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Telecommunications
David Lazarus
Dongjun(Donny) Ma
Stock presentationMarch 8, 2005
Outline
• Sector Recap
• SIM holding and performance
• Analysis on stocks
• Candidates in future
• Recommendation
Business Trends
• Deregulation• Price Wars• Oligopolies• M&A (US and International)• Voice over Internet (VoIP) • Wireless Video• MP3/Internet/Camera Phones• Fiber Optic Cable• Video on Demand
Sector Outlook• Market Cap: $360 Billion• Local and Long Distance Phone Services,
Wireless Networks, Internet/Broadband Services, Directory Publishing, Business Services
• Voice over Internet (VoIP) increasing market share
• Industry depends on low interest rates to fuel heavy capital expenditures
Consolidation Continues…
•Consolidation has led to fewer carriers in local phone markets. Soon there will be just 3 or 4 large telecom providers of local phone service.
•Wireless providers are also looking for partners, as large capital expenditures force them to seek economies of scale through acquisitions.
Verizon Communications
• Verizon Communications Inc. is a provider of communications services with four operating segments: Domestic Telecom, Domestic Wireless, Information Services and International
• Domestic Telecom services principally represent Verizon's telephone operations that provide local telephone services in 29 states and the District of Columbia
• Domestic Wireless products and services include wireless voice and data services and equipment sales across the United States
• International segment has wireline and wireless communications operations and investments primarily in the Americas
• 100 Billion Market Cap, $71 Billion in sales• Currently in talks to purchase MCI for $6.7 Billion
Business Segments
Segment InformationVERIZON COMMUNICATIONS CORP (VZ) StockVal ®
FY 2003Business Segment Sales $M Sales % Profits $M Profits %
Domestic Telecom 39,602 58.1% 3,335 47.5%
Domestic Wireless 22,489 33% 1,083 15.4%
Information Services 4,114 6% 1,206 17.2%
International 1,949 2.9% 1,392 19.8%
Total 68,154 100% 7,016 100%
Geographic Segment Sales $M Sales % Profits $M Profits %
Domestic 65,303 96.4%
Other 2,449 3.6%
Total 67,752 100% 100%
Information services is only 6% of sales, yet makes up 17% of profits.
Wireless is 33% of sales and accounts for only 15% of profits!
Price History (5 yr)VERIZON COMMUNICATIONS CORP (VZ)StockVal® PRICE 36.2 DATE 02-25-2005
2000 2001 2002 2003 2004 20052828
3030
3232
3434
3737
40404242
4646
4949
5252
5656
6060
6464
69
74
The Ohio State UniversityFisher College of Business
PRICE MOMENTUM INDEX (OVERBOUGHT/OVERSOLD)-2-2
-1-1
00
+1+1
+2+2
MCI Deal Announced
Verizon vs S&P 100 (3yr)StockVal®
2002 2003 200458
61
64
67
70
73
76
80
84
88
92
96
100
105
110 02/28/02 - 02/28/05
SP1
VZ
TOTAL RETURN COMPARISONFEB 2002 = 100 ANNUAL RATE CUMULATIVE
S&P 100 COMPOSITE INDEX (SP1) +1.2% +3.6%VERIZON COMMUNICATIONS CORP (VZ) -4.4% -12.8%
Verizon Compared to Telecom (3yr)
StockVal®
2002 2003 200454
57
60
63
66
70
74
78
82
86
90
95
100
105 02/28/02 - 02/28/05
S50
VZ
TOTAL RETURN WITH REINVESTMENT COMPARISONFEB 2002 = 100 ANNUAL RATE CUMULATIVE
S&P TELECOM SERVICES SECTOR (S50) -2.7% -7.9%VERIZON COMMUNICATIONS CORP (VZ) -4.4% -12.6%
Verizon Compared to Telecom (2yr)
StockVal®
Q1/03 Q2/03 Q3/03 Q4/03 Q1/04 Q2/04 Q3/04 Q4/04 Q1/0592
96
100
104
108
112
116
121
126
131
136
141
146
152 02/28/03 - 02/28/05
S50
VZ
TOTAL RETURN WITH REINVESTMENT COMPARISONFEB 2003 = 100 ANNUAL RATE CUMULATIVE
