
EP Trend5 Positive
Est. 5-Yr. EPS Growth4 NA
Est. 5-Yr. Div. Growth NA
1On 5/10/99 DJIA closed at 11007.3 and S&P 500 at 1340.3.
2Refers to total consolidated EBITDA per share.
3Long term debt.
4Although earnings are negative until 2001, thereafter
company shows 50% CAGR through 2007.
3Economic profit trend. NM=not meaningful.
With licenses for over 270 million POPs throughout the United
States and approximately 225 million proportionate POPs in
emerging markets worldwide, Nextel is able to provide
customers with an integrated wireless service that allows for
digital cellular, paging and voice dispatch in a single handset.
Investment Summary
Nextel and Microsoft announced today that Microsoft has
committed to make a $600 million equity investment in Nextel
and that the two companies are working together to provide an
array of wireless Internet services to Nextel subscribers.
Under the terms of the agreement, Microsoft will pay $36 per
share for Nextel stock, subject to certain transfer and
standstill restrictions. The funds will be used by Nextel to
develop and deploy wireless Internet services in the United
States and abroad.
We believe the price paid by Microsoft is indicative of the
fact that Microsoft is only receiving a very small stake (
less than 5%) of the company, and will not have any
representation on the board of directors. The agreement is
not exclusive; both Nextel and Microsoft can work with other
partners, but one of the key things to note about Nextel's
data strategy is that every single handset beginning year end
will be data/internet ready. Every phone has its own IP
address, and will be capable of connecting to the MSN portal
. This will become standard even on future versions of the
world phone that will come out in the years to come.
Nextel plans to use Microsoft's MSN portal as a "web-computing
" platform for its Nextel Online offering. Nextel Online,
which is a website that Nextel subscribers will be able to
access using Internet-capable handsets, offers three major
sets of services. First, Nextel Online will serve as a web-
based customer care center. Nextel customers will be able to
use Nextel Online to check their account balances, pay bills
and obtain information about Nextel products and services.
This is expected to improve customer service and take costs
out of the business. Second, Nextel Online will offer an
integrated set of customized Internet services, including
email, calendar, address book and other Web-based content
services. Third, Nextel Online will serve as a platform for
communication among members of Nextel Business Networks, a
service that brings together communities of interest such as
workers in a particular industry. Approximately 33% of
Nextel subscribers were participants in Nextel Business
Networks as of the end of first quarter 1999. Nextel's
Developers Program has enlisted more than 90 organizations to
develop applications for the various segments within Nextel
Business Networks.
During the conference call, Nextel affirmed its plans to have
micro-browser technology installed in all handsets by July of
1999 and to launch data services in six cities by the end of
the year, with a full nationwide launch expected in 2000.
We view the announcement as a very positive development for
Nextel, which is aggressively attempting to become a leader
among mobile telephony players as a provider of wireless data
services, for the following reasons:
The investment by Microsoft represents an endorsement of the
iDEN technology upon which Nextel's network is based,
particularly in terms of its potential as a data network.
Arguably the most powerful software company in the world,
Microsoft is in our view the ideal partner to help Nextel
develop software and applications for its data services.
Like dispatch, wireless data/Internet services have the
potential to become another key factor that differentiates
Nextel from its cellular and PCS competitors.
Microsoft brings a great deal of credibility to Nextel in
terms of marketing wireless data services. Given the
prevalence of Microsoft software in the business world,
Nextel has another point of access to its target market of
business customers. And while they say it is not their
present focus, it opens up a big door into the consumer
market if Nextel desires access there as well.
Companies mentioned in this report: (Closing prices are as of
May 10, 1999)
Microsoft (MSFT, $79.69, Strong Buy)*
* Followed by a different CSFB analyst.
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