When wireless telecom company Nextel launched a proxy solicitation to ensure bondholder and stockholder consent to expansion plans that would triple the size of the
company, Paul Blalock, executive director of IR, lost a few nights sleep.
Assuming their consent was forthcoming, Nextel would claim the largest footprint of any wireless telecom company in America, covering some 250 mn people – or ‘pops’ in the industry jargon. More importantly, Nextel would potentially have up to a billion dollars of backing from Craig McCaw, one of the world’s top telecom entrepreneurs, to pursue its challenge in the wireless market.
On the other hand, problems in the solicitation process could well have meant the end of a dream. ‘If Nextel did not win consent, the company would not have been able to expand its footprint, and would not have had a short-term capital infusion from McCaw,’ says Christy Phillips, a telecom analyst at Smith Barney, who has followed the saga. ‘Without consent, the company would have been dependent on the market to form a consensus about its business strategy. That would never have happened. And I’m not sure the company would have survived the subsequent fall-out.’
In the end, all went well for Nextel and Blalock in a deal worth over $2 bn in paper. In order to complete its transactions, Nextel issued 109 mn shares (then trading at $15) – bringing the total to 248 mn – with a further tranche expected for a pending merger. Yet, in one of the surprises of this year’s season, the proxies went through totally uncontested.
The surprise was particularly acute for the Street, which had bet heavily against Nextel getting the approvals.
‘We initiated the proxy solicitation process in the midst of having the largest short position of any stock on Nasdaq,’ recalls Blalock, who assumed the Nextel investor relations post in early 1995 after many years as head of IR at BellSouth Corp. In effect, short investors would profit if Nextel went under and the proxies were defeated. But Blalock does note that much of the short position was a function of investors looking to reduce risk in the underlying securities of the merging entities.
‘We came out with a survival plan which included a key investor and changes in technology. The bondholders saw the plan for what it was,’ says Lou Salamone, CFO of Nextel since late 1994 and its former external auditor at Deloitte Touche. ‘In effect, the plan was in everyone’s best interest.’
In the summer of 1995, Nextel completed a series of transactions involving over $2 bn in new shares issued and gave the company the nationwide wireless footprint it was seeking. In the most critical deal, the McCaw Family became Nextel’s largest investor on a fully diluted basis, agreeing to invest up to $1.1 bn over the coming six years.
The McCaw purchase of 25 mn shares gave Nextel a $315 mn cash infusion, leaving McCaw with 25 per cent of the board and a majority on the Operations Committee. Dennis Weibling, president of McCaw’s private holding company Eagle River, is now acting CEO and president of Nextel.
Nextel then used its shares to buy new capacity in the wireless market: it issued nearly 60 mn shares (worth close to $1 bn) to buy Motorola’s nationwide 800 MHz spectrum position, along with related assets and business; 21 mn shares ($350 mn) to buy the SMR spectrum and other assets of OneComm, a provider of mobile services in the Northwest and Rocky Mountain states; and 4.2 mn shares ($65 mn), to buy American Mobile Systems of Florida.
Lastly, in the one deal still pending, Nextel will buy Dial Page, a provider of wireless services in the southern US, for some 26 mn shares worth about $390 mn. The merger was subject to various conditions: stockholder, bondholder and regulatory approvals; consummation of the then pending acquisition of Motorola properties; Nextel’s ability to refinance Dial Page debt if its paging business was not sold by the time of the merger; delivery by Dial Page of specified channels; and satisfaction of covenants related to Dial Page debt.
Following this shopping extravaganza, Nextel has assets of some $7 bn, stockholders’ equity of $3.1 bn, and revenues on nearly $300 mn per year. But the spree isn’t over yet: the company still plans to spend $2 – $3 bn by 1997 on constructing digital cells.
