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Technology Stocks : NEXTEL -- Ignore unavailable to you. Want to Upgrade?

To: Richard Chowning who wrote (9144)	5/7/1999 8:28:00 PM
From: SteveG	Read Replies (1) \| Respond to of 10227

CSFB: WCOM: Demise Of Nextel Talks Reflects Mgmt's Financial Discipline CREDIT SUISSE FIRST BOSTON CORPORATION Equity Research Americas Telecom Services/Wireline U.S. Telecom Research Team Frank J. Governali, CFA Kathryn D. Littlefield John D. Doughty Robert Pomeroy STRONG BUY MCI WorldCom (WCOM) Demise of Nextel Talks Reflects WCOM's Strong Bargaining Position and Financial Discipline. Summary Reports that WCOM has terminated merger talks with NXTL because of price is consistent with recent conversation with WCOM's CFO. He was dead set against any deal creating greater than mid-single digit dilution. WCOM's view, which I share, was that there was no other effective bidder for Nextel and therefore if they could not agree on price now, by pushing off any deal the economics would only improve for WorldCom. Our est of the synergies of a merger suggests that if WCOM would announce a deal with Nextel in 12 mos, with a 1/1/01 closing, 2001 dilution could be as low as 5 %, reflecting a benefit of delaying a deal. We're pleased with this apparent outcome, but because of the obvious appeal of wireless wouldn't be surprised to see discussions resume in the future with WorldCom in an even stronger bargaining position. Price Target Mkt.Value 52-Week 05/5/991 (12mo.) Div. Yield (MM) Price Range 89.625 $110 $0 None $172,259.3 $39-94 Annual Prev. Abs. Rel. EV/ EBITDA/ EPS EPS P/E P/E EBITDA Share 12/00E $2.86 31.3X 115% 12.96 $7.68 12/99E 2.00 44.8 158% 16.26 6.12 12/98A 0.82 109.3 317% 24.94 3.99 March June Sept. Dec. FY End 1999E $0.36A $0.44 $0.55 $0.65 DEC. 31 1998A 0.17 0.21 0.21 0.23 1997A 0.00 0.02 0.05 0.08 ROIC (12/98) 5.2% Total Debt (3/99) $19.0BIL Book Value/Share (3/99) $23.41 WACC (12/98) Debt/Total Capital (3/99) 29.7% Common Shares 1,922 EP Trend2 Positive Est. 5-Yr. EPS Growth 30% Est. 5-Yr. Div. Growth NA 1On 05/5/99 DJIA closed at 10955.4 and S&P 500 at 1347.3. 2Economic profit trend. MCI WorldCom is the second-largest long-distance carrier in the United States, the largest Internet service provider, and the largest Competitive Local Exchange Carrier (CLEC). Investment Summary Reports that WorldCom and Nextel have terminated discussions because of price are consistent with our conversations with WorldCom's CFO, Scott Sullivan, a couple of weeks ago. Scott was adamant that there was no deal at this time that was so strategic that WorldCom would be willing to tolerate greater than mid-single digit dilution. WorldCom's view, which we share, was that there was no other effective bidder for Nextel and therefore if they could not agree on price now, by pushing off any deal the economics would only improve for WorldCom. Based on reasonable estimates of synergy, and the prices that have been talked about in the market, it would be a push for WorldCom to do a deal with Nextel for 1/1/2000 closing that would allow mid-single digit dilution. In contrast, it would not be too difficult to hit 5% dilution, for 1/1/2001 closing . The synergy numbers we've used to draw this conclusion would be $150 million in revenue, $175 million in SG&A and COS , $250 million in interest expense, and $250 million in NOLs . Assuming a merger were done at $110 for WorldCom shares, and $45 for NexTel, about 5% dilution results. So, we're pleased with this apparent outcome, and because of the obvious appeal of obtaining a wireless capability, wouldn't be at all surprised to see discussions resume again in the future with WorldCom in an even stronger bargaining position. Trading at the relatively low multiple of 2000 earnings and cash flow that it is at now, WorldCom's stock should produce nice upside potential. It is also worth noting that the company should be able to produce significant increases in ROIC now that it can expand revenues on a slower growing asset base. Data and Internet growth in particular are very high asset turnover businesses, and should help bring the ROIC into the low to mid-teens in the coming years. Our price target of $110 by yearend assumes multiple expansion based on the sustainability of revenue cash flow and earnings growth, combined with expanding returns on capital.