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Technology Stocks : Winstar Comm. (WCII) -- Ignore unavailable to you. Want to Upgrade?

To: Steven Bowen who wrote (8885)	10/22/1998 9:44:00 PM
From: SteveG	Read Replies (3) \| Respond to of 12468

Vogel? Haven't heard, but know he's leaving a wealthy man. Yannus has been at NBMO for awhile - Renegar just came onboard. Here's the bulk of Grubman - OCR'd somewhat imprecisely: ================= 10/22/98 WinStar Communication $l9.56, l-S, TGNT $52.00) Jack B. Grubman --OPINION: Lucent and WinStar announced an agreement where Lucent will provide $2 billion of vendor financing ($500 million on LU's balance sheet, the rest syndicated) to WinStar at an interest rate of the lower of LIBOR plus 350 basis points or Prime + 250 basis points. At current tirmolt rates this would mean an 8.5% cost of debt (vs. WCII's current 16.8%). Furthermore, as WinStar meets certain performance goals, the rate will decline to LIBOR plus 2.5% and eventually LIBOR plus 2%. The vendor financing will come in 4 tranches and Lucent will provide, in addition to capital expertise, in building and designing networks and implementing and integrating certain support Systems to get winstar's networks up and running. This move by LU reinforces what we suggested in our conference call on 10/9--that those CLECs that were already well capitalized and already had viable business plans would have no problem in obtaining additional financing via vendor financing, the capital markets or strategic investors- -and we believe that there will be more evidence supporting this over the next several weeks. An interesting wrinkle in this agreement is a "best of breed" position where WinStar hal the opportunity to choose non-Lucent vendors for equipment Lucent does not provide. Up to 35% of the $2 billion of financing can be channeled to non-Lucent suppliers which means WinStar can spend up to $700 million of this funding on equipment such as radios that Lucent does not make. However, if a non-Lucent vendor chooses to OEM their particular product through Lucent that will not count against the 35% non-Lucent threshold. In other words, with a $2 billion umbrella financing and a 35% non-Lucent provision, winstar has all the money it needs to tap all the suppliers available for the entire fleet of network equipment needed to build out its markets. FULLY FINANCED POSITION RAISES WCII's PRICE TARGET Since winstar was currently fully funded through 40 markets with only an extra $300 million required to simply buildout to its target rollout of 50 markets, this financing gives WCII $1.7 billion in surplus capital with which to expand into the more than 50 markets within the U.S., expand outside the U.S. or accelerate business plans within their 50 market footprint. Furthermore, WCII needed, by our estimates, approximately $700 million of additional funding to get to free cash flow positive, thus the LU financing gives WCII over $1 billion of true net liquidity which obviously lowers its risk profile and clearly will help WCII in the marketplace since financial liability will not be an issue for prospective customers. Clearly, this is a massive positive for WCII since it completely eliminates the issue of financing, which, as we wrote in our October 9th First Call note (and subsequent 10/20 report), was not particularly worrisome at any rate given the liquidity WCII currently has, but having it completely eliminated as an issue no doubt will provide a boost to the equity of WCII. In fact, given our very rigorous mathematical approach to calculating discount rates, the fact' that WCII will now have over half of its debt at an 9.5% interest rate will result in a lowering of our discount rate calculation that is behind our previous $37 price target for WCII. Specifically, if we lower wCIS's cost of debt to 12.3% from 16.9% and, to account for surplus funidng, lower WC!I's risk premium used in the cost of equity calculation to 14.7% from 16.9% (text books suggest 8.4%), the resultant discount rate is 19.2%, down from 21.8% with cost of. equity dropping to 24.4% from 25.9%. The impact to WCII's price target is to raise it from *37 to $52 with this price target still implying very high hurdle rates for a company that has zero funding risk. More importantly, the Lucent commitment indicates that Lucent fundamentally believes in the CLEC value proposition in general and in particular clearly believes that fixed wireless, point-to-multipoint is a viable local network alternative which is particularly interesting since Lucent itself really does not manufacture radio equipment. This type of endorsement also belies having a 19% discount rate or 24% cost of equity for WCII. Agreement VALIDATES CLEC STRATEGY & IS AN ENDORSEMENT OF FIXED WIRELESS as we have indicated in the past, if point-to-multipoint fixed wireless proves to be a commercially viable technology- -and we firmly believe this is true--then as much as 60% of the business lines in the U.S. could theoretically be most economically served via fixed wireless technology with 25% most economically served by fiber and 15% most economically served with Bell copper. We believe fixed wireless technology could put as much as 250 mbps of capacity into a building for less than $20,000 or roughly $6 per DS-0 circuit. When accounting for the cost of equipment, radios and hub sites, we believe fixed wireless will be superior to using the Bells for customer line demands greater than 2 T-1s or 48 lines out of a building and will not be surpassed by fiber until there are 400-500 or more subscriber lines in service within a building. Clearly WinStar and Teligent are the only two fixed wireless CLECs with national licenses and enough channel capacity to make a viable business. The bottom line is that Lucent's announcement is a validation of the CLEC strategy in general and most importantly, a very real endorsement of fixed wireless technology in particular. Specifically for WinStar this is nothing short of a grand slam home run (Go Yanks:) since it fully finances them well beyond their current market deployment schedule and is as good a marquee endorsement as one can get while trying to call on customers to provide service over their fixed wireless network. As we said on October 9th when we did our conference call, we felt the CLEC stocks had been oversold and were selling at discounts beyond a going-out-of-business scenario. We also stated then that the CLECs remain good strategic assets with a viable long-term business proposition and clearly Lucent endorses our positive view of this group. We believe this announcement will provide a catalyst for the continuation of what has been a rebound of sorts in the CLECs over the past two weeks. In addition, we expect other positive.announcements within the CLEC space over the course of the next few weeks providing further proof of capital availability as well as some strategic activity. Clearly, we reiterate our bullish stance on the CLECs that we follow and in particular our Buy rating on WinStar. NET/NET: Lucent's move is perhaps the most significant event in the CLEC industry since the acquisitions of MFS, Brooks and Teleport and provides a ringing endorsement for the long term value that is likely to be created on the part of the CLECS. For WinStar, this is the credibility stamp it needed to prove once and for all that a smart technology player clearly believes that point-to-multipoint fixed wireless will be a viable alternative in the local loop competitive arena. ============ I'll see if I can get the other reports put up this weekend. Then again IMO, too much me-too "need to post" blather without any technical or fundamental value. Hope everyone who needs to, finds a therapy group to "share" with.