<..You "guys" are a tough crowd to please..>
True - and I for one greatly appreciate your and Zorro's valuable
participation.
Not sure if Bow is just taking a day or so due diligence "posting
waiver", or if the issue is winding down. Thanks again all for
helping clarify a fairly murky and arcane issue.
And in the spirit of good posts begetting more good posts, I finally
took the time to handscan and OCR (so watch for mis-conversions) Jim
Henry's pretty interesting WCII/WMB/telco comments from last month.
Some here may know Henry's (from BS) respected telco research. He
doesn't (yet) follow WCII (I understand that he and Steve Chrust go
back a ways), but who knows. There have understandably been a LOT of
new analyst attention on WCII. We await any possible comments from
Reingold's (ML) wireless colleague - Mark Kassan. Piper Jaffrey's Sam
May will also very likely initiate coverage in the not too distant
future. Sam has followed WCII closely for a long time since his days
at Pacific Growth Equities. He is a very bright guy who was hired by
PJ to start up and head a wireless division. He's been spending a LOT
of time with cos like ERICY, MOT, and NOK.A, but WCII is clearly on
his radar. And WHO KNOWS when LE's Bath/Garrahan/Stricker will get
green lighted to release their long overdue re-initiation report.
T minus 27 - but we are really skating on thin ice at these levels.
If we don't make it 30 days at this point, I suspect that soon after
Feb's follow-on will see the tape painted with some exciting things -
some small like joel's report, some hopefully more incrementally
significant.
(PS. was it mentioned here that WCII's P-MP demonstration in NY last
Dec was on PCMS radios? As I opined previously, I would be surprised
if LU didn't pick them up. We're trading like it could be soon)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
James H. Henry
BEAR, STEARNS & CO. INC.
12/21/98
Subject: Company Update
Industry: Telecommunications
WinStar Communications, Inc. (WCII-S3E 9/16~NR)
Industry Implications Of The Winstar-Williams wholesale Deal
***Winstar Williams Deal Highlights The Bandwidth Barons' Need
For Local Access.
***we Believe This Deal Portends Additional CLEC-IXC
Partnerships, Potential Mergers.
***Reiterate BUY Rating On The CLEC Gronp As A Uniquely
Positioned Telecora Play.
INVESTMENT VIEWPOINT
WinStar Hosts An Investor Meeting. WinStar Communications, Inc,
hosted its first investor conference on December 17, 1998. The
day included an exhaustive and upbeat review of the company's
operations and business prospects as well as some exciting
contractual news. The company will expand into a total of 110
local markets over the next 5 years, doubling its current
domestic footprint to 60 markets and entering 50 international
markets. During 1999 WinStar will expand into 45 US markets and
6 international markets. Company management calculated that the
expansion would create an incremental $3-$4 billion in value for
shareholders, though it did not disclose the parameters of its
DCF valuation model. However, this expansion will require
investors to stomach $350 million to $400 million in incremental
EBITDA losses over a 3-year period, including approximately $30
million in 4Q98. On the contractual front, WinStar announced
that it had agreed to sell a 25-year indefeasible right-of-use
(IRU) for 2% of the capacity on its wireless broadband network to
Williams Communications for $400 million. In addition, WinStar
agreed to purchase four strands of dark fiber on Williams
Communications' 15,000-mile long distance network in a 7-year
deal valued at $640 million. This pair of deals at once provides
a powerful revenue and EDITDA stream for WinStar, while boosting
its long distance bandwidth and reducing its corresponding
network costs. As positive as this news is for WinStar, we
believe that it is a positive sign for the CLEC industry as a
whole and bears further review.
The "Bandwidth Barons" Need Local Access. we have long been
proponents of the view that the next generation of long distance
carriers will need to own or control the crucial local network
assets - just as their forefathers have - in order to be truly
competitive. We wrote in the July 27. 1998, edition of our
Global Competitive Telecom Weekly, "As new players like Frontier,
IXC, Level 3, Qwest, and Williams spend billions of dollar to
create broadband super-highways, it is important to note that
both customer demand and these carriers' ability to supply such
bandwidth is largely gated by the local loop bottleneck." After
all the business case of each of these players requires not just
market share gains but tremendous growth in the market as well.
We have a hard time understanding how these players will
successfully mass market or provision broadband services such as
high-speed Internet and interactive video conferencing until they
own or control that crucial local loop connection. In addition,
we also believe that the so-called long distance Bandwidth Barons
will be at an economic disadvantage without the local loop
facilities. Consider the fact that WorldCom has a state-of-the-
art 47,000-mile us long distance network, 9,000 route-miles of US
local fiber, and has at least a 10-year head start in loading
traffic onto that network that will afford it attractive
economies of scale. Even with the low transmission cost enabled
by the latest fiber and wave division multiplexing (WDM)
electronics, we suspect some of the new entrants will have an
uphill battle in matching that cost structure. The bottom line
is that we believe that the Bandwidth Barons need local loop
assets in order to achieve their long-term goals for growth and
profitability.
