Subject: [NEXTEL-1] Smith Barney- Jumps On the "Plan Scam" Bandwagon and Body Slams Nextel

From: Marcel <[email-masked]>
Date: Thu, 08 May 2003 16:36:16 -0400

Like I said once Wall Street gets it-

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* We put the odds on NXTL receiving the “clean” PCS spectrum below 50%.

* Motorola’s proposed strategy to use technical fixes to reduce public safety interference
could
   become a viable competitor to Nextel’s “Consensus Plan.”

* We recommend investors continue to wait for a better entry point into the stock to
better balance theriskreward
    scenario.

* Motorola’s proposed strategy may provide an alternative to the consensus plan with
potentially a lower cost,less
   disruption to existing users, faster deployment schedule, and easier implementation.

* Motorola’s proposed strategy to fix the problems with technical enhancements may
  delay a decision on the Consensus Plan.

* We find Nextel is still susceptible to the industry risks of slowing subscriber growth
and
   pricing competition.

* Nextel also uses a proprietary technology on SMR spectrum, which may
   increase the expense of a possible “3G” migration.

* Nextel faces possible competition to its Direct Connect product from competing carriers
who have
   announced plans to offer a “push-to-talk” product.

=====================================================================================

United States
NEXTEL Communications
(NXTL)
NXTL: Motorola Challenges the "Consensus
Plan", Fair Value Remains $14/Shr.
2S (In-line, Speculative)
Mkt Cap: $14,856.5 mil.
May 8, 2003
WIRELESS SERVICES
Michael Rollins, CFA
Thomas P. Vincent
Michael Nelson

SUMMARY

 The FCC published a letter on 5/6 sent to the Commission from Motorola,
which proposes to use technical fixes to reduce public safety interference,
rather than the spectrum swap proposed by Nextel’s “Consensus Plan.”
Three take-aways: 1) MOT continues to work on interference problems with
new technology; 2) Letter may provide alternative to the Consensus Plan with
potentially a lower cost, less disruption, faster deployment, and easier
implementation; and 3) Letter may delay a decision on the Consensus Plan.

We believe it is too early to determine whether or not NXTL will receive
“clean spectrum” in a swap; FCC has yet to provide an indication on the issue.
We put the odds on NXTL receiving the “clean” PCS spectrum below 50%.

Still view fair value for NXTL at $14, and recommend waiting for a better
entry pt. Maint. In-Line (2S) within Underweight sector. Catalysts remain
weighted to 2H/03, while competitive conditions weigh on sub. economics.

FUNDAMENTALS

P/E (12/03E).............................. 15.9x
P/E (12/04E).............................. 14.5x
TEV/EBITDA (12/03E) ................ 6.4x
TEV/EBITDA (12/04E) ................ 6.0x
Book Value/Share (12/03E)........ NA
Price/Book Value ........................ NA
Dividend/Yield (12/03E)... NA/NA
Revenue (12/03E) ............ $9,378.0 mil.
Proj. Long-Term EPS Growth ...... NA
ROE (12/03E) ............................ NA
Long-Term Debt to Capital(a)...... NA
NXTL is in the S&P 500® Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (5/7/03) ............................... $13.82 Current
Rating............................... 2S
52-Week Range...... $15.61-$2.78 Prior Rating..................................... 2S
Shares Outstanding(a) .................. 1,075.0 mil. Current Target
Price...................... $14.00
Convertible ........................................ No Previous Target
Price....................... $14.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/02A Actual ($0.14)A $0.06A $0.14A $0.21A $0.27A
12/03E Current $0.21A $0.24E $0.25E $0.17E $0.87E
Previous $0.21A $0.24E $0.25E $0.17E $0.87E
12/04E Current NA NA NA NA $0.95E
Previous NA NA NA NA $0.95E
12/05E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/03E $0.91; 12/04E $1.23; 12/05E $1.48

OPINION

The FCC published a letter on 5/6 sent to the Commission from Motorola, addressing ways
to resolve interference for public safety operations in the 800MHz band. Specifically,
Motorola indicated in a letter to the FCC that the company continues to work to overcome
the interference challenges through advances in receiver technology and increased signal
strength for public safety systems. Motorola believes that technical advances in receiver
design are commercially viable and will have limited impact on the cost of portable public

safety equipment. The company expects to deploy the receiver technology advancements by
the end of 2003.

