Description

NII Holdings, which was formerly named Nextel International, is the first investment idea in over a year that I have found worth posting.

NII Holdings was incorporated in 1996 as a wholly-owned subsidiary of Nextel Communications (NXTL) to hold all of NXTL’s international wireless assets. Between 1996 and 2002, NXTL invested over $500 mil in NII and bondholders invested an additional $2 bil in the company to finance the build-out of NII’s wireless network.

Struggling under the weight of its massive debt load, the company decided not to pay a coupon due to bondholders on February 1, 2002 and the company then filed for bankruptcy in Delaware on May 24, 2002. In the ensuing months, the company and its advisors (Houlihan Lokey and Bingham Dana) worked with creditors on a plan of reorganization and on November 12, 2002, NII Holdings emerged from Chapter 11 with a substantially de-leveraged capital structure.

The following are the main arguments for investing in the company now:

1. Under-researched, neglected equity – Having just emerged from bankruptcy, NII’s shares began trading on the OTC Bulletin Board a few days ago. There are no equity analysts following the situation. Much of the financial detail is buried in hundred-plus pages of disclosure statements and plan documents.

2. Low valuation – The company’s enterprise value is 2.8 x current annualized EBITDA. The valuation isn’t easily discerned from the public filings so I will post the details in a follow-up post.

3. Spectrum rights – Spectrum rights are a source of “moat” much like cable TV franchise rights or broadcast radio license rights. NII owns the rights to spectrum in the 800 MHz region in Brazil, Mexico, Argentina and Peru.

4. Differentiated wireless offering – NII offers all of the wireless calling features that traditional wireless operators offer. However, NII offers the DirectConnect feature that its competitors do not (and cannot without expensive network overhauls). DirectConnect is a walkie-talkie-like function on Nextel phones that provides an instant connection to other users in one’s designated calling group. For example, field supervisors can simultaneously convey work order changes to multiple field agents using DirectConnect. This DirectConnect feature has two primary benefits: (1) it is a service which is preferred by many business users (such as the above field agents) which tend to generate higher average revenue per user than traditional wireless users and (2) once users get set up into a calling group, there is a natural reinforcement against switching to other carriers (the field agent that leaves Nextel in the above example would cut himself off from DirectConnect messages from others in his workgroup). Indeed, all of the Nextel companies have shown higher ARPU and lower churn rates than the traditional wireless carriers over a sustained period of time.

5. Capital structure has been fixed – NII’s plan of reorganization converted $2.4 bil of bonds into equity. In addition, several credit facilities paid down and a $100 mil Argentina facility was settled for $5 mil.

6. Public comps trade at higher prices. While I’m not a fan of comparable company analysis, it’s worth noting that investors are willing to pay 6.9x 2003 EBITDA for NXTL’s equity and over 10x for Nextel Partners’ equity (NXTP). The average of the traditional wireless carriers is 6.7x. (Note that I am using 2003 EBITDA for the peers but current run rate in calculating the multiple for NII). If NII were to trade at a 5x EBITDA multiple, the stock price would be $28.10.

7. Non-core assets not included in valuation -- In addition to the 1.2 million subscribers it has in its 4 primary markets (Brazil, Mexico, Peru, and Argentina), NII owns wireless assets in Chile and the Philippines. The latter two do not contribute to cash flow and NII is in the process of selling its Philippine stake.

8. Strategic importance to Nextel Communications. NXTL customers are able to roam on to NII’s international network. As an indicator of how important this is to NXTL (particularly in the adjacent Mexico regions), NXTL agreed during the bankruptcy to pay $50 mil to NII to ensure the build-out of certain regions in NII’s territories. NXTL has also made an additional investment in the reorganized NII. NXTL now owns 36% of the common stock of NII.

Catalyst

1. Emergence from bankruptcy.
2. Eventual move off of the bulletin board onto Nasdaq should raise the profile of NII. Investors in NXTL and NXTP will start to notice NII.
3. Valuation will normalize to 5.0x EBITDA from 2.8x EBITDA currently. NII would trade at $28.10 if it were to achieve a 5.0x EBITDA multiple.