Subject: [NEXTEL-1] Solomon Smith Barney On The "SCAM PLAN"

From: Marcelrf <[email-masked]>
Date: Thu, 25 Mar 2004 11:44:20 -0500

Solomon Smith Barney On The "SCAM PLAN"

3/2004

NEXTEL – Spectrum Swap Proposal Is Likely to Come Down to Cost as FCC
Mulls Options; We estimate $2-3 Billion Cash Cost to Nextel

Implication – The FCC has been reported to be mulling the proposals to
reduce interference within the public safety band. We believe the
viability of Nextel’s plan to swap spectrum and to receive 10 MHz of
clean 1.9 GHz spectrum will ultimately come down to cost. We continue to
estimate a total cash contribution for the swap by Nextel of $2-3
billion.

Part of the incremental cost from the existing consensus plan at $850
million reflects our view that the 700 and 900 MHz spectrum bands will
not be included in the swap. Resolution is still at least 1-2 months
away and speculation of terms will increase with the options currently
being circulated to the FCC Commissioners.

Resolution would be favorable for the long-term ability for Nextel to
evolve its network platform and widen its product offering and target
market. However, we do not believe the Street is fully factoring in the
total costs to Nextel of spectrum and network buildout that we believe
can reach as much as $5 billion. The next step is for the FCC to propose
and vote on an Order that is likely to be presented at one of the next
few Open Meetings. While the FCC does not need the consent or approval
of the interested parties, we believe any proposed Order would try to
achieve a solution that the interested parties can digest. Interested
parties that are not satisfied with an approved Order may ask for
reconsideration after the vote.

We arrive at our $2-3 billion estimate based on 1) $3.6-4.6 billion in
spectrum costs based on historical auction prices on a $/POP/MHz basis;
2) About $1 billion for the value of the existing 2.5 MHz of 800 MHz
spectrum that will be traded-in; and 3) About $150-500 million in
incremental spectrum clearing and relocation costs for the 1.9 GHz
spectrum and 850 MHz bands, respectively. We believe the 700 MHz and 900
MHz bands that have been offered in the consensus plan are likely to be
excluded from the final FCC order. By keeping the 900 MHz band, Nextel
can reduce spectral relocation costs for existing iDEN customers and
provide Nextel with incremental capacity for the iDEN network.

On the investment side of the equation, we believe Nextel will need to
invest a net $2-3 billion in the spectrum plus buildout and incremental
operating costs associated with the transaction. Total cost with a new
network deployment without the incremental operating costs, we believe,
may run up to $5 billion. We estimate a new network deployment using
CDMA or Flarion on the 1.9 GHz spectrum will run in the $1-2 billion
range.

As for the stock, the question is whether or not the stock continues to
take a breather as investors digest the potential cost of these
investments balanced against the potential improvement in its spectrum
position. We believe Nextel’s initiatives to invest in spectrum are
favorable for long-term business opportunity. However, we are still
waiting for a better entry point given the next 1-2 months of questions
over the right cost for the Consensus Plan and 1Q/04 performance that
should be affected by seasonally slower performance relative to the last
three consecutive quarters showing consistent margin improvement. We
forecast a 42% EBITDA margin in 1Q vs. 43%-44% during 2H/03. We maintain
our Hold (2S) rating for NXTL and $30 target price.