WASHINGTON-MCI WorldCom Inc. last week halted talks to buy Nextel Communications Inc. after succumbing to differences over price, putting shares of the No. 2 long-distance telephone company and the last independent national wireless operator on a wild roller-coaster ride for weeks.
Some Wall Street analysts said the timing was not right, and they would not be surprised to see MCI WorldCom and Nextel back together at the negotiating table again in the not-too-distant future.
Others are not so sure, pointing out that Nextel spectrum capacity constraints-which the firm is trying to improve in court and at the Federal Communications Commission-added to its highly leveraged position appeared to have scared away MCI WorldCom.
The existence and precise circumstances surrounding MCI WorldCom-Nextel talks have been clouded by the fact that neither firm officially confirmed negotiations were on or off.
“I don’t think this is dead. I would call it dormant,” said David Freedman, senior managing director at Bear, Stearns & Co. “Neither side needed the deal today so neither side would be overanxious in the negotiations.”
Freedman said Jackson, Miss.-based MCI WorldCom, while in need of a big wireless play to stay on par with rivals AT&T Corp. and Sprint Corp., is performing splendidly with its core long-distance, data and international businesses.
Nextel, of McLean, Va., despite its $8 billion long-term debt largely for buildout and growing losses ($1.8 billion in 1998), continues to produce positive cash flow, owing to steady growth of high-paying business subscribers.
Nextel is the nation’s dominant specialized mobile radio operator, offering dispatch, mobile telephone and data messaging services on handsets made by Motorola Inc.
Nextel has access to capital even if it’s not on par with what it would enjoy with MCI WorldCom’s deep pockets.
From the time the two firms began talking, following MCI WorldCom’s decision earlier this year to stay out of a bidding war for AirTouch Communications Inc., the obstacle that never went away and could not be overcome was MCI WorldCom President Bernard Ebbers’ concern that buying Nextel and its $8 billion long-term debt would dilute profits and earnings that otherwise continue to surpass expectations.
Those fears were reinforced when MCI WorldCom stock took a dive on speculation of a deal with Nextel, which is capitalized at about $11 billion. Wall Street had sent Ebbers a clear and resounding message that it did not think much of a big acquisition, whether it be AirTouch or Nextel, at this time. Vodafone Group plc will pay $62 billion for AirTouch.
In addition, MCI WorldCom is said to have rejected a proposal to put a mechanism in place to compensate shareholders for variations in stock price after the announcement of any deal.
Nextel, according to estimates, would have cost MCI WorldCom between $13 billion and $25 billion.
Nextel bulls said they are optimistic about an MCI WorldCom-Nextel deal a year or so from now. The analysts said the dilution factor will become less of an issue by 2000 and beyond as Nextel’s debt is reduced and MCI WorldCom’s revenues grow.
One analyst who closely tracks Nextel said the emphasis on share dilution that would result from an MCI WorldCom-Nextel arrangement is overstated and that any stock drop that might occur if a deal were done today would narrow in a couple years.
MCI WorldCom reportedly was open to paying for each Nextel share with one-half of a share of its own stock, getting Nextel for about $42.50 a share.
Nextel, with cellular pioneer Craig McCaw and Motorola as major investors, apparently wanted to sell in the mid $40s. Some bullish Wall Street investors believed Nextel could sell to MCI WorldCom in the $50s.
Bears, like Lehman Brothers Inc.’s John Bensche, believe Nextel is overvalued. “It was now or never,” said Bensche.
While Freedman believes Nextel’s McCaw is in the driver’s seat, Bensche says Ebbers has more cards to play.
“I don’t think there was another buyer” for Nextel, said Bensche. On the other hand, Bensche said MCI WorldCom could team up with other digital mobile firms or even make a play for a much larger wireless carrier that already has merged.
Without MCI WorldCom, according to Bensche, Nextel remains a growth company that could attract attention from foreign firms.
