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Technology Stocks : Broadband Wireless Access [WCII, NXLK, WCOM, satellite..] -- Ignore unavailable to you. Want to Upgrade?

To: SteveG who wrote (826)	10/28/1999 1:19:00 AM
From: SteveG	Read Replies (1) \| Respond to of 1860

Fahnestock on NXLK: Company possibly seeking $1 billion in bank financing – would cover needs into 2001. Investment Opinion: We are maintaining our BUY rating on NEXTLINK. Our year-end target price of $58 reflects a 30% public market discount to our 1999 NAV estimate of $82 per share. Key points: · NEXTLINK is probably seeking $1 billion in bank financing although management isn't commenting. Last week (10/21/99), Bloomberg news reported that NEXTLINK is seeking up to $1 billion in bank financing (not a new development as management has noted its intent to source capital here for months). The numbers cited in the article however are confusing and triggered a small flurry of calls. For the record: · CASH outlays this year should total $1.5 billion. Cash outlays of $950 million for 1H99 were comprised of the following: $340 million for WPN, $138 million for 50% of NEXTBAND, and $20 million for SPEEDUS.com. This totals $498 million for acquisitions. Add $262 million of capital spending, $88 million in cash interest payments, $99 million of EBITDA losses, and total cash outlays approximate $950 million. Second half cash outlays should approximate $600 million based on our estimates for EBITDA losses of $123 million, capital spending of $358 million and cash interest payments of $120 million. · CASH outlays should total $1.7 billion 2000 and $1.9 billion in 2001. Our 2000 estimate assumes capital spending of approximately $1.2 billion, EBITDA losses of $282 million and cash interest payments of $293 million. Our 2001 estimate assumes capital spending of $1.2 billion, EBITDA losses of $260 million and cash interest payments of $412 million. · We believe NEXTLINK can meet these cash needs (without additional financing) through year 2000. Based on our long-term capital sufficiency analysis (attached), we believe NEXTLINK will need to raise over $5 billion before the company can finance itself with internally generated funds (positive free cash flow) in year 2004. · 30% discount to 1999 NAV suggests a full valuation. However, we're disinclined to change our BUY rating since we are so close to rolling out our 2000 NAV estimate. Liquidity NEXTLINK's Available Capital: NEXTLINK's $2.3 billion in available capital should cover its financial obligations through 2000. At the end of 2Q99, the company's cash position approximated $1.8 billion. This amount included roughly $1.2 billion from stock and bond offerings that were completed during June. The addition of $500 million in currently available bank financing should carry the company through 2000. We believe the company still needs to raise an additional $5 billion or so before it becomes self-financing in 2004. The table below summarizes the key components of our more detailed sources and uses analysis on page 4. · CLEC Spending: Spending on basic terrestrial infrastructure totaled $262 million through the first half of this year. Full year 1999 spending is expected to approximate $620 million. In June we raised our 2000 and 2001 estimates to $700 million from $600 million to reflect new guidance following a more detailed review of the company's build out schedule with management. We also increased our longer-term capital spending estimates by $200 to $300 million per year through 2005. These changes were accompanied by a lift in cash flow estimates so the date at which the company becomes self-financing remained 2004. · LMDS Spending: NEXTLINK spent most of the first half of 1999 conducting LMDS tests in its NEXTLAB facilities in Texas. The company recently selected vendors for its broadband wireless equipment and initiated field trials in the LA/Orange County and Dallas markets. Commercial operations are on-track for a 4Q99 rollout. By year-end 2000, an estimated 25 markets are scheduled to be commercially deployed. In June, we doubled our combined 2000 and 2001 wireless (LMDS) capital spending forecasts to 300 million from $150 million. We also increased our longer-term capital spending estimates by $200 million per through 2005, representing the company's acceleration in network deployment from increasing market penetration. · InterNext Spending: In July 1998, NEXTLINK and sister company Eagle River Investments LLC agreed to contribute a total of $700 million toward the construction of Level 3 Communications' national fiber optic network. As part of that agreement NEXTLINK and Eagle River will each make capital contributions of $350 million. NEXTLINK's contribution in 1998 approximated $15 million, leaving $325 million to be contributed to the venture during 2000 ($200 million) and 2001 ($135 million). The cost of lighting (activating) this network is estimated to run in the $800-million range for the next two years. Half of this cost will be picked up by NEXTLINK. · Total Capital Requirement: The resulting capital spending obligations for the Company will surpass the $1- billion mark for 2000 and 2001. Adding an estimated $314 million of negative EBITDA in 2000 and $315 million of negative EBITDA in 2001, the Company's aggregate capital requirement for the next two-and-a-half years approximates $4.2 billion, assuming no new acquisitions are announced. Table below highlights on our long-term capital spending and EBITDA forecasts. NEXTLINK's capital spending should peak in 2001 in conjunction with acceleration of its market deployment. As noted earlier, we expect the company to achieve positive cash flow in 2004 and accelerated EBITDA growth thereafter. Valuation Our discounted cash flow model on page 7 summarizes the key long term fundamental and valuation assumptions that drive our Net Asset Value for NEXTLINK. The top two thirds of this table reflect our fundamental forecast. The bottom third highlights our valuation assumptions. NEXTLINK's net asset value: The mathematics behind our net $82 per share year-end 1999 net asset value estimate for NEXTLINK runs as follows. The net present value of NEXTLINK's free cash flows (EBITDA minus capital spending) discounted at 14% for 10 years approximates $1.0 billion. The net present value of NEXTLINK's liquidation value 10 years hence (based on a multiple of 10x cash flow and discounted at 14%) approximates $14.2 billion. The sum of these two estimates ($15.2 billion) reflects NEXTLINK's gross asset value. After subtracting roughly $2.4 billion of net debt, the company's net asset value approximates $12.8 billion or $82 per share. These figures are detailed in the box in the lower left hand of our 10-year DCF model accompanying this report. The box in the lower right hand side of our 10-year DCF highlights the sensitivity of our target price to different discount rates and terminal multiples. Although a strong case can be made that our 14% discount rate is too steep and our 10x terminal multiple is too light, these metrics continue to successfully identify undervalued CLEC stocks and, as such, we think they represent reasonable (and useful) valuation metrics. CLECs don't have P/E ratios so investors look at “public market discounts” instead: Historically, investors in the telecom and media sectors have measured the investment attraction of earnings-less companies on the basis of their public market discounts, i.e. the discount at which a stock trades vis-à-vis its break-up value. Over the past 15 years we have published dozens of estimated net asset values for companies we've covered in both sectors. By comparing the historical price action of these stocks with our historical net asset value estimates a clear pattern emerges. Typically public market discounts bottom at 50% or so and top out at 30% or so. The tables on the following page offer a historical perspective of NEXTLINK's public market discount vis-à-vis our historical and current published net asset value estimates: · Top Table: Highlights NXLK's price action from February 1998 to the present. A line representing our 1998 and 1999 net asset value estimates for the company has been superimposed on this price action. Over this period our net asset value estimates have increased by nearly 260% reflecting the company's announced expansion into new markets, entry into the wireless arena and establishment of a significant long-haul strategy. · Middle table: The bottom chart highlights NXLK's public market discount (i.e., the spread between the company's stock price and our net asset value estimate). · Bottom Table: In February 1998, we established our year-end 1998 net asset value of $45 per share. At the time NXLK's public market discount approximated 20% (rich by historical standards). Within three months NXLK shares had pulled back 28% and its public market discount returned to a more attractive 40% level. This pullback was followed by a spectacular 53% price run-up, which shrank the company's public market discount to 9%, by July. During the August – October 1998 “financing scare” (which called into question the industry's ability to finance its build-out plans) NXLK shares plunged 73% resulting in a public market discount of nearly 80% when the stock bottomed at $11 per share. Over the past nine months, the stock has bottomed four times when its public market discount traded at the 50% level. The last four times the stock peaked, it did so when its public market discount traded at the 30% level. We are once again there.