October 14, 1999
Credit Suisse First Boston Corporation
On October 12, the chairman and CEO of bankrupt NextWave Telecom issued a
statement asserting that Nextel has not reached an agreement with NextWave or
any of its shareholders or other constituencies, and that no such agreement
is even being contemplated by any of these parties. He added that NextWave
is "fully funded" to deploy wireless services under the spectrum it was
originally awarded. Since this statement hit the wires, Nextel shares have
declined precipitously, from a closing price of $84.38 on October 11 to below
$72 in mid-day trading on October 13-approximately a 15% decline.
Welcome to The Twilight Zone....
Where is he? We know he must be nearby-Rod Serling that is, you remember,
the guy from The Twilight Zone? Because that's where we would have to be,
if investors are surprised that NextWave's Chairman and CEO is not overjoyed
about the fact that someone else might actually be able to make use of
wireless spectrum licenses which have been tied up for more than three years
now. Quite clearly, NextWave's objective has been, and will continue to be,
to buy licenses out of bankruptcy at a very reduced price, run its own
business, and hopefully, take that business public in the future, and maybe,
make a great deal of money. NextWave has made many public statements against
Nextel's attempting to gain access to the spectrum-it is very convenient
because Nextel is still under a gag order right now, and cannot respond. But
the fact of the matter is that to our knowledge, this matter is tied up right
now with the FCC and the Bankruptcy court arguing about who has jurisdiction
over these licenses. While there are no guarantees that Nextel will win
access to this spectrum, the process will be messy with numerous challenges,
and Nextel's stock has already had a very strong run recently based on the
industry consolidation flurry and positive investor meetings (and hence, we
believe might have been due for some pull-back), we are surprised by the
market's overreaction to what are the same old comments by a party who
clearly has its own agenda at work. We would take the opportunity to buy
Nextel shares on weakness, and we expect investors will be pleased with the
fundamental business results when the company reports on Monday, October 18.
In most cases, the market will decide and economics (logic) should prevail-
but not necessarily if you're in the Twilight Zone...
People often ask us about what we think will happen here, and our response is
what it has been in most every case we deal with-in most cases, the market
wins. The guy who is willing to pay the most and who can put the scarce
resource to the best use is the one who will probably prevail. One would
think that if one company is willing to pay X, and another is willing to pay 4
-8X, and the second company has a business in place already, and could start
serving customers now-the second company's offer might be more attractive to
the people who own and control the asset. Now you might doubt the second
company's chances if another company with another network and the same
resources could pay the same amount, but why would you doubt the second
company's chances, if the first company was the one making the comments?
Additionally, even if you agreed to stay in the Twilight Zone for a while,
and the first company decided to hire enough lawyers so that somehow, they do
obtain the licenses-you might want to consider that Iridium and MobileMedia
had licenses too. Those companies both went bankrupt, as have many of the
former "C" Block players who bid for licenses. NextWave blames the FCC for
its plight, and talks about following Designated Entity rules. But what
about all of the Designated Entities who lost out because they played by the
rules and because NextWave bid almost $5 billion-almost 70% of the entire A &
B auctions that were conducted amongst the largest players in the nation
combined? This whole thing is very curious since the FCC has awarded
thousands of licenses successfully, and wireless has flourished in the United
States in terms of competition.
Well, if NextWave can do it, then I don't want to pay my mortgage either.
It's not my fault I bought my apartment at the top of the market, right?
It's Citibank's fault. I think I should be able to file for bankruptcy, and
then find a judge who will tell Citibank that in fact, New York City real
estate is not really worth what it was a few years ago, and that miraculously
, my mortgage is now suddenly reduced to 20% of what I originally agreed to
pay. This would work out nicely for me, because then I could have the
benefit of a low interest rate on a fifth of the amount, and I would still
get to live in my apartment.
And then, even though I know I said that the apartment wasn't really worth it-
that was just when I didn't want to pay Citibank. I still want to make sure
I get to live in the apartment, and then, when the market is really hot, I
get to sell it to someone else for a huge amount of money in the future.
Guess what folks-New York City real estate is not down from where it was
several years ago; in fact, it is a lot higher than in 1996. And you know
what, the values of wireless spectrum and wireless stocks are also higher
than they have ever been. How is it possible that we are worried about
anybody's designated entity status when the basis of NextWave's claim is
predicated on a ruling that claims a nationwide set of wireless licenses is
worth $1 billion-how is it possible that a company like WorldCom is paying
over $50 billion for Sprint PCS, and we have mergers everyday in wireless
that are going for all-time highs-in fact, everyone claims we're shifting to
wireless, right? Something which is a fact-and we are still very bullish on
wireless. So, how is it possible NextWave is going to get away with a ruling
which assumes spectrum value has gone down? Obviously, this should be the
FCC's question to the courts-but we have to ask this as American citizens too
? Don't the airwaves truly belong to the American public? Again, wasn't the
FCC's mandate to get the scarce resource into the hands of companies who
would provide us with more service? Additionally, isn't it better if the FCC
gets more money-it's not Bill Kennard who is going to pocket the cash here,
right? It is going back to the Treasury which should hopefully benefit the
public (we said "hopefully.") We must have missed the part where the FCC
promised anyone a successful business and guaranteed a lucrative IPO down the
road for any one party. |