S&P TELECOM SERVICES SECTOR (S50) +18.6% +40.6%VERIZON COMMUNICATIONS CORP (VZ) +6.7% +13.7%
Revenue growth and earnings flat…
Income StatementVERIZON COMMUNICATIONS CORP (VZ) StockVal ®
FYE Dec
2003 % Chg 2002 % Chg 2001 % Chg 2000 % Chg 1999
Revenues ($ Mil) 67752.0 1 67304.0 1 66713.0 4 64236.0 11 57823.0
Cost of Goods & Services
Gross Profit
S G & A Expense
R&D Expense
Interest Expense 2797.0 -11 3130.0 -4 3276.0 -6 3490.0 33 2616.0
Pre-Tax Income 4761.0 -24 6258.0 129 2731.0 -85 17819.0 35 13168.0
Taxes 1252.0 -22 1597.0 -26 2147.0 -69 7009.0 44 4872.0
Net Income Reported ($ Mil) 3077.0 -25 4079.0 949 389.0 -97 11797.0 43 8260.0
Net Income Adjusted 7283.0 -14 8449.0 -4 8768.0 4 8463.0 14 7445.0
EPS Reported 1.11 -26 1.49 964 0.14 -97 4.31 45 2.97
EPS Adjusted 2.62 -15 3.08 -4 3.21 4 3.09 15 2.68
Shares Outstanding (Thou) 2789000 2 2745000 1 2730000 0 2737000 -1 2777380
Dividends Common (Per Shr) 1.54 0 1.54 0 1.54 0 1.54 0 1.54
Dividends Preferred ($ Mil) 0.0 0.0 0.0 0.0 0.0
2004: 2.79 2005E: 2.552006E: 2.66
Margins falling…Prospective Growth & Margin Check StockVal ®
VERIZON COMMUNICATIONS CORP (VZ)Price 36.200 02/25/05
Percent Change Actual Year Profit Momentum %
Quarter Revenue REV RPS EARN EPS EPS Ago Margin % SF REV EPS
Mar 03 16,490.0 1 -1 -3 -5 0.69 0.73 11.6 +2 +1 -5
Jun 03 16,829.0 0 -1 -11 -13 0.68 0.78 11.3 0 0 -13
Sep 03 17,155.0 0 -1 -12 -13 0.67 0.77 10.9 +1 0 -14
Dec 03 17,278.0 1 1 -31 -30 0.57 0.82 9.1 0 +1 -35
Mar 04 17,136.0 4 3 -17 -17 0.57 0.69 9.3 0 +4 -18
Jun 04 17,838.0 6 5 -5 -6 0.64 0.68 10.1 +1 +6 -6
Sep 04 18,206.0 6 6 -4 -4 0.64 0.67 9.9 0 +6 -5
Dec 04 18,263.0 6 4 15 12 0.64 0.57 9.9 0 +6 +12
T4Q 71,443.0 5 4 -4 -5 2.49 9.8
Mar 05 E 18,093.5 6 5 6 5 0.60 0.57 9.4 +5 +5
Jun 05 E 18,676.3 5 4 1 0 0.64 0.64 9.7 +5 0
Sep 05 E 19,005.8 4 4 2 2 0.65 0.64 9.7 +4 +2
Dec 05 E 19,147.9 5 5 2 2 0.65 0.64 9.6 +5 +2
F4Q E 74,923.5 5 4 3 2 2.54 9.6
Point-to-Point Growth Rates (%) Long-Term Growth Rate Estimates (%)
Years REV RPS EARN EPS Median Estimate 5.0%
1 5 4 -4 -5 Number of Estimates 10
3 2 1 -7 -8 Standard Deviation 6
5 4 4 -1 -2 Default GRE Estimate 2.0%
10 4 4 3 2 Analyst GRE Estimate 2.0%
15 3 3 4 3
20 4 3 4 3 Expected Report Date 04/27/05
Cash flows uncertain…Cash Flow Analysis
VERIZON COMMUNICATIONS CORP (VZ) StockVal ®
FYE Dec
2003 % Chg 2002 % Chg 2001 % Chg 2000 % Chg 1999
Net Income Reported ($ Mil) 3077.0 -25 4079.0 949 389.0 -97 11797.0 43 8260.0
Accounting Adjustment 4206.0 -4 4370.0 -48 8379.0 -3334.0 -309 -815.0
Net Income Adjusted 7283.0 -14 8449.0 -4 8768.0 4 8463.0 14 7445.0
Depreciation & Amort 13617.0 2 13290.0 -2 13523.0 10 12261.0 24 9890.0
Cash Flow Adjusted 20900.0 -4 21739.0 -2 22291.0 8 20724.0 20 17335.0
Capital Expenditures 11884.0 -9 13061.0 -29 18369.0 4 17633.0 36 13013.0
Free Cash Flow Adjusted 9016.0 4 8678.0 121 3922.0 27 3091.0 -28 4322.0
Dividends Common ($ Mil) 4295.1 2 4227.3 1 4204.2 0 4215.0 -1 4277.2
Free Cash Flow After Dividends 4720.9 6 4450.7 -282.2 75 -1124.0 44.8
Net Cash From Operations 22482.0 2 22099.0 13 19526.0 23 15827.0 -7 17017.0
Net Cash From Investing -12246.0 -80 -6800.0 68 -21324.0 -33 -16055.0 8 -17420.0
Net Cash From Financing -10959.0 26 -14809.0 1973.0 -1048.0 1732.0
Other Cash Flows 0.0 0.0 0.0 0.0 0.0
Change In Cash & Equiv -723.0 490.0 180 175.0 -1276.0 1329.0
Capital expenditures totaled $13.3 billion in 2004, compared with $11.9 billion in 2003. In 2005, overall capital spending is
expected to increase approximately 10 % to $14.6 billion!
