Subject: [NEXTEL-1] Goldman Slams Nextel-SPECTRUM SWAP APPROVAL LIKELY TO SEE FURTHER DELAYS AND UNCERTAINTY.

From: Marcel <[email-masked]>
Date: Thu, 08 May 2003 14:46:27 -0400

Tell it like it is Frankie!

* Over the past week several new submissions to the docket have appeared, offering
seemingly viable
   alternatives to the NXTL proposal. The most credible and important, in our view, was
filed by
   Motorola (MOT)

* We have concerns, and have heard concerns raised at the FCC, that
   the $850mn NXTL has proposed to solve the problem may not be adequate.

* PTT COMPETITION IS IMMINENT AND HIGHLY LIKELY TO AFFECT NXTL'S GROWTH
   OPPORTUNITIES.

* VERIZON'S ENTRY HAS TO HAVE AN IMPACT.
--------------------------------------------------
Analyst Comment
Stock rating: Underperform
Coverage view: Neutral
Large-Cap Value
Price: US$13.82
May 8, 2003
United States
Nextel Communications (NXTL)
Telecom Wireless
Downgrading to Underperform; catalyst is
MOT proposal.

We are downgrading Nextel Communications (NXTL) shares to Underperform/Neutral
from In-Line/Neutral based on negative news flow in coming months, creating an
unattractive risk/reward situation. NXTL mgmt continues to execute extremely well in a
tough segment. Yet developments in two areas, the spectrum swap and push-to-talk
competition, are likely to create news flow that will overwhelm investor focus on recent
strong execution. Specifically, we believe the mkt will increasingly focus on the
imminence of push to talk competition in the June/July time frame from both VZ and
PCS. And, Motorola's submission yesterday to the FCC of an alternative to NXTL's
proposed spectrum swap, will likely raise concerns about delays in this action, or perhaps

no action at all. Our valuation analysis suggests full value in the stock in the $13 to
$14
range, reflecting limited upside. Considering the importance of these two potentially
negative issues, we think the stock can fall below this range for a sustained period until

uncertainty associated with these issues is resolved.

INCREASING UNCERTAINTY SURROUNDING SPECTRUM SWAP RAISES RISK.

Over the next several months the FCC has the option of accepting NXTL's spectrum swap
proposal or delaying a decision for an indefinite period of time. We believe it will
delay,
as it continues its cautious approach to approving a sweeping solution, and as it
encourages others to submit proposals to deal with interference issues. A delay is not
necessarily bad for NXTL operationally in the short term, but it does raise the perceived
risk of the NXTL proposal ever getting adopted. We believe the stock has been discounting
approval of the NXTL proposal this summer, thus a delay is likely to create disappointment
and
weakness in the stocks. Last night Motorola submitted a proposal to the FCC which argues
that
technical advances Motorola expects can eliminate interference in the majority of cases
around the
country. While the MOT proposal doesn't seem to answer all the issues concerning
interference, at
minimum it would seem to provide support for those at the FCC who would rather study the
issue
longer, than make a decision sooner.

EXPECT PTT COMPETITION TO SLOW GROWTH, HURT MARGINS.

We expect to see competing push to talk ('PTT') offerings in the market from Sprint PCS
and Verizon Wireless early this summer. We expect other carriers, including AT&T Wireless,

will follow with offerings in the late 2003 to early 2004 timeframe. Demonstrations we
have
seen from a couple of potential vendors exhibit minimal degrees of latency, which we
expect
will be acceptable for many - though possibly not all - users. The introduction of a
competing
PTT product won't likely impact NXTL's traditional base of existing customers in the near
term.
But, we think it will immediately impact its growth opportunity into new market segments.
Verizon's huge advertising budget, its industry leading position, its mind-share with
consumers
as the highest quality provider, is likely to give it strength going into the PTT market
segment.
Some have argued that CDMA operators won't have an equivalent product to NXTL's Direct
Connect.
This isn't the issue. If the CDMA offering can be similar enough, at a lower cost,
it is likely to rob NXTL of growth opportunities in new market
segments, raise customer acquisition costs, and potentially impact churn.

VALUATION AT HIGH END OF FAIR VALUE RANGE.