Motorola’s proposed strategy to use technical fixes to reduce public safety interference
could
become a viable competitor to Nextel’s “Consensus Plan.” The benefits to Nextel of its
“Consensus Plan” rest with the ability to create two contiguous bands of spectrum with one

at the 800 MHz level and the other at the PCS spectrum level (1.9-2.1 GHz). To the extent
the “Consensus Plan” (explained below) is not chosen by the FCC, we would expect
Nextel’s spectrum position to change from the existing 700/800/900 MHz bands.
We would highlight the following three take-aways:

1) MOT continues to work on
interference problems in the Public Safety spectrum band and is testing new advanced
technology to solve these challenges;

2) Motorola’s proposed strategy may provide an
alternative to the consensus plan with potentially a lower cost, less disruption to
existing
users, faster deployment schedule, and easier implementation; and

3) Suggestion to fix the problems with technical enhancements may delay a decision on
the Consensus Plan. We still believe it is too early to determine whether or not Nextel
will receive “clean spectrum” in aswap as the FCC has yet to provide an indication on the
issue,
but we view Motorola’sefforts to alleviate interference through technical enhancements
as an incremental negative.

We now put the odds on Nextel receiving the “clean” PCS spectrum below 50%.

We continue to believe fair value for Nextel is $14 per share and believe potential
catalysts
to support our target price remain weighted towards the second-half of the year,
including:
1) the pending launch of nationwide Direct Connect and

2) sales of the 6:1 vocoder handsets to plant the seeds for future improvement to network
capacity.
Meanwhile, we believe thecompetitive conditions within the sector could weigh on Nextel’s
subscriber economics,
especially as it continues its growth into the consumer segment, where pricing has
intensified and competing Push-To-Talk solutions are on the horizon. We recommend
investors continue to wait for a better entry point into the stock to better balance the
riskreward
scenario. The stock is trading at a premium to its peers at 6.4x ’03 EBITDA versus
the group average of around 6 times.

TAKE-AWAYS FROM MOTOROLA’S LETTER TO THE FCC:

Motorola continues to work to overcome interference in the 800MHz Public Safety
band and is currently testing new advanced technology – Motorola’s letter to the FCC
indicates that the company continues to work on addressing the interference problem in
the Public Safety band. Motorola believes the problem can be overcome through
technical enhancements and best practices, rather than through a swap of spectrum.
Specifically, Motorola believes that technical advances the company has made in receiver
design are commercially viable, and would have limited impact on the cost of portable
public safety equipment. The company plans to deploy the receiver technology
advancements by the end of 2003. The technical section of the letter indicates that
Motorola has recently begun field-testing of the solution. The company indicated that
current results are largely qualitative, but highlighted that it is in the process of
developing more quantitative test information. Motorola is dedicated to moving forward
aggressively to quicken commercial availability and plans to begin beta testing products
with customers as early as May 2003.

Motorola’s proposed strategy may provide an alternative to the consensus plan with
potentially a lower cost, less disruption to existing users, faster deployment
schedule, and easier implementation – While we recognize the difficulties in judging
the viability of Motorola’s technical solution, given the early phase of development, we
believe the solution could offer a significantly more economic alternative to Public
Safety providers. Maybe even more importantly, a technical fix to the public safety
interference problem would be easier to implement and most likely less disruptive to the
operations of public safety providers. Motorola explained that adopting a best practices
approach may be more effective to fix interference problems as the number of reported
customer issues were small at only 5 filed complaints in 1Q/03 (23 during 2002) relative
to the 2,139 public safety systems within the band. Net-net, a solution that has a lower
cost and avoids the disruption to all-users from a spectrum swap is a compelling
proposition, which is worthy of consideration.