And this stock is not cheap…
2003 2004 2005N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
StockVal®
VERIZON COMMUNICATIONS CORP (VZ)First Call FY1 Mean Estimate
PRICE32
34
36
38
40
42 HI 42LO 32ME 37CU 36GR -5.0%
01-03-200302-25-2005
FY1 MEAN ESTIMATE (FYE DEC 2005)2.4
2.5
2.6
2.7
2.8
2.9 HI 2.95 LO 2.43 ME 2.64 CU 2.55 GR -6.3%
01-31-200302-25-2005
FY1 PE RATIO11
12
13
14
15 HI 15.9 LO 11.7 ME 14.1 CU 14.2
01-31-200302-25-2005
On a positive note…
• Dividend yield of 4.36 %• # 2 in US wireless market with 44 million customers• Merger with MCI will increase business-access lines to 18.5
million• Leader in high speed wireless internet and video services• This company is making money, although earnings growth is
expected to be only 2 - 4%• Should be one of the few left standing
DCF AnalysisVZ
(000,000s) FY04 FY03 FY02 FY01 FY00
Net income 3,077 3,509 4,661 590 10,810
Depreciation 13,617 13,617 13,290 13,657 12,261
Capital expenditures (11,884) (11,884) (11,984) (17,371) (17,633)
Free Cash Flow of Firm 5,504$ 5,242$ 5,967$ (3,124)$ 5,438$
DCFTerminal Value 136,937$
Value of VZTotal Value of Equity 95,000$ # of shs outstanding (mill) 2,769 Value of One Share 34.31$
Cost Of EquityBeta 1.00Risk Free Rate (10 yr treasury) 4.24%Mkt Risk Premium 5.19%CAPM = Expected return=R(f)+beta (Mkt Prem) 9.43%# of shs outstanding (000,000's) 2,769 Recent Price (3/4/05) 36.42$ Current Mkt Value of Equity ($ mill) 100,847$
Long term rate of growth 5.20%
Mkt PremiumRecent Price 36.42$ Div/Sh (2004) 1.54$ Long term rate of growth 5.20%K 9.43%Mkt Premium (K-Risk Free Rate) 5.19%
Recommendation
• Reduce
ALLTEL--Stock performance
2001 2002 2003 2004 2005 2006
ALLTEL CORPORATION (AT)PRICE 57.3 DATE 02-25-2005 QR 3.0 NET 4.5%StockVal® EPS Lagged 1-Year
2828
3030
3232
35353737
4040
4343
4646
50505353
5757
6161
66
71
76
The Ohio State UniversityFisher College of Business
THE G-MODEL
IR 3.89 3.89
K 5.11 5.11
K' 0.00 0.00
NE 3.55 3.71PE 16.2 15.5
WPE 15.1 15.1
WP 53 56
AP -7% -2%
Expected Return 1-Yr 0%
First Call Data 2005 2006 2007
Mean Estimate 3.44 3.68 3.80Change +2% +7% +3%
High 3.54 4.02 4.04
Low 3.24 3.34 3.56
Total 24 16 2
# Up 9 6 0
# Down 13 4 0
House Estimate
PE Ratio 16.6 15.6 15.1
2005 3.52
2006 3.682007 3.85
2008 4.02
2009 4.20
2010 4.39
2011 4.59
2012 4.79
Normalized Earnings
FYE December
Alltel --Financial Analysis (1)
Income StatementALLTEL CORPORATION (AT) StockVal ®
FYE Dec
2004 % Chg 2003 % Chg 2002 % Chg 2001 % Chg 2000
Revenues ($ Mil) 8246.1 3 7979.9 12 7112.4 8 6615.8 5 6308.9
Cost of Goods & Services 3449.7 4 3317.1 13 2930.3 8 2707.7
Gross Profit 4796.4 3 4662.8 11 4182.1 7 3908.1
S G & A Expense 1524.2 2 1498.1 16 1297.0 8 1201.1 -12 1369.1
R&D Expense
Interest Expense 369.2 -6 393.8 6 371.0 32 281.6 -1 284.3
Pre-Tax Income 1592.0 4 1534.1 13 1360.3 -17 1631.0 -49 3208.0
Taxes 565.3 -3 580.6 14 510.2 -22 653.0 -51 1325.3
Net Income Reported ($ Mil) 1046.2 -21 1330.1 44 924.3 -13 1067.0 -45 1928.8
Net Income Adjusted 1038.1 9 954.4 5 906.9 -1 913.3 31 699.1
EPS Reported 3.39 -20 4.25 44 2.96 -13 3.40 -44 6.08
EPS Adjusted 3.37 10 3.05 5 2.90 0 2.91 32 2.20
Shares Outstanding (Thou) 308400 -1 312800 0 312300 0 313500 -1 317200
Dividends Common (Per Shr) 1.49 5 1.42 4 1.37 3 1.33 3 1.29
Dividends Preferred ($ Mil) 0.1 0 0.1 0 0.1 0 0.1 0 0.1
• Expansion trend in sales, but slow down in 2004
(Sector is declining)
• Solid operating margin 24%
(Sector is 15% in 2003)
Balance SheetALLTEL CORPORATION (AT) StockVal ®
FYE Dec
