Subject: [NEXTEL-1] Barrons- Real Danger Ahead for Nextel

From: [email-masked]
Date: Sun, 25 May 2003 18:39:30 -0400

The real danger is the coming competitive pressures
(the focus of a January Barron's Online story).
Verizon Wireless and Sprint PCS are racing to
introduce walkie-talkie services by July. AT&T Wireless
plans to introduce its service in 2004.

----------------------------------------------------
MONDAY, MAY 26, 2003

Juicy Target
Three big rivals are eager to take a bite out of Nextel's
walkie-talkie phone monopoly

By JIM MCTAGUE

HOW DO YOU CELEBRATE WHEN your cellphone investment
not only outperforms the market but becomes a role model
for its peers? If you're billionaire Craig McCaw, you take the
money and head for the hills.

In March, McCaw disclosed that he was selling shares of
Reston, Va.-based Nextel Communications, which he helped
found, and that his stake would fall below 5%, the level
needed for him to have guaranteed representation on its
board.

Motorola, another of Nextel's major stockholders, is selling,
too. The electronics maker, which produces most Nextel
handsets and holds the patents on Nextel's walkie-talkie
service, sold 25 million of its 108 million shares in March.
And it has arranged to sell another 25 million to several
banks over the next five years, cutting its holding to less
than 6%.

The sales come just as Sprint PCS, Verizon and AT&T
Wireless are readying walkie-talkie services that will compete
with Nextel, possibly triggering a price war. They also come
after a spectacular rise in Nextel shares, which have jumped
500%, from 2.50 last June to a recent 15, on strong
demand for its service from high-paying business
customers, who've flocked to its phones like ants to a
dropped ice cream cone. The wireless outfit's customer base
swelled from 6.68 million users in 2000 to 10.61 million last
year. And another 1.7 million are expected to sign up in
2003.

The big gains have
aided Nextel bonds,
too, because the
company has used
cash from operations
to trim its heavy debt
load and, it hopes, to
eventually raise the
ratings on its paper
from single-B (a junk
grade) to triple-B (a
low investment grade).
A total of $3.8 billion in
debt has been retired over the past 12 months, leaving it
with a still-staggering $12.5 billion -- $2.6 billion of which is
due in 2007.

But with at least $500 million in free cash flow expected this
year, Nextel should end 2003 with $2.8 billion or more in
cash.

Currently, Nextel is the only company in the world whose
cellphones double as walkie-talkies, providing cheap,
instantaneous contact between employers and their
employees and a 25% profit margin to Nextel.

Trucking companies and building contractors are big fans, as
are public-safety agencies. Some White House employees
wear Nextel phones in hip holsters, so that they can be in
instant touch with their West Wing colleagues.

Business customers pay about $20 more a month for
service than do retail customers. This helped Nextel's earnings to apparently
turnpositive in 2002, after 15 consecutive years of losses. The company reported
net of $1.7 billion, or $1.88 a share, after losing $2.9 billion, or $3.67, in 2001. But
those numbers didn't include a restructuring charge that cut the gain to 27 cents a share,
or other charges that led some analysts to conclude that it had actually lost five
cents a share.

This year, first-quarter results were more encouraging, with net of $208
million, or 20 cents a share, versus a loss of $654 million, or 82 cents, a year earlier.
Nextel predicts  that it will report full-year earnings of at least 75 cents a share. But some
analysts consider that a calculated understatement and are looking for 10 cents to 20
cents more.

The Nextel skeptics think that all the good news is already reflected in the
stock price and that the shares -- which fetched 79.60 in March 2000 at the top of the
telecom bubble -- could wander between $12 and $16 for a while. Goldman Sachs, Bear
Stearns and RBC Capital Markets are among the firms that have reduced their
expectations for the company. They all see it fairly valued at $14 to $16, based on its $25
billion-plus enterprise value (stock-market valuation, plus debt, minus cash and
equivalents) and $4.3 billion cash flow (based on earnings before interest, taxes, depreciation
and amortization). However, the company's ratio of enterprise value to cash flow
certainly doesn't seem outlandish. A recent report by Legg Mason, which is recommending
the stock, puts it at 6.3, a premium to AT&T Wireless's 5.6, but a discount to
Sprint PCS's 6.4.

The real danger is the coming competitive pressures
(the focus of a January Barron's Online story).
Verizon Wireless and Sprint PCS are racing to
introduce walkie-talkie services by July. AT&T Wireless
plans to introduce its service in 2004.

Verizon has deep pockets. And AT&T Wireless's
balance sheet is among the industry's strongest. Both
Verizon and AT&T Wireless score very high in
customer satisfaction surveys by J.D. Power &
Associates, as does Nextel. Sprint PCS, on the other
hand, earns some of the lowest consumer satisfaction
scores and so seems less of a threat.

Nextel CFO Paul Saleh says that the worries about his
company are overblown. He perceives no dark portent
in the recent sales. They weren't votes of
no-confidence, he maintains. McCaw, he says, wanted
to raise cash to invest in other assets. (Barron's
attempts to contact McCaw were unavailing.) And
Motorola, he adds, sold stock to offset some losses
and, under pressure from rating agencies, to raise
cash to strengthen its balance sheet. (In its official
statement about the sales, Motorola said it was selling
stock to take profits and boost its cash position.) As
for the assertions that competing walkie-talkie
services will engender a price war, "I think that they
are over-simplifying," he says.

Nextel walkie-talkie calls, which average 40 seconds in
duration, are nearly instantaneous over 100 miles.
This range will be extended coast to coast by
summer's end, Saleh says. The technology came
naturally to Nextel and Motorola, which cobbled
together a nationwide cellular network by buying the
radio spectrum of dispatch services in major cities.
Duplicating it will be an engineering challenge for the
other providers. The competition is likely to have a
"substantial latency" problem, he asserts, meaning
there could be a nettlesome lag between the time one person sends a message
and the time the other party receives it. Establishing contact could take six seconds
or more. "Six or seven seconds to set up a call of this nature would seem like a
lifetime for a lot of the people we serve," he says.

Rudy Baca, an analyst with the Precursor Group, a telcom research concern in
Washington, D.C., says that other carriers also might have problems with the
walkie-talkie calls interfering with their regular cellular calls.

Ritch Blasi, an AT&T Wireless spokesman, doesn't see it that way. "We are
working with Sony, Nokia, and Siemens," he says. "We won't launch a service that is not
equivalent to what is available today."

In fact, some rating downgrades for Nextel stock were triggered on May 5 by
Jonathan Atkin, an analyst for RBC Capital Markets in Minneapolis. He tested
walkie-talkie software that is less advanced than what will be used by Verizon and Sprint PCS and
reported that the latency problem was no big deal. Furthermore, Verizon plans to market
aggressively in building-supply and home-improvement stores, where plumbers,
electricians and carpenters, who are among Nextel's best customers, shop.
Atkin thinks a lower price could cause some of them to switch.

There's also a wild card here, in that Nextel's basic cellphone service uses a
technology that no other big U.S. wireless carrier employs. Given that, and the company's
hefty debt load, Nextel might have trouble finding a white knight to bail it out
through a merger if things go awry.

Calling Nextel shareholders: This might be one costly fight. Over.

http://online.wsj.com/article_email/0,,SB105373900734487400,00.html?

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