From The Wall Street Urinal:
(bold emphasizes how stupid i think it would be for a fine company like WCOM, with the highest projected EPS growth of any company in the S&P 500, to buy a money losing dog like NXTL)
Dow Jones Newswires -- April 6, 1999
Reported Talks Between MCI WorldCom, Nextel Greeted Warily
By Shawn Young
NEW YORK (Dow Jones)--The fact that MCI WorldCom Inc. (WCOM) and Nextel
Communications Inc. (NXTL) are reportedly having preliminary discussions about a merger isn't
making investors rush to place bets that a deal is near.
Preliminary talks between the nation's No. 2 long-distance carrier and Nextel, a nationwide wireless
phone company that serves business, were reported in The Wall Street Journal on Tuesday. The
article said there is no agreement on key terms, including price, and cited sources familiar with the
talks who put the odds of a deal at no more than 50-50.
Officials at Nextel, McLean, Va., and MCI WorldCom, Jackson, Miss., declined to comment on the
report.
For the moment, the reported 50% risk that WorldCom won't buy Nextel outweighs for many
shareholders the possibility that their Nextel stock, which has already been bouyed by takeover
rumors, will be worth much more in a buyout, said ABN AMRO Inc. analyst Kevin Roe.
Shares of Nextel recently were up a modest 3/8, or 0.9%, to 40 on Nasdaq volume of 11.1 million,
more than twice the daily average.
Investors apparently are confident that talks about a deal, which would cut into MCI WorldCom
earnings, are occurring. MCI WorldCom shares recently were down 3 3/8, or 3.6%, to 89 1/16 as
Nasdaq volume neared the daily average of 12.6 million.
In recent months there have been repeated rounds of rumors that a deal was in the wings between the
companies.
The strategic logic of such a combination is evident. MCI WorldCom is virtually alone among the
nation's top phone companies in not having a substantial wireless business. Some industry experts feel
it cannot long leave that strategic gap unfilled.
But a deal with Nextel would heavily damage MCI WorldCom's earnings, which MCI WorldCom
Chief Executive Bernard J. Ebbers has resisted.
"They have a lot of alternatives and a fair amount of time," said Lehman Brothers Inc. analyst Blake
Bath. "WorldCom needs to have wireless in its quiver in the next five years, but I don't think they
really need it for the next three years.
"I think they likely will wait for a better opportunity," Bath said.
Others see Nextel as virtually the only near-term opportunity for MCI WorldCom to pick up a truly
coherent wireless offering in a single, clean deal.
If MCI WorldCom doesn't buy Nextel, but wants to get into wireless, its alternatives could include
building its own wireless network, buying up Omnipoint Corp. (OMPT) and a handful of
technologically related companies or waiting until the time is ripe to buy one of Nextel's rivals.
If it waited two or more years for regulatory and legal roadblocks to dissolve, MCI WorldCom might
be able to buy one of the Baby Bells, which all have extensive wireless operations. It might also be
able to buy Sprint PCS Group (PCS), which is the wireless unit of Sprint Corp. (FON), or even the
combined Vodafone Group PLC (VOD) and AirTouch Communications Inc. (ATI), which are
merging.
All these options are expensive and all except a deal with a Baby Bell probably would cut into MCI
WorldCom's earnings at least temporarily, analysts said.
Most of them were skeptical about a report in Business Week that MCI WorldCom was looking at
buying the paging company Skytel Communications Inc. (SKYT). The price might be attractive, they
said, but a deal for a paging company wouldn't really give MCI WorldCom the weapons it needs to
compete with Sprint or AT&T Corp. (T).
MCI WorldCom said in January that it considered making a bid for AirTouch before that company
agreed to merge with Vodafone. The disclosure that MCI WorldCom considered a bid was widely
regarded as an acknowledgement by the company that it will have to move into wireless. That, in
turn, fed speculation about Nextel.
Assuming MCI WorldCom had to account for the acquisition of Nextel as a purchase, the deal
would cut projected earnings for 2000 by 25% to $2.10 from $2.80, according to a report by Merrill
Lynch & Co. analyst Daniel Reingold. The report assumes a price of 42 a share for Nextel, which the
firm's wireless analysts expect will post a loss of $1.4 billion in 2000.
In 1998, the company lost $1.8 billion, or $6.46 a share, on revenue of $1.9 billion. It has about 3
million customers.
Buying it would be dilutive to MCI WorldCom because of the losses, which are tied to the
tremendous cost of building wireless networks and businesses. Nextel's capital spending has been a
source of concern even for analysts and investors who are used to monstrous capital-spending
numbers. At the end of the fourth quarter, one analyst forecast capital spending for Nextel in 1999 at
$1.6 billion.
MCI WorldCom could be daunted by the losses and capital expenses, or by Nextel's valuation.
Earlier, shares hit a 52-week high of 42 1/2, surpassing the previous mark of 40 that was reached
March 30. That gave the company a market capitalization of nearly $12 billion. Nextel has long-term
debt of about $7.7 billion.
Analysts' estimates of the fair takeout price for Nextel range widely from "starts with a 3" to "north of
50," with most in the 40s.
Among the Nextel bulls is BT Alex. Brown Inc. analyst Jeffrey Hines, who said buying Nextel would
bring MCI WorldCom a precious asset both domestically and internationally. Nextel is expanding in
Latin America and Asia as it grows a domestic network that covers about 70% of the country.
A takeout at $46 to $48 a share would be far cheaper than the AirTouch offer MCI WorldCom
considered, said Cynthia Motz, an analyst at Credit Suisse First Boston Corp.
"AirTouch and Vodafone getting together have raised the stakes around the world," she said. A series
of patchwork acquisitions wouldn't bring MCI WorldCom the same reach it can get with Nextel, she
said.
Merrill Lynch estimated that despite the initial dilution, buying Nextel would enhance earnings growth
by 30% to 38% in five years and leave the value of MCI WorldCom's shares intact.
Experts seem to regard it as a given that MCI WorldCom will have to get into wireless. The question
they are debating is whether Nextel is the gold-plated opportunity or just one of several expensive
alternatives.
- Shawn Young; 201-938-5248; shawn.young@.dowjones.com |