2004 % Chg 2003 % Chg 2002 % Chg 2001 % Chg 2000
Cash & Equivalents ($ Mil) 484.9 -26 657.8 389 134.6 58 85.3 27 67.2
Accounts Receivable 912.7 3 890.0 -13 1018.3 -18 1241.2 -3 1273.6
Inventories 156.8 28 122.1 -12 138.5 -15 163.8 -32 239.9
Other Current Assets 62.4 5 59.2 -90 577.1 108 277.5 39 200.0
Total Current Assets 1616.8 -6 1729.1 -7 1868.5 6 1767.8 -1 1780.7
Plant & Equipment Gross 15836.3 6 14909.9 4 14320.1 9 13082.0 8 12113.4
Accumulated Depreciation 8288.2 14 7289.1 8 6756.4 7 6300.7 13 5564.4
Plant & Equipment Net 7548.1 -1 7620.8 1 7563.7 12 6781.3 4 6549.0
Other Long-Term Assets 7438.8 2 7311.2 7 6812.4 72 3951.6 5 3757.5
Total Long-Term Assets 14986.9 0 14932.0 4 14376.1 34 10732.9 4 10306.5
Total Assets 16603.7 0 16661.1 3 16244.6 30 12500.7 3 12087.2
Accounts Payable 448.2 -7 479.8 16 413.7 -21 522.1 -24 688.4
Short-Term Debt 225.0 -19 277.2 -44 494.7 859 51.6 -24 68.3
Other Current Liabilities 787.1 7 735.7 -17 882.3 24 711.4 -6 759.2
Total Current Liabilities 1460.3 -2 1492.7 -17 1790.7 39 1285.1 -15 1515.9
Long-Term Debt 5352.4 -4 5581.2 -9 6145.4 59 3861.5 -16 4611.7
Deferred Income Taxes 1715.1 21 1417.7 27 1115.4 51 738.0 240 217.0
Other Long-Term Liabilities 947.2 -17 1147.3 -4 1195.0 14 1050.3 62 647.2
Total Long-Term Liabilities 8014.7 -2 8146.2 -4 8455.8 50 5649.8 3 5475.9
Total Liabilities 9475.0 -2 9638.9 -6 10246.5 48 6934.9 -1 6991.8
Minority Interest
Preferred Equity 0.3 -25 0.4 0 0.4 0 0.4 -20 0.5
Common Equity 7128.4 2 7021.8 17 5997.7 8 5565.4 9 5094.9
Total Equity 7128.7 2 7022.2 17 5998.1 8 5565.8 9 5095.4
Total Liab & Equity 16603.7 0 16661.1 3 16244.6 30 12500.7 3 12087.2
Alltel --Financial Analysis (2)
• Significant increase in cash since 2003.
• Need at least 1 billion cash to acquire Western.
• Will be less liquid in short-term.
Cash Flow AnalysisALLTEL CORPORATION (AT) StockVal ®
FYE Dec
2004 % Chg 2003 % Chg 2002 % Chg 2001 % Chg 2000
Net Income Reported ($ Mil) 1046.2 -21 1330.1 44 924.3 -13 1067.0 -45 1928.8
Accounting Adjustment -8.1 98 -375.7 -2056 -17.4 89 -153.7 88 -1229.7
Net Income Adjusted 1038.1 9 954.4 5 906.9 -1 913.3 31 699.1
Depreciation & Amort 1299.7 4 1247.7 14 1095.5 1 1082.0 9 988.4
Cash Flow Adjusted 2337.8 6 2202.1 10 2002.4 0 1995.3 18 1687.5
Capital Expenditures 1157.7 -3 1194.4 -2 1213.2 -3 1250.6 7 1164.7
Free Cash Flow Adjusted 1180.1 17 1007.7 28 789.2 6 744.7 42 522.8
Dividends Common ($ Mil) 459.5 3 444.2 4 427.9 3 417.0 2 409.2
Free Cash Flow After Dividends 720.6 28 563.5 56 361.3 10 327.7 188 113.6
Net Cash From Operations 2466.8 0 2474.7 3 2392.2 27 1882.1 26 1496.3
Net Cash From Investing -1258.4 1 -1265.9 72 -4494.6 -953 -427.0 66 -1264.3
Net Cash From Financing -1381.2 -13 -1218.2 2079.5 -1479.5 -707 -183.4
Other Cash Flows -0.1 532.6 465 94.3 91 49.3 4830 1.0
Change In Cash & Equiv -172.9 523.2 633 71.4 187 24.9 -50 49.6
Alltel --Financial Analysis (3)
• Solid operating cash flow in accordance with stable operating income
-- Quality of core earnings
StockVal®ALLTEL CORPORATION (AT) Price 57.32001 2002 2003 2004 2005 2006
PRICE / YEAR-FORWARD EARNINGS12
15
18
21
24
HI 22.5 LO 12.1 ME 16.0 CU 16.5
02-23-200102-25-2005
PRICE / YR-FORWARD EPS ESTS / GRE1
2
3
4
HI 3.4 LO 1.1 ME 1.9 CU 2.5
02-23-200102-25-2005
PRICE / SALES1
2
3
4
HI 3.10 LO 1.73 ME 2.10 CU 2.14
02-23-200102-25-2005
PRICE / CASH FLOW ADJUSTED4
6
8
10
12
HI 11.4 LO 5.8 ME 7.5 CU 7.5
02-23-200102-25-2005
Alltel --Valuation Analysis (Absolute
Multiple)
• P/E, P/S and P/Cash at average position in 4-yr.
