WCII: CBS To Invest In WinStar's Business-To-Business Portal
Bankers Trust Research/BT Alex. Brown Research
Bo Fifer,Jeffrey Hines
April 22, 1999
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WINSTAR COMMUNICATIONS INC. [WCII] "STRONG BUY"
CBS To Invest In WinStar's Business-To-Business Portal
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Date: 04/22/1999 EPS 1998A 1999E 2000E
Price: 46.25 1Q (2.54) (3.76) NE
52-Wk Range: 55 - 10 2Q (2.77) (4.00) NE
Ann Dividend: 0.0 3Q (2.83) (3.60) NE
Ann Div Yld: 0.00% 4Q (3.80) (3.54) NE
Mkt Cap (mm): 3,557 FY(Dec.) (11.96)A (14.90) (10.79)
3-Yr Growth: FY P/EPS NM NM NM
CY EPS (11.96) (14.90) (10.79)
Est. Changed No CY P/EPS NM NM NM
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HIGHLIGHTS:
-- WinStar announced a deal with CBS yesterday (22-Apr) whereby CBS will
take a 33% equity stake in WinStar's business-to-business "virtual
consultant" web portal--Office.com--for $42 million in advertising
over the next 6 years.
-- POSITIVE NEW NEWS: WinStar now has four major components to its data
business: high speed local access on a global basis, long haul
transport over a tier 1 backbone in the top 60 US markets, web
consulting/hosting/design, and content (including WinStar New Media
and Office.com). CBS brings extensive reach in TV, radio, and print
media advertising that should help generate the awareness Office.com
that is crucial to the success of a portal. CBS also marks the third
major corporate partner to validate or endorse the WinStar network,
after Lucent and Williams in late 1998.
-- STOCK PRICE PERFORMANCE: YTD, WCII is up 19% versus a 59% gain in our
CLEC Index and an 11% gain in the S&P 500.
-- NET-NET: We believe the results of Office.com are already "baked" into
our model for 1999 and 2000 from a cost and capital perspective, with
relatively modest revenue upside possible depending on the success of
Office.com. Hence, we are not changing our operating model at this
time. Significant upside, however, could be realized if WinStar were
to monetize its original $14 million investment in Office.com through
an IPO or other public spin. Virtually any public valuation is likely
to place a higher value on Office.com than the $126M valuation implied
by the CBS deal. Management has indicated its desire to monetize this
asset.
--VALUATION: Based on our 10-year DCF, using a 20% equity discount rate and
a 10x terminating multiple, our 12-month price objective on WCII is
$62/share.
DETAILS:
WinStar announced a deal with CBS yesterday (22-Apr) whereby CBS will take
a 33% equity stake in WinStar's business-to-business "virtual consultant"
web portal--Office.com--for $42 million in advertising over the next 6
years.
"Triple Threat"
WinStar has developed a clear position as a dominant player in three areas-
-local, long distance, and data:
1) Global Broadband Local Access. WinStar's "Wireless Fiber" network
provides high-speed local access in the last mile in 30 top domestic
markets (45 by YE 1999) and plans to reach the top 50 global markets within
5 years.
2) Wide Area Connectivity. Through its recent deal with Williams, WinStar
"owns" up to 6 strands of fiber connecting nearly all of its target US
markets.
3) Data Services and Content. In addition to high speed data and Internet
access, WinStar offers web hosting, web design, and web consulting
services, as well as several strategic content sources such as Telebase and
Office.com.
WinStar is putting together all of the pieces that it believes its target
small/medium businesses need to grow their business in a bundled set of
services.
Data Is A Growing Part Of The WinStar Story
WinStar's data services consist of four key parts, which, in aggregate,
have achieved a $100M revenue run rate as of March 1999.
1) High speed local access on a global basis
2) Long haul transport over a tier 1 backbone in the top 60 US markets
3) Web consulting/hosting/design
4) Content (including WinStar New Media and Office.com)
While this morning's announcement directly relates to WinStar's content
effort, we expect the company to use Office.com as a calling card (or
resume) for selling new services to existing clients. WinStar's sales
force will be able to take the Office.com example to clients and offer them
similar services and expertise to either start a presence on the Web or
leverage an existing effort.
What Is Office.com?
Office.com is a virtual consultant, through which users can access
information on industry events, suppliers, professional services--basically
any information that a business would need access to can be found through
Office.com. The target market, small/medium businesses, can find
everything from computer help to accounting services to legal advice to
where to go to find capital. Office.com is positioned as a business-to-
business communications tool that offers one-stop shopping for all of a
small/medium business's business needs.
One More Validation Of The WinStar Strategy
Over the past six months, WinStar has received some important endorsements
of its wireless network and strategy. In October 1998, Lucent stepped up
to the plate with a $2 billion facility for equipment at rates of around 8%
at a time when some of WinStar's public debt was yielding approximately
18%, and with a discount on pricing and the ability to go outside of Lucent
with 30% of that facility for equipment purchases.
In December, telecom wholesaler Williams Communications agreed to buy 2% of
WinStar's capacity for $400 million in a deal that gave William's customers
a broadband connection to their end users.
And now CBS has expanded its Internet holdings (which include
hollywood.com, storerunner.com, sportsline.com, and marketwatch.com) to
include WinStar's Office.com.
More Strategic Value Than Operating Upside
We believe the results of Office.com are already "baked" into our model for
1999 and 2000 from a cost and capital perspective, with relatively modest
revenue upside possible depending on the success of Office.com. Hence, we
are not changing our operating model at this time. Since WinStar already
owns high-capacity web hosting and access facilities, the major cost would
have been in advertising to build the awareness of the Office.com portal,
which now falls on CBS' capable shoulders.
Significant upside, however, could be realized if WinStar were to monetize
its original $14 million investment in Office.com through an IPO or other
public spin. Virtually any public valuation is likely to place a higher
value on Office.com than the $126M valuation implied by the CBS deal, and
management has indicated its desire to monetize this asset.
We are not prepared to forecast a public value for Office.com, however,
pending a more detailed discussion with management. The effects will be,
we believe, quite positive and represent yet more "gravy" to the WinStar
model.
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