and what would a major WCII event be without comments and target raising from Jack? [who comedian Ben Stein (bigfiles for broadband fun: geocities.com ) - as moderator of this morning's panel (at Western Cable) - good-naturedly ripped into several times. and this evening's treat was my longtime favorite: geocities.com and the motley crue in attendance geocities.com - 2 SI posters - any guesses which and who?]
WCII: Investment By Strategic Buyers Positive;
Raise Target to $86
Jack Grubman
Salomon Smith Barney
Thursday, December 16, 1999
--SUMMARY:--WinStar Communications, Inc.--Telecommunications Services
*Yesterday, Winstar announced that it enter into an agreement under which
Microsoft, CSFB Equity Partners, Welsh, Carson, Anderson and Stowe, VIII,
L.P. and Cascade Investments will invest $900 million in Winstar.
*The investment is in the form of a convertible preferred stock which
converts into common stock at $67.50 per share, & pays a 5.75% dividend.
*With this investment Winstar is fully funded to 2003 and thus, its
financing risk is greatly reduced. We reduced the discount rate on our DCF
to 15.0% from 15.8%, updated our model to include 2009, & included add'l
shs from the convertible preferred. Thus, we are raising our DCF driven
price target to $86 from $70.
*WCII expanded strategic relationship w/MSFT to provide jt mktg, provide
MSFT software to customers, & entered into a technology alliance w/ MSFT.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/98 EPS $(2.54)A $(2.77)A $(2.83)A $(3.80)A $(12.61)A
Previous 12/99 EPS $(3.72)A $(3.53)A $(3.28)A $(3.30)E $(13.83)E
Current 12/99 EPS $(3.72)A $(3.53)A $(3.28)A $(3.30)E $(13.83)E
Previous 12/00 EPS $N/A $N/A $N/A $N/A $(13.40)E
Current 12/00 EPS $N/A $N/A $N/A $N/A $(13.40)E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $N/A
Current 12/01 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1S Prior:No Change Price (12/15/99)....:$73.00
P/E Ratio 12/99.....:N/Ax Target Price..:$86.00 Prior:70.00
P/E Ratio 12/00.....:N/Ax Proj.5yr EPS Grth...:0.0%
Return on Eqty 98...:N/A% Book Value/Shr(99)..:-5.30
LT Debt-to-Capital(a)N/A% Dividend............:$N/A
Revenue (99)........:440.00mil Yield...............:N/A%
Shares Outstanding..:99.3mil Convertible.........:Yes
Mkt. Capitalization.:7248.9mil Hedge Clause(s).....:#
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
--OPINION:------------------------------------------------------------------
Yesterday, Winstar announced that it enter into an agreement under which
Microsoft, Credit Suisse First Boston Equity Partners, Welsh, Carson,
Anderson and Stowe, VIII, L.P. and Cascade Investments will invest $900
million in Winstar. The investment is in the form of a 10 year
convertible preferred stock which converts into common stock at $67.50
per share, and pays a dividend of 5.75%. The quarterly dividend may be
paid in additional shares of the preferred stock or in cash. The
convertible can be converted into common stock after 3 years by Winstar
if the stock is trading at 155% of the conversion price. The combined
investment represents roughly 13% of Winstar's fully diluted shares. We
view this investment as yet another validation of the fixed wireless
strategy, which we continue to believe is one of the most economic ways
of providing broadband services. This funding will also provide WCII
with the flexibility to accelerate its business plan.
*Salomon Smith Barney is an advisor to WinStar Communications in this
agreement.
With this investment Winstar is fully funded to 2003 and thus, its
financing risk is greatly reduced. As a result we have reduced our
discount rate in our DCF to 15.0% from 15.8%. In addition, we have
updated our model to include 2009 numbers as well as the additional
shares from the convertible preferred and we are raising our DCF driven
price target to $86 from $70.
Furthermore, WCII expanded its strategic relationship with Microsoft to
provide joint marketing including participation in Microsoft's trade show
booths, and using Microsoft's VAR channel and Certified Solution
Providers for distribution of WCII's products. In addition, Microsoft
will license its applications to WCII on an Application Service Provider
basis. Winstar is already a member of the Microsoft Office Online beta
pilot and by the end of January 2000 WCII will be including in its bundle
of service Microsoft's Office Online in 5 markets--NY, Boston, Washington
DC, Seattle, and San Francisco and will likely offer the bundle in more
than 40 of WCII's markets by the end of Q1'00. Furthermore, WCII's
technology alliance with Microsoft will be key to WCII developing new ASP
products. As part of this alliance, WCII will have space in the
Microsoft lab to set up test demonstrations for new applications.
Microsoft has two people dedicated with interfacing with WCII as the
Office Online 2000 product gets rolled out. Some of the applications
that WCII is working on with Microsoft will include directory enabled
dynamic IP bandwidth allocation, media streaming, IP video conferencing,
and media player distribution. We have not included any revenues from
WCII's Microsoft initiatives in our numbers, providing potential upside
to our model.
We have been unabashed bulls for many years on the new entrants space
given that we believe they will take a lot of market share of existing
services, will participate in the growth of new services, and they have
valuable strategic assets. We believe our view has been reinforced by
strategic investments that have been made in the CLECs over the last few
months. To review the investments made by strategic investors in the
CLEC space: Forstmann Little invested $1 billion into McLEODUSA and $850
million in Nextlink, Paul Allen's Vulcan Ventures invested $215 million
in Allegiance and $1.65 billion in RCN, Hicks, Muse, Tate & Furst also
invested $250 million in RCN, an investment group led by Microsoft and
Hicks, Muse, Tate & Furst have invested $500 million in Teligent, and now
an investment group led by Microsoft have invested $900 million in
Winstar--all of which occurred within the last 9 months. These private
equity investors are investing in the CLEC space a long time after these
companies have gone public are obviously reinforcing our belief that
these businesses have such a large potential that there is no real way of
figuring out what the right value is--we believe that values are a lot
higher than where the CLECs trade today. Aside from what mathematically
this does to a DCF, i.e. lowers the risk premium and the WACC, these
investments are a huge endorsement of the CLEC space collectively by a
number of smart investors who promise a return to their investors that is
on average far higher than public equity returns. Aside from fully
funding Winstar or any other CLEC a few years out, having this funding on
hand now enables these companies to accelerate their business plan and
not worry about what the capital markets does and that takes a massive
risk out of the story.
NET/NET: This investment is yet another example of smart strategic buyers
investing in the CLEC space and is a very positive for WCII, allowing
WCII to be fully funded to 2003. We reiterate our Buy and raise our
target to $86. |