• PEG at relatively higher position
StockVal®ALLTEL CORPORATION (AT) Price 57.32001 2002 2003 2004 2005 2006
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd0.3
0.6
0.9
1.2
1.5
HI 1.21 LO 0.55 ME 0.96 CU 1.00
02-23-200102-25-2005
PRICE / YR-FORWARD EPS ESTS / GRE RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50)0.4
0.8
1.2
1.6
2.0
HI 1.61 LO 0.53 ME 0.97 CU 0.92
02-23-200102-25-2005
PRICE / SALES RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd1.0
1.2
1.4
1.6
1.8
HI 1.76 LO 1.09 ME 1.43 CU 1.43
02-23-200102-25-2005
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd1.2
1.4
1.6
1.8
2.0
HI 1.87 LO 1.25 ME 1.43 CU 1.44
02-23-200102-25-2005
Alltel --Valuation Analysis (Relative
Multiple)
• All on average level
• Correctly priced relative to sector
More on Alltel
• On Jan 6, 2005, the company announced to acquire Western Wireless (WWCA)
• This event became major driver of the stock performance in short run
• Deal to be closed in mid-year
8/04 9/04 10/04 11/04 12/04 1/05 2/05 3/05
ALLTEL CORPORATION (AT)PRICE 57.3 DATE 02-25-2005StockVal®
5353
5454
5555
5656
5757
5858
5959
6060
6161
62
63
Volume in Thousands of Shares00
954954
19081908
28622862
38163816
47704770
5724 60 Day Avg. Volume 1,979
8/04 9/04 10/04 11/04 12/04 1/05 2/05 3/05
WESTERN WIRELESS CORPORATION (WWCA)PRICE 39.2 DATE 02-25-2005StockVal®
2424
2626
2828
3030
3232
3434
3636
3838
4040
42
44
Volume in Thousands of Shares00
20002000
40004000
60006000
80008000
1000010000
12000 60 Day Avg. Volume 2,527
After combined• Fifth-largest U.S. wireless company• coverage over one-fourth of the United
States' population• 10 billion revenue• 10 million domestic wireless customers in 33
states customers • 1.6 million international wireless in six
countries • 3 million wireline customers in 15 states.
Detail of the deal
• Purchase price: $ 39.25 per share
0.535 shares of Alltel stock plus $9.25 in cash for each Western share.
• Western shareholders will have an option for all cash or all stock subject to proration.
• Deal to be closed in mid-year
WWCA current price is $ 39.30, with P/E (forward) of 18.28 which is a little bit higher than Alltel’s
Is it a good deal for Alltel?
Western Wireless
2001 2002 2003 2004 2005 2006
WESTERN WIRELESS CORPORATION (WWCA)PRICE 39.2 DATE 02-25-2005StockVal®
11
22
44
66
1010
1616
2828
48
84
The Ohio State UniversityFisher College of Business
Price Change % Diff SP5
1-Day 0.95 0.02
1-Week 1.92 1.04
4-Weeks 4.03 0.89
QTD 33.92 33.97
YTD 33.92 33.97
2004 59.59 50.59
2003 246.42 220.03
2002 -81.24 -57.87 FYE Dec 2003 EPS -0.08
First Call Data 2004 2005 2006
Mean Estimate 1.52 2.13 2.02Change NMN +40% -5%
High 1.65 2.87 2.25
Low 1.46 1.52 1.78
Total 5 9 2
# Up 0 2 1
# Down 4 5 0
House Estimate
PE Ratio 25.8 18.4 19.4
Revenues ($Mil) 1,823
Market Value ($Mil) 3,922
Shares Out (Mil) 100.0
Daily Volume (Thou) 2,527
Daily Volume ($Mil) 99.1
Dividend Estimate None
Payout Ratio
Retention Rate
Dividend Yield
Data Page # 1
$2.5 to $39
1400% return in 2.5 years !!!