Additional CLEC Partnerships/Acquisitions Are Likely. We believe
that the local access agreement between Williams and WinStar is a
clear indicator that the Bandwidth Barons are starting to
recognize the need for local facilities. Given this announcement
and the escalating competitive environment in the US market, we
believe that additional deals between CLECs and IXCs are likely.
while many of the deals will likely be contractual at first, the
economic and operational logic of owning end-to-end local and
long distance facilities is extremely compelling In addition to
the potential for activity between the Bandwidth Barons and the
CLECs, we believe that the industry giants are likely to make
additional moves. If the economics of an AT&T-TCG combination
truly justify the $12 billion price tag, why wouldn't the company
make additional smaller purchases to eliminate competitors and
fill in the gaps it has in some of the smaller markets. Longer
term we believe that RBOC entry into long distance will pave the
way for out-of-region expansion which will likely involve
wholesale relationships or acquisitions in order to develop truly
national-local capabilities. We also expect to see CLECs looking
for horizontal merger candidates in order to form larger-scale
entities with greater economies of scale. We have seen one major
LEC purchase each year for the past three years and we suspect
that 1999 will follow that trend. The following table outlines
some of the players in the US market and the potential solutions
to their needs for CLEC assets:
Company CLEC Assets Still Missing Potential
Solution
AT&T Teleport CLEC assets in Buy or partner
purchase gave secondary and with GSTX or
AT&T local tertiary ELIX on the
fiber in the markets West Coast,
top 65 US nationwide. ESPI in the
markets. It Alternative Southeast and
has "preferred broadband Southwest, HYPT
provider" access the SOHO on the East
agreements for market. Coast, MCLD in
special access the Midwest,
services with xDSL players
multiple CLECs. for SOHO market
TCI deal gives access.
it local access
to residential
customers.
Bell
Atlantic None CLEC assets in Given SBC's
primary, stated intent
secondary and to enter 30 out-
tertiary of-region
markets markets as a
nationwide. CLEC if its
Ameritech
merger is
approved, we
suspect that
Bell Atlantic
has similar
plans. The
company has a
data deal with
ICIX, and could
clearly
leverage off of
that for other
services.
Frontier Local switches CLEC assets in We would be
and total primary, surprised if
service resale. secondary and Frontier
tertiary stepped up to
markets actually buy a
nationwide. CLEC, but the
company could
clearly be a
strong source
of wholesale
traffic for
many CLECs.
IXC
Comms None CLEC assets in We would be
primary surprised if
secondary and IXC acquired a
tertiary CLEC, but the
markets company could
nationwide. clearly be a
strong source
of wholesale
traffic for
multiple CLECs.
Level 3 Level 3 intends CLEC assets in Time-to-market
to build CLEC primary is key for a
networks in secondary and company with
more than 50 US tertiary lots of cash, a
markets and markets richly valued
interconnect nationwide. stock, and very
those markets few network
with a 15,000- assets in the
mile long ground. The
distance company could
network. buy or partner
with ICIX,
NXLK, MFNX,
ICGX, or Time
Warner Telecom.
MCI MFS, Brooks CLEC assets in Buy or partner
Worldcom Fiber, and secondary & with GSTX or
MCImetro tertiary ELIX on the
purchases gave markets that West Coast,
it local fiber Brooks Fiber ESPI in the
in the top 75 and MOlmetro Southeast and
US markets. It did not cover. Southwest, HYPT
has "preferred Needs broadband on the East
provider" xDSL access to Coast, MCLD in
agreements for the SOHO the Midwest,
special access market. xDSL players
services with for SOHO market
multiple CLECs. access.
Qwest None. Qwest Qwest is Qwest could
Comm has contracted missing the best develop a
with ACST crucial local national CLEC
Network assets that it footprint by
Technologies to needs in order buying or
build 140 route to directly partnering with
miles of fiber, connect to its ICIX, NXLK,
some of which customers on a NFNX, ICGX~ or
may be local. national basis. Time Warner
Telecom, XDSL
pureplays could
offer S0HO
market access.
EPS dilution is
a gating factor
that may be
hard to
overcome in the
near term.
SBC None. SBC said Top 30 out-of- ICIX has the
Comm that it will region markets most overlap
"build, buy, or in the US with its 30
partner" to targeted
develop CLEC markets. Most
operations the other CLBCs
top 30 out of have too much
region markets overlap with
if its its in-region
Ameritech markets.
merger is
approved.
Sprint Limited CLEC Central office Sprint will
assets, Plans collocations, likely
to build xDSL fiber establish
FOPs in 35 Us facilities wholesale
cities during necessary to agreements with
1999 and get broadband multiple CLECs
ultimately services into for fiber and
establish xDSL large business xDSL access to
collocations in customers. customers in
1,600 ILEC order to deploy
central offices its ION
around the network. Could
country. purchase an
xDSL player to
jumpstart its
business plan.
Williams
Comm 2% of WinStar's Fiber-based Contractual
network access in all deals with
capacity on 270 first-tier multiple CLECs
wireless markets and any seem logical,
network hubs access in but purchases
that will be secondary and not likely
built over the tertiary unless Williams
next 3 years. markets. starts to
Deal will directly target
provide access end-users in
to 60 us addition to its
markets. carrier
customers. |