 Motorola’s proposed strategy to fix the problems with technical enhancements may
delay a decision on the Consensus Plan – We believe Motorola’s letter will slow down
the process to rule on the consensus plan as more data will likely be needed to fully
evaluate the merits of Motorola’s recommendations. We had expected a decision in
either late –2Q, but more likely 3Q. We believe the exploration of technical solutions
will make a decision unlikely until at least the third quarter, although we recognize the
FCC is very focused on solving the interference problems for public safety users.

BACKGROUND ON NEXTEL’S CONSENSUS PLAN FOR THE PUBLIC SAFETY SPECTRUM SWAP

Nextel submitted a "Consensus Plan", in August 2002, to realign the spectrum in the 800
MHz Land Mobile Radio Band to principally 1) mitigate public safety interference; and 2)
increase the spectrum available for public safety use. The revised plan (12/24/02) would
create a 16 MHz contiguous block of spectrum for Nextel in the 800 MHz band and calls for
the FCC to swap Nextel’s remaining 700/900/800 spectrum position for a 5 MHz x 2 (i.e. 10
MHz in total) contiguous spectrum block in the 1.9 MHz band. Under Nextel’s plan, the
company would still need to contribute $850 million to relocate public safety over the
relocation period, potentially reimburse some entities for previous Microwave relocation
activities, and absorb transition costs to reconfigure its own 800 MHz spectrum position.

VALUATION

Our valuation analysis for Nextel is based upon an asset valuation analysis. We take a
target
EBITDA multiple of around 6.5x on our 2003 estimate of $3.85 billion to arrive at a $25.03

billion enterprise value. Our 6.5x multiple is within the range of 5-6.5x '03 EBITDA that
wireless stocks have been trading. We believe Nextel warrants a multiple on the higher end

of the range due to the company’s above average growth prospects. We add an additional
$263 million for the net value of other investments, NOLs, and reversal of capital leases.

Subtracting net debt of $10.2 billion under company guidance; we arrive at an implied
equity
value of around $15.1 billion. Fully diluted shares are now around 1.121 billion that
result
in an equity value of around $14 per share.
Other Inv. Value 4.5x 5.5x 6.5x 7.5x 8.5x

0 $6.38 $9.82 $13.25 $16.69 $20.12
500 $6.83 $10.26 $13.70 $17.13 $20.57
750 $7.05 $10.49 $13.92 $17.35 $20.79
1,000 $7.28 $10.71 $14.14 $17.58 $21.01
1,250 $7.50 $10.93 $14.37 $17.80 $21.23

EBITDA Multiple

2003 Target Price Sensitvity Analysis
The DCF analysis supports our $14 target price and assumes a terminal value of 6.0 times
estimated operating cash flow in 2007, which is consistent with the multiples we use for
other wireless carriers with similar growth profiles. We use a WACC of 10% over the
fiveyear
model horizon.

RISKS

Risks to the stock achieving our valuation target include the following:
We find Nextel is still susceptible to the industry risks of slowing subscriber growth and

pricing competition. Financial leverage is also a risk for Nextel, but the company has
made
substantial strides to improve its financial liquidity with better operating results and
reductions in capital spending. Over time, we expect Nextel’s ARPU to decline as it
represents a substantial premium to the industry average. We believe the risk to ARPU is
greatest once minutes of use plateau. MOUs in 4Q continue to grow 9% yoy and surprise to
the upside. Nextel also uses a proprietary technology on SMR spectrum, which may
increase the expense of a possible “3G” migration. Our business case for Nextel is based
solely on the current capabilities of its national packet data network. In addition,
Nextel
faces possible competition to its Direct Connect product from competing carriers who have
announced plans to offer a “push-to-talk” product. Also, Nextel’s shares could be
adversely
affected if the company is not successful in achieving its proposed Public Safety Spectrum

Swap with the FCC.