Income StatementWESTERN WIRELESS CORPORATION (WWCA) StockVal ®
FYE Dec
2003 % Chg 2002 % Chg 2001 % Chg 2000 % Chg 1999
Revenues ($ Mil) 1501.3 27 1186.6 14 1038.0 24 835.0 33 626.8
Cost of Goods & Services 583.6 22 479.3 23 391.2 74 224.8 37 164.6
Gross Profit 917.7 30 707.3 9 646.8 6 610.1 32 462.2
S G & A Expense 473.0 19 398.4 -4 416.6 41 296.1 35 220.0
R&D Expense
Interest Expense 158.6 1 156.7 -3 161.9 6 152.2 52 100.0
Pre-Tax Income 36.9 -92.1 36 -143.6 65.4 -148.8
Taxes -35.0 123.3 0.0 0.0 0.0
Net Income Reported ($ Mil) -0.3 100 -185.7 -20 -155.1 65.4 -148.8
Net Income Adjusted -9.8 92 -115.1 -2 -113.1 42.8 -48.1
EPS Reported 0.00 -2.35 -19 -1.97 0.81 -1.94
EPS Adjusted -0.12 92 -1.46 -1 -1.44 0.53 -0.63
Shares Outstanding (Thou) 82824 5 78955 0 78625 -2 80303 5 76775
Dividends Common (Per Shr) 0.00 0.00 0.00 0.00 0.00
Dividends Preferred ($ Mil)
• Loss in 2002 and 2001, because of one-time or special charge
• Rapid growth in sales
• Solid operating margin
Western Wireless
Balance SheetWESTERN WIRELESS CORPORATION (WWCA) StockVal ®
FYE Dec
2003 % Chg 2002 % Chg 2001 % Chg 2000 % Chg 1999
Cash & Equivalents ($ Mil) 128.6 106 62.4 38 45.1 94 23.3 -46 42.7
Accounts Receivable 215.8 35 160.0 9 147.3 31 112.1 48 75.8
Inventories 30.2 23 24.5 -28 33.8 96 17.2 78 9.7
Other Current Assets 23.1 -57 53.3 -24 70.4 25 56.1 85 30.3
Total Current Assets 397.7 32 300.2 1 296.5 42 208.7 32 158.6
Plant & Equipment Gross 1834.8 15 1595.0 19 1344.6 42 949.6 59 596.7
Accumulated Depreciation 932.9 26 739.4 42 521.7 42 367.9 62 227.2
Plant & Equipment Net 901.9 5 855.6 4 823.0 41 581.7 57 369.5
Other Long-Term Assets 1222.2 -2 1243.2 -1 1250.9 4 1206.0 46 824.4
Total Long-Term Assets 2124.0 1 2098.8 1 2073.9 16 1787.7 50 1194.0
Total Assets 2521.7 5 2399.0 1 2370.4 19 1996.5 48 1352.6
Accounts Payable 100.7 70 59.4 -27 80.9 314 19.6 64 11.9
Short-Term Debt 47.3 -67 141.9 174 51.7 1734 2.8 0.0
Other Current Liabilities 234.8 12 209.6 -21 266.2 62 164.2 122 73.9
Total Current Liabilities 382.8 -7 410.9 3 398.8 114 186.6 117 85.8
Long-Term Debt 2172.9 -6 2317.1 5 2215.6 15 1926.4 33 1450.0
Deferred Income Taxes 151.0 25 120.7 0.0 0.0 0.0
Other Long-Term Liabilities 39.6 182 14.0 -54 30.2 0.0 0.0
Total Long-Term Liabilities 2363.4 -4 2451.8 9 2245.8 17 1926.4 33 1450.0
Total Liabilities 2746.2 -4 2862.7 8 2644.6 25 2113.0 38 1535.8
Minority Interest 22.1 -3 22.7 -9 25.1 13 22.2 1444 1.4
Preferred Equity
Common Equity -246.6 49 -486.4 -63 -299.3 -116 -138.7 25 -184.7
Total Equity -246.6 49 -486.4 -63 -299.3 -116 -138.7 25 -184.7
Total Liab & Equity 2521.7 5 2399.0 1 2370.4 19 1996.5 48 1352.6
Western Wireless
• Improved in liquidity
Western Wireless Cash Flow Analysis
WESTERN WIRELESS CORPORATION (WWCA) StockVal ®
FYE Dec
2003 % Chg 2002 % Chg 2001 % Chg 2000 % Chg 1999
Net Income Reported ($ Mil) -0.3 100 -185.7 -20 -155.1 65.4 -148.8
Accounting Adjustment -9.4 70.6 68 42.0 -22.6 100.7
Net Income Adjusted -9.8 92 -115.1 -2 -113.1 42.8 -48.1
Depreciation & Amort 276.4 13 244.2 14 214.6 67 128.2 20 106.7
Cash Flow Adjusted 266.6 106 129.2 27 101.5 -41 171.0 192 58.6
Capital Expenditures 250.1 -17 300.4 -21 378.2 44 262.6 56 168.2
Free Cash Flow Adjusted 16.6 -171.3 38 -276.8 -202 -91.5 16 -109.6
Dividends Common ($ Mil) 0.0 0.0 0.0 0.0 0.0
Free Cash Flow After Dividends 16.6 -171.3 38 -276.8 -202 -91.5 16 -109.6
Net Cash From Operations 324.1 122 145.9 100 72.9 -56 167.0 74 95.7
Net Cash From Investing -180.6 41 -304.3 30 -432.9 33 -644.3 -38 -467.1
Net Cash From Financing -84.9 171.7 -55 381.7 -17 457.8 11 412.0
Other Cash Flows 7.6 85 4.1 9999 0.0 0.0 0.0
Change In Cash & Equiv 66.2 281 17.3 -20 21.8 -19.5 40.5
• Solid operating cash in-flow
Western WirelessStockVal®WESTERN WIRELESS CORPORATION (WWCA) Price 39.2
2001 2002 2003 2004 2005 2006
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd0.6
0.9
1.2
1.5
1.8
HI 99.90 +LO 0.74 ME 0.92 CU 1.13
02-23-200102-25-2005
PRICE / YR-FORWARD EPS ESTS / GRE RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50)0
2
4
6
8
HI 99.90 +LO 0.16 ME 0.46 CU 0.48
02-23-200102-25-2005
PRICE / SALES RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd0.0
0.5
1.0
1.5
2.0
HI 1.89 LO 0.12 ME 0.88 CU 1.42
02-23-200102-25-2005
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P TELECOM SERV. SECTOR COMPOSITE A (SP-50) M-Wtd0
1
2
3
4
HI 4.87 LO 0.43 ME 1.31 CU 1.60
02-23-200102-25-2005
• Multiples at relatively higher position
Pro Forma Combined Financial Measures
Western Wireless (Pre-Synergy) OIBDA for the twelve months ended December 31:(Dollars in millions) 2005 2006 Operating income under GAAP* 445.0$ 509.0$ Depreciation and amortization* 292.0 310.0 OIBDA* 737.0$ 819.0$ *-Amounts based on average of Wall Street analyst estimates (Merrill Lynch, Bear Stearns and Lehman Brothers.