Our approach to valuation of U.S. wireless stocks has been first to compare them to
foreign peers, and second to test them against a DCF analysis. On the first, given the
superior fundamentals of leading foreign wireless names, our view is that U.S. carriers
should trade at material discounts. Currently NXTL trades at a premium to its U.S. comps
across each valuation metric. And, versus foreign peers it's at a minor discount to most.
NXTL's EV/EBITDA multiple for '03-'05 is as follows: 6.4x, 5.8x, 5.5x. Vodafone, the gold
standard of wireless, is as follows:7.1x, 6.3x, 5.6x. Using a DCF analysis, which has been
a less reliable predictor of wireless stock values due to the uncertainty of long term
assumptions, we get a full value in the $13 to $14 range. In either case, the upside seems
capped, and near term news flow would seem to have the ability of pushing the stock
towards recent lows in the $11 to $12 range.

SPECTRUM SWAP APPROVAL LIKELY TO SEE FURTHER DELAYS AND UNCERTAINTY.

 To be clear, the NXTL spectrum swap proposal (also referred to as the
'consensus plan') is broadly viewed by most important parties as extremely thorough,
sophisticated
and well researched, and it has received support from many significant users in the 800
MHz band,
including from many public safety agencies. However, there is caution at the FCC to
approve such a
sweeping proposal on an all or nothing basis, including delivering a swath of new spectrum
on a
national basis to a single carrier. This caution has bred delays and a search for
alternative solutions
to the interference issue.

Over the past week several new submissions to the docket have appeared, offering seemingly
viable
alternatives to the NXTL proposal. The most credible and important, in our view, was filed
by
Motorola (MOT) and proposes that advances in receiver technology that MOT expects to be
commercially available later this year would likely alleviate a majority of the
interference being
experienced through best practices and new technical solutions. This approach limits the
disruption
to the small number of locations where interference is actually occurring and so is much
easier to
implement.

At the very least, we feel the risk to NXTL has gone up because there had previously been
little
organized resistance to its proposal, making its proposal's acceptance seem almost 'in the
bag.' We
understand that FCC staff is actively encouraging alternative solutions to be submitted,
which again,
at minimum creates more opportunities for delays.

So, how to assess the NXTL proposal vis-à-vis the recent proposal from MOT? Keeping in
mind we
are not making an assessment on 02-55 proposals from an engineer's perspective, we feel
the FCC's
decision making criteria will look for a proposal that is (1) technically practical; (2)
able to be
implemented from a funding perspective; and (3) in the public interest. All current
proposals would
appear to be in the public interest simply due to the fact they address the public safety
interference
issue. We address concerns regarding points 1 and 2, below.

*** TO POINT 1 - TECHNICAL PRACTICALITY.

There is concern at the FCC and among some critics that NXTL's proposal is too extreme
given
the interference problems occur on only a small fraction of the public safety systems
deployed.
(Of course these systems tend to be the largest, with the greatest population, so their
importance shouldn't be dismissed.) The recent submission by MOTestimates a total of only
59
unique 'issues' of interference on the over two thousand public safety
systems deployed in the 800 MHz band, and these are spread over the past three years.

*** TO POINT 2 - FUNDING.

We have concerns, and have heard concerns raised at the FCC, that
the $850mn NXTL has proposed to solve the problem may not be adequate. Given the solution
NXTL's proposes is technically complex and expected to take at least three years to
implement, the
risk of higher costs certainly exist. Some at the FCC are concerned that NXTL's proposal
may be
left unfinished if the money runs out.

We feel these concerns pose a greater impediment to NXTL's proposal under recently
installed FCC
wireless bureau chief, John Muleta, because he is likely to take more of an engineering
approach to
solving the interference problem. We expect his review of the proposal, and potential
requests for
additional data on the extent of the interference problem, and why alternatives to NXTL's
proposal
would be inadequate, will delay the decision process at least until later in 2003.

The operational downside for NXTL in not getting the spectrum swap over the long run may
be that
it will have a harder time reducing network costs on a go-forward basis. It may also
necessitate an
upgrade to CDMA sooner than we now expect (2005-2006 timeframe). In addition, it may
require
that additional investments be made in acquiring spectrum, because efficiencies expected
from
having contiguous spectrum and a clean slice of spectrum at 1.9 GHz, are no longer
possible.
Finally, from a perception standpoint, there has been the view that if NXTL gets the
additional
spectrum it would become a more attractive take-over candidate. Thus, concern about this
occurring, is likely to alter this perception.

PTT COMPETITION IS IMMINENT AND HIGHLY LIKELY TO AFFECT NXTL'S GROWTH
OPPORTUNITIES.

