Subject: [NEXTEL-1] Goldman Sachs On The "Scam Plan"

From: [email-masked]
Date: Mon, 06 Oct 2003 14:17:14 -0400

Goldman Sachs On The "Scam Plan"

We met recently with NXTL and various members of the FCC to discuss the issue of
interference in the 800MHz band. We highlight three key points: (1) There is
evidence the FCC and NXTL are moving away from take-it-or-leave-it positions on
Nextel's consensus plan proposal and are negotiating to find common ground, which
may allow an agreement sometime this winter; (2) the FCC increasingly seems intent
on a re-banding solution, which is central to NXTL's proposal; (3) major
challenges in the negotiation with NXTL appear to include NXTL's proposed spectrum
"trade" of 700, 800 and 900MHz spectrum for spectrum in the 1900MHz band, and how
to insure adequate funding is provided to implement realignment. The process
remains a complex mix of political and technical considerations. Resolution of
this issue is not likely to produce a spectrum windfall for NXTL (which some had
been assuming), but fundamentally it should be perceived as a meaningful positive
development. Maintain U/C on NXTL shares.

EVIDENCE NEGOTIATIONS ARE PROGRESSING. In our recent meetings with NXTL and  the
FCC, we sensed that the consensus proposal is the subject of more active
negotiations. This is a departure from earlier views that the proposal was an
all-or-none package. This is not surprising, because the starting point in  any
negotiation is a "wish list" of demands that over time migrates to a  mutually
agreeable middle ground. In fact, there is evidence such  negotiations have
already occurred with some third parties. For example, the  FCC indicated that
NXTL has agreed to offer better interference protection for  private wireless
licensees who had been concerned they would face more  interference in their new
"guard band" frequency allocation under the  consensus plan. Of course, there are
still some crucial components to  negotiate, such as the 1900MHz spectrum.

SENSE INCREASED FCC SUPPORT FOR A RE-BANDING SOLUTION. Discussions we have
had  with FCC engineers suggest the FCC believes it has two viable technical
solutions for solving
public safety interference: the NXTL-led consensus plan  and the MOT proposal.
Though we sense
the FCC has become apprehensive that the  MOT proposal alone is sufficient to
address the
interference issues. And while  the FCC has indicated in the past that nationwide
800MHz
re-banding seemed  like overkill, it recently highlighted some long-term benefits
of realignment.
For example, that realignment addresses shortcomings of haphazard historical
spectrum allocation decisions, and that it could result in lower costs for  public
safety in the future because it would be less expensive to provision
interoperable radios once different types of users in the band were no longer
interspersed. We expect the FCC will keep the MOT proposal on the table  because
it gives the FCC negotiating leverage with NXTL, but we suspect the  final
decision will look more like the consensus plan than not in regard to  the
realignment process.

EXPECT NXTL WILL BE RESPONSIBLE FOR REALIGNMENT COST OVERRUNS. We feel it  makes
sense for the FCC to require that NXTL fulfill a certain detailed list  of items
necessary to complete the re-banding process, with the understanding  that certain
unforeseen costs would be compensible by the FCC but basic cost  overruns would be
funded by NXTL. This would put the burden on NXTL to insure  that its $850mn
estimate for realignment was realistic and to fund incremental  costs if it was
not. This would create an overhang for NXTL because despite  its best estimates,
the duration and complexity of the re-banding process in  all likelihood makes its
true ultimate cost very hard to estimate. We would  expect the FCC to put certain
caps in place so that NXTL can have certainty  that while its costs may exceed
$850mn that they could not become excessive.

WE SEE THE SPECTRUM "TRADE" AS KEY CHALLENGE TO NXTL'S PLAN. The key challenge  to
the consensus plan is the apparent imbalance in the value between what NXTL
proposes to give up vs. what it would get under the plan. It makes sense for  NXTL
to be compensated for spectrum it forfeits in the realignment. However,  the
government may have a hard time with the apparent imbalance with the  spectrum
it's getting back and that which it is being asked to give up. NXTL  has proposed
swapping spectrum that has a book value of about $2bn in exchange for spectrum
that the public market may estimate at $5bn. Of course,  NXTL also is proposing to
pay $0.85bn for the realignment, though that still  leaves about a $2bn gap. The
FCC's bargaining position includes the fact that  it my argue that it has the
power to order NXTL to solve the interference  problems it causes, on a case by
case basis, on NXTL's own dime. The net of it  all is that both parties want
something, both parties have bargaining  leverage, and both parties now appear to
be in the negotiating phase of the  "dance." A win/win solution has to be achieved
where neither side is unduly  enriched or penalized. A formula summarizing this
situation would have the value of eliminating interference, plus the forfeited
spectrum plus $850  million equaling the value of some amount of spectrum NXTL
would get back at  1900MHz. Playing a role here is the benefit to NXTL of
potentially improving  the efficiency of its network and getting more contiguous
spectrum at 1900  MHz. The FCC needs to factor in the political consequences of
"giving" NXTL spectrum, i.e. it cannot seem like NXTL is getting a windfall
otherwise the  media attention and political fire could kill a deal.

We estimate that the 1900 MHz spectrum that NXTL wants to receive is worth  about
$5bn,
assuming 10MHz, 280mn POPs and a price of $1.80/MHz/POP. We reach  the $1.80 by
assuming a
15% premium to prices paid recently for 1900MHz  spectrum, such as Cingular's
acquisition of
NextWave spectrum. The premium  accounts for the spectrum being allotted in one,
nationwide
block.