Segment OIBDA for the twelve months ended September 30, 2004: Western(Dollars in millions) ALLTEL Wireless Pro Forma % of total Wireless segment income under GAAP 991.7$ 321.3$ 1,313.0$ Depreciation & amortization 720.5 256.1 976.6 Wireless OIBDA 1,712.2 577.4 2,289.6 59.6%
Wireline segment income under GAAP 927.2 - 927.2 Depreciation & amortization 520.5 - 520.5 Wireline OIBDA 1,447.7 - 1,447.7 37.7%
Communications support services segment income under GAAP 66.4 - 66.4 Depreciation & amortization 35.1 - 35.1 Communications support services OIBDA 101.5 - 101.5 2.6% Total Business Segments OIBDA 3,261.4$ 577.4$ 3,838.8$ 100.0%
Adjusted OIBDA for Western Wireless International Operationsfor the nine months ended September 30:(Dollars in millions) 2003 2004 International operations segment income under GAAP (37.2)$ 67.0$ Depreciation and amortization 51.4 66.4 Stock-based compensation, net - 11.3 Adjusted OIBDA for international operations 14.2$ 144.7$
Valuation on Acquisition
• Synergy: Revenue: opportunity to increase penetration;
opportunity to offer high-value service plans; expanded roaming relationships
Operating expenses: corporate overhead; IT operations; network operations; sales and marketing; handset/network purchasing
Operating synergies: $50M-$60M in 2006, $60M-$70M in 2007, and $70M-$80M in 2008
• Special charge for restructuring in 2005• Fair acquisition? Some analysts estimate
that the stand-alone value of WWCA is around $39 per share
Summary on Alltel
• Cost of acquiring Western is close to fair value, at least close to its stand-alone value
• Market over-reacted to this acquisition, but it will take time for the market to get the confidence back
• Restructuring cost in short run, synergy in long run. Less surprise before second quarter of 2006.
• Unlikely to surge before the acquisition is closed—limit potential in 1-year horizon
Recommendation– sell 50%
Look For Other Candidates
Portrait of Targets of acquisition:
• Wireless, long distance business or international business
• Attractive customer base
• Improving (or stable) operating cash flow—solid business operation
• Middle or large market cap.