New push to talk offerings are not likely to be identical to NXTL's either in the
way they work or to whom they are sold. But, they are likely to be marketed in a way that
obscures
the differences, and interferes with NXTL's growth in the mass market. From all
indications,
NXTL's traditional users are wedded to its service and will remain loyal to the company
for a good
long time. However, increasingly NXTL's growth is being driven by entry into new markets,
where
alternative services that are similar, cheaper, and perhaps more broadly available, will
seem
appealing. Thus, in our view, the risk to NXTL here is not cannibalization of its base,
but rather
interference with its growth into new markets. This is likely to raise costs, pressure
ARPU, and
increase churn.

***VERIZON'S ENTRY HAS TO HAVE AN IMPACT.

Verizon is now the 800 pound gorilla in wireless. It has had few missteps in recent
periods.
We don't think it will misstep with its entry into the push to talk field. All indications
are
that its expected entry in June/July is progressing on time.

Expectations are that it will enter the market with handsets from both Nokia and Samsung,
with
push to talk activated through a soft-key feature. In addition, distribution is expected
to be at least
partially facilitated through free-standing kiosks in hardware/homeware mass- merchants
addressing
the small contractor segment. At minimum, the advertising push that Verizon is likely to
employ,
will slow down the decision making process of customers that might have been planning on
going
to NXTL. Realistically, it will take a healthy part of this growth. Sprint's entry in the
same time
frame will only add to the challenges in this market segment.

***LATENCY A FOCUS, BUT NOT THE ONLY ISSUE. The criticism of most push-to- talk
alternatives to the NXTL Direct Connect service, is that there is both a delay in the
connect time,
and a latency in the voice delivery. Our experience with alternatives in demonstration
situations,
suggest to us that both forms of latency will be tolerable to the mass market, especially
if the service
is a cheaper version of NXTL's. Latency is a more serious issue for customers conditioned
to the
instantaneous nature of the Direct Connect. And more important in a business setting where
there
may be a need for continuous back-and-forth exchanges. However in the consumer market, and

probably in many small business situations this is not as much an issue. Thus, our
expectation is that
the service that VZ and FON will introduce this summer will successfully ap
peal to their target audience.

***A BASE OF LOYAL CUSTOMERS, BUT AN EFFECT NONETHELESS. Most of NXTL's
core base of enterprise and government users will not churn to competing carriers, even if

competing solutions exhibit minimal to no latency, because of high switching costs, and
satisfaction
with the service. Not only will larger groups of users need to switch out multiple
handsets if they
change carriers but the value added from being part of a large group of NXTL users (e.g.
being an
electrician in Boston tapped into the Boston electrician's network) will be lost. Being
able to retain
this core group of enterprise and government users is likely to lessen the impact on churn
and
ARPU of competing products. However, largely because we expect alternative suppliers to
eat into
NXTL's growth opportunity, we expect its net additions in 2004 to drop to 1.1mn from 1.9mn
in
2003. For the industry overall we show a decline in net additions of only 3.6% in 2004. We
also
expect churn to rise to 2.5% in 2004 from 2.2% for 2003, due both to competition on PTT
and from
wireless local number portability (WLNP.) On the cost side, we expect significant
increases in
customer acquisition and retention costs, again due both to WLNP and PTT. As a result, we
show
EBITDA growth in 2004 of only 4.2%, to $4.0bn, and show EBITDA margins contracting to 39%
in 2004 from 41% in 2003.

NXTL'S TRACK RECORD OF SUPERIOR EXECUTION WILL FACE NEW OUTSIDE
CHALLENGES.

Despite our downgrade, we still hold the view that NXTL management continues
to demonstrate strong execution in a challenging operating environment. Consistency in
performance and ability to meet expectations have been the hallmark of this company,
supporting
its premium valuation. Within the context of its traditional market segment, and within
the realm of
operations where outside influences are unchanged, we don't expect any erosion in this
sound
execution. Now, however, new influences are coming to bear on the business, and some of
the
factors affecting operations are outside of the control of management (i.e. government
action/inaction on the spectrum swap, and new competition.) This may represent the
inflection point
in the story, making NXTL more similar to its U.S. wireless peers, which have been so
negatively
impacted by industry factors outside of their individual control. While NXTL's embedded
base of
business may be insulated from these influences, its new opportunities are likely to be
defined by
these factors. And since stock prices move based on the incremental factors, we believe at
this point
there is more risk on the downside, than opportunity on the upside.

Read the rest of the details here:

Goldman Slams Nextel-050803.pdf