News: Analysis & Commentary: TELECOMMUNICATIONS
McCAW IS GETTING A LOT MORE THAN A CHUNK OF NEXTEL
What a bargain. On Apr. 5, wireless-phone magnate Craig O. McCaw agreed to pay $12.25 a share for 9.4% of Nextel Communications Inc. That's not only a fraction of the $54 Nextel stock fetched in October, 1993; it's even below the $13.25 at which Nextel closed the day before the deal. If he likes the company, McCaw can exercise options to acquire up to 44 million more shares at prices that top out at $21.50 in six years. Says Steven R. Yanis, senior telecom analyst at Oppenheimer & Co.: "The company just has to be mildly successful and he makes a fortune."
McCaw's sweet deal is likely to infuriate Nextel's long-suffering shareholders--some of whom filed a class action on Mar. 10 accusing company executives of insider trading and making false and misleading statements about their technology. Nextel executives say the suit is without merit. But McCaw's purchase, which could be worth up to $1.1 billion, reflects this reality: Nextel badly needs McCaw, both for his money and for his strategic savvy.
Until a year ago, Nextel could do little wrong, stitching together an impressive nationwide network of radio-dispatch services for fleets of trucks, vans, and taxis. Then came a huge miscalculation, in the guise of a tentative deal by MCI Communications Corp. to pay $1.36 billion for a 17% stake in the company. The goal: To transform Nextel into a system rivaling the big cellular phone companies. But Nextel's network wasn't up to challenging the cellular operators. In August, MCI backed out, deciding it would cost too much to bring Nextel's phone quality up to the expectations of cellular customers. Nextel's stock plunged (chart).
"OUT OF FAVOR." Now, McCaw's cash injection bails Nextel out of a mess. The company needs hundreds of millions of dollars to finish building its national digital network. And it has fallen below the equity-to-total-capitalization test of its bond covenants, limiting its ability to buy the radio dispatch operations it needs from Motorola Inc. and others.
Beyond that, McCaw likely will help guide a company that has some major strengths: national digital coverage and an established customer base. "What you have is a company out of favor with nearly everybody and nearly written off--which still has a viable business case. And, without question, it is substantially underpriced," says Herschel Shosteck, president of Herschel Shosteck Associates Ltd., a market researcher.
McCaw, who will head a newly formed "operations committee," plans to return Nextel to its roots in two-way radio, a nearly 20 million-person market, while working to expand into white-collar sectors such as law firms. Where Nextel has an advantage over cellular, he says, is in permitting instant communication among members of a predefined work group. Within this "group" mode, all customers have to do is press the talk button and talk--no dialing required. That's suited, McCaw says, for "stream-of-consciousness" communications--say, the fast-paced back-and-forth that comes in the throes of closing a deal. It's no coincidence that Nextel Communicators were employed in the all-night session where the terms of McCaw's investment were thrashed out.
It's a splashy return to the spotlight for McCaw, who seemed outmatched in the recent auctions for airwaves for personal communications services (PCS). At the end of the action, McCaw, despite active bidding, came away without any licenses. He says now that he "couldn't have been happier with the outcome," since in bidding on a variety of properties, he made sure that no potential competitor got a better deal than AT&T, of which his family acquired 3% from its sale of McCaw Cellular Communications Inc. last year. Says McCaw: "Licenses should go for fair value, and if they weren't, they should go to me."
His Nextel deal has little to do with PCS, McCaw says. Analysts agree: Nextel has been down that path before, with disastrous results. McCaw simply is buying into Nextel at the right time, and at a price that leaves him with assets for other opportunities. "I view myself as flexible," McCaw says. Expect to hear more from the wizard of wireless.By Peter Coy in New York, with Kathy Rebello in San Francisco and Mark Lewyn in Washington