Look for Potential Targets (1)
330 Public companies in Telecom Service sector
•Market cap >2 billion
•Excluding ADRs
•Not involved large M&As recently
13 companies qualified
•Business Analysis
4 companies
•Financial Analysis
•Detail Business analysis
1 candidate to watch
They are: BCE,CTL,CZN,USM
USM
Look for potential targets (2)Ticker Name Market Cap Sales P/E P/S P/Cash
BLS BellSouth Corporation 46,948.04 20,300.00 13.86 2.35 6.73
BCE BCE Inc. (USA) 22,095.86 15,882.99 18.5 1.38 5.61
TU TELUS Corporation (USA) 10,670.63 6,273.75 23.79 1.68 5.76
RGRogers Communications Inc. (USA) 10,029.79 4,641.05 NA 1.42 6.66
TDS Telephone & Data Systems 4,841.64 3,720.39 117.51 1.33 6.72
CTL CenturyTel, Inc. 4,483.91 2,407.37 13.83 1.95 5.59
CZN Citizens Communications 4,432.90 2,202.04 53.65 1.86 6.24
AMT American Tower Corporation 4,330.61 769.86 NA 5.37 37.5
USMUnited States Cellular Corporation 4,218.55 2,837.62 39.59 1.52 7
TLWT Telewest Global, Inc. 4,044.95 2,430.63 NA 1.67 7.42
NIHD NII Holdings, Inc. 3,934.26 1,174.80 NA 3.54 72.98
CCICrown Castle International Corp. 3,633.36 696.44 NA 5.18 NA
SSI SpectraSite Inc. 2,927.59 337.475 71.95 9.51 22.23
Analysis on USM--Profile
United States Cellular Corporation (USM)Seventh-largest wireless service provider A business unit of Telephone and Data
Systems, Inc. [AMEX: TDS], which owns 82% of the company
4,409,000 customers in 26 states 182 majority-owned wireless licenses CDMA technology
Analysis on USM--Segment
(IN THOUSANDS) 2003 2002 2001
Retail service 1,984,671 1,682,020 1,408,253
Inbound roaming 221,737 255,443 272,361
Long-distance and other 217,381 161,430 145,771
Service Revenues 2,423,789 2,098,893 1,826,385
Equipment sales 158,994 98,693 68,445
Total Operating Revenues
2,582,783 2,197,586 1,897,830
Analysis on USM--Balance sheet
Balance SheetUNITED STATES CELLULAR CORP (USM) StockVal ®
FYE Dec
2003 % Chg 2002 % Chg 2001 % Chg 2000 % Chg 1999
Cash & Equivalents ($ Mil) 9.8 -34 14.9 -49 28.9 -77 124.3 -37 197.8
Accounts Receivable 287.0 -9 315.3 27 247.4 13 219.0 12 195.7
Inventories 71.0 28 55.5 -1 56.0 15 48.8 63 30.0
Other Current Assets 56.3 -17 67.7 -6 71.6 315 17.3 -32 25.3
Total Current Assets 424.1 -6 453.3 12 404.0 -1 409.4 -9 448.8
Plant & Equipment Gross 3441.2 12 3085.6 37 2253.0 25 1801.4 14 1579.3
Accumulated Depreciation 1267.3 20 1051.8 26 833.7 27 655.8 29 508.3
Plant & Equipment Net 2173.9 7 2033.8 43 1419.3 24 1145.6 7 1071.0
Other Long-Term Assets 2325.7 5 2212.8 14 1935.9 -1 1946.2 -3 2014.5
Total Long-Term Assets 4499.5 6 4246.6 27 3355.2 9 3091.8 0 3085.5
Total Assets 4923.6 5 4699.8 25 3759.2 7 3501.2 -1 3534.2
Accounts Payable 285.6 -7 306.9 56 196.8 -7 212.3 44 147.1
Short-Term Debt 108.0 -79 505.2 91 264.0 380 55.0 0.0
Other Current Liabilities 188.3 11 169.1 45 116.4 -11 131.0 64 79.9
Total Current Liabilities 581.9 -41 981.2 70 577.1 45 398.3 75 227.0
Long-Term Debt 1144.3 42 806.5 100 403.2 -10 448.8 -18 546.3
Deferred Income Taxes 443.0 23 359.4 -7 388.3 9 357.8 -11 402.0
Other Long-Term Liabilities 198.1 139 82.7 877 8.5 -82 46.8 8 43.3
Total Long-Term Liabilities 1785.5 43 1248.6 56 799.9 -6 853.3 -14 991.6
Total Liabilities 2367.4 6 2229.7 62 1377.1 10 1251.7 3 1218.6
Minority Interest 60.1 9 55.1 19 46.4 33 34.9 -15 41.0
Preferred Equity
Common Equity 2496.2 3 2415.0 3 2335.7 5 2214.6 -3 2274.6
Total Equity 2496.2 3 2415.0 3 2335.7 5 2214.6 -3 2274.6
Total Liab & Equity 4923.6 5 4699.8 25 3759.2 7 3501.2 -1 3534.2
Need cash!
Analysis on USM--Annual Report
Operating income decreased 58% in 2003 and 11% in 2002. Due to:Loss on impairment of intangible assets
Increased costs of acquiring, serving and retaining U.S. Cellular’s customers,
Ongoing development of the Chicago market Losses on assets held for sale related to the
exchange and sale transactions entered into with AT&T Wireless
Increased costs related to the acquisition of and subsequent brand launch in the Chicago market.
Will TDS SELL USM ?
In 2003, USM contributes to TDS:
• Provides 74.8% of TDS' consolidated revenues
• Provides 52.8% of TDS’ consolidated operating income
Will TDS SELL USM ?
Your industry keeps on consolidating. Would you sell U.S. Cellular?
I’m not the guy that would consider it. The company is heavily owned by TDS, and they would make that decision. As of right now and as far as I know, there is no interest in selling. I’m not advising them to do that. But I’ve worked in industry long enough that I’ve had three companies acquired out from under me. So I know the realities of life. If somebody decides they got an offer they can’t refuse, I’m sure that the TDS board would give it consideration, and so would our board.
--JOHN ROONEY, CEO of USMApril, 2004
Recommendation on Sector• Underweight
• S&P 500: 3.1%• SIM: 4.7%
• Reduce to 2.0%
Recommendation
Sell sector to underweight:
• Sell 50% Alltel
• Sell 50% Verizon
Watch:
• USM
• Nokia