Wall Street is cautiously optimistic about Craig McCaw’s ability to work wireless wonders for Nextel Communications Inc., whose quest to convert radio dispatch systems around the country into one nationwide digital network has been fraught with technical, financial and legal problems in recent years.
Despite the setbacks, telecommunications analysts say the combination of a $1.1 billion investment in Nextel by the McCaw family over the next six years and Craig McCaw’s cellular experience should go a long way toward putting the Rutherford, N.J., firm back in the good graces of the financial community.
“I think all is right in the world of ESMR (enhanced specialized mobile radio) again,” said Jeff Hines, an analyst at PaineWebber Inc.
For starters, noted Hines, the McCaws’ initial cash infusion of $14.9 million, coupled with another $300 million upon the transaction’s closing this summer, helps reduce Nextel’s capital risk in light of the additional $700 million to $1 billion needed to complete the company’s plans to build a nationwide digital wireless network over the next several years.
Moreover, the McCaw investment should help Nextel get bondholder consent to complete pending acquisitions of SMR properties owned by Motorola Inc., OneComm Corp., Dial Page Inc. and American Mobile Systems Inc. Currently, Nextel’s debt-to-total capitalization is 48 percent, higher than the 30 percent permitted under bondholder covenants.
But having written off the consumer cellular telephone market and restricted itself to the much smaller two-way radio dispatch business, analysts also are leery of whether Nextel can sign up enough digital customers-who will generate monthly revenues far below that of cellular subscribers-to support a firm with a market capitalization of more than $4 billion.
Given that, other questions remain on Wall Street: Can Nextel investors get a fair return? What exactly is Nextel’s business? How should the company now be valued?
Nextel, which was founded in 1987 and went public five years later, reported losses of $9.6 million in 1993 and $56 million last year.
Furthermore, analysts emphasize that failure to work out technical glitches in integrated digital wireless technology developed by Motorola Inc. for Nextel spells only further trouble for an already embattled company.
As such, analysts are scrubbing the numbers and reviewing Nextel’s valuation in light of the McCaw deal and the strategic shift in corporate direction to the “mobile work force,” both blue and white collar alike.
“I think the key issue for them is their ability to improve their quality and to establish distribution,” said David Freedman, an analyst at Bear, Stearns & Co.
Today, there are 1.8 million SMR dispatch radio units in operation. That number is expected to more than double by 1999. Overall, there is said to be nearly 20 million two-way radio users and many millions more who get data, text messaging and mobile telephone service on different devices. Nextel has attempted to blend all those capabilities into one radio.
“People today who have not yet imagined how to apply these technologies will also recognize they can communicate in a way they never thought they could from a business productivity standpoint,” said McCaw, who will hold a very influential position at Nextel as head of its newly created operations committee.
The McCaws could eventually become the largest shareholders in Nextel, with a 23.5 percent stake in the firm. Craig McCaw, 45, is the largest single shareholder in AT&T Corp., following the $11.5 billion sale last year of McCaw Cellular Communications Inc.-the biggest U.S. cellular operator-to the long-distance telephone giant.
One analyst, who agreed to speak on background, said McCaw withdrew from the broadband personal communications services auction when he couldn’t find any under-valued properties and took interest in Nextel because its stock is selling low. The analyst described McCaw as an arbitrageur, who is getting the national wireless footprint he always wanted at a good price and in a market sector with little competition.
Motorola, which was in line to be the largest shareholder in Nextel, will reduce its equity position in the wireless firm to about 20 percent by selling 4 million common shares to McCaw for $49 million and by giving McCaw options on an additional 9 million shares. Comcast Corp. holds an 11 percent share in Nextel.
The technology originally developed exclusively for Nextel changed its name from Motorola Integrated Radio System, or MIRS, to Integrated Dispatch Enhanced Network, or iDEN, and will be licensed to other vendors. The move, part of the McCaw-Nextel-Motorola package and intended to spur equipment competition, is going over well on Wall Street.
“Essentially, they’re doing the things we thought they needed to do,” said Jan Klein, an analyst at Dean Witter Reynolds Inc.
Despite problems with Nextel radios, which some say still sound muffled and “tinny,” Motorola is making software upgrades to improve service quality and make it commercially acceptable.
Today, most of Nextel’s 323,500 mobile radios use analog technology. Some 19,000 digital units are in use in California, New York and Chicago, with more than 11,000 digital radios in backlog.
If all pending acquisitions close, Nextel will have 750,000 mobile radios-mostly analog-in service. Nextel’s challenge is to convert analog customers to digital.
Nextel shares got a predictable-albeit temporary-boost from the April 5 McCaw announcement, closing at $16.63 that day and leveling off a week later at around $15. The stock soared into the mid-$50 range in fall 1993, but has since dropped to the low- to mid-teens as a result of technical snags and MCI Communications Corp.’s withdrawal of a planned $1.3 billion investment last August. MCI would have given Nextel the powerful distribution arm it still lacks.
The sharp decline in the stock’s price and the firm’s failure to deliver on its promise to be competitive with cellular, has prompted a class action lawsuit by several shareholders. An effort is underway to consolidate that case with several other shareholder suits against Nextel.
Though it will dominate the radio dispatch market with close to nationwide coverage by the end of 1996, Nextel could face competition in some locales from Geotek Communications Inc. Geotek, based in Montvale, N.J., plans to offer integrated digital radio services for commercial fleet management and mobile work groups in 36 markets by mid-1997.
Unlike Nextel, which uses a cellular-like architecture of multiple, low-power transmitters to achieve greater channel capacity through channel reuse, Geotek relies on a different digital technology called Frequency Hopping Multiple Access that also is spectrum efficient but requires a single, high-power “macrocell” to cover a geographic area. As such, Geotek’s infrastructure costs are expected to be much lower than Nextel’s.
There could be additional competition for Nextel as well. Landline telephone companies, cellular carriers and PCS licensees are now free to offer radio dispatch services.
The Federal Communications Commission plans to auction blocks of SMR spectrum over the next year or so.