Above all, Nextel needed the approval of junk bondholders, many of whom had seen a billion dollars worth of high-yield debt drop from yields of 93/4 per cent and 111/2 per cent to a high of 22 per cent. As it was, the deep discount structure of the bond precluded anyone receiving interest or principal payments until 1999. These bondholders were asked to waive a debt-to-equity ceiling of 30 per cent so that acquisitions could be made and more high-yield debt piled on the balance sheet from acquired companies, bringing the grand total to $1.8 bn.
‘By the time the Nextel bonds reached 22 per cent, people had lost a fortune,’ says one high-yield analyst from Merrill Lynch, the underwriter of the two Nextel ten-year issues. According to him: ‘Hundreds of millions of dollars were lost and many investors were left holding bonds. It became clear investors were facing risks they were just not being compensated for – the risk of an alliance not following through, or delay in the roll-out of technology.’
Stockholders had to make a major leap of faith as well. The transaction may have looked good on paper, but many shareholders remembered MCI’s letter of intent to invest $1.3 bn and provide marketing assistance to Nextel in 1994. MCI pulled out of that deal. As a result, the stock nosedived from its high of $54 in 1993 to under $10 in February 1995. Now Nextel shareholders were being faced with dilution, although their stock value remained stable, and they had to be wondering whether McCaw would honour his commitment.
‘Rarely has anyone done a bondholder consent solicitation in the middle of major mergers,’ says Salamone. ‘At the start, we were not sure everything would go our way. I guess all the stars were aligned for us that week. Most consent solicitations are adversarial, but in this case we raised the level of dialogue between Nextel and bondholders.
Our goal was to create an atmosphere of cooperation. Yet in the end the full force campaign was not widespread. We were selectively looking for our 51 per cent majority.’
Salamone and Blalock met major investors on both the bond and equity side over the course of the IR campaign. They were supported by David Ying and Colin Knudsen of Donaldson Lufkin & Jenrette, one of the largest underwriters of high-yield bonds, on the bond advisory side. Meanwhile, DF King handled the mechanics of distribution of the solicitation.
To be sure, Blalock needed all the help he could get. He joined Nextel as a one-man IR show at a critical stage in early 1995, since when he has borne all the stresses and strains involved in running a media relations function for one of the most volatile stocks on Wall Street. He took this on after leaving his post as director of IR at BellSouth, which had an IR staff of more than a dozen and a well-oiled communications machine to handle one of the biggest capitalised telecom stocks in America.
To reduce some of the Nextel communications load, Blalock recently added his first support staff. ‘I do not work completely alone, but I am the primary mouthpiece,’ he explains as his Sky Page starts beeping in the background. ‘The story is so complex it is better to centralise explanations to Wall Street. On top of that, there were few investment banks that could do research or commentary. With at least ten transactions going, and an average of two banks per deal, the Street had to stay mum to avoid conflicts of interest. As far as I know, only two analysts publish information on Nextel.’
‘Share and bondholders were willing to approve the transaction to end an era of acquisition,’ says Christy Phillips, one of those two analysts (the other is Jeff Hines at PaineWebber.) ‘Nextel has made the necessary alliances to secure the national footprint and investors were ready to settle down after a period of major acquisitions,’ she adds.
In May 1995, Nextel sent its bondholders a full three inches of solicitation material, requesting their consent to certain waivers of bond indenture covenants, needed before the deals could go through. To implement these, Nextel and Bank of New York entered into two supplemental indentures, relating to Senior Redeemable Discount Notes due 2003 and 2004 respectively.
To sweeten the offer for debtholders, Nextel offered a payment – $10 per $1,000 of principal amount at maturity of the bonds, or 1 per cent of face value – to consenting holders.
For investors to receive this payment, the waivers and amendments had to be approved and had to be operative. Nextel expected to pay $27.2 mn in total for the required consents, and the IR strategy was to bring in over 50 per cent.
High-yield debtholders of OneComm and Dial Call, a subsidiary of Dial Page, also needed to give their consent. OneComm solicited consents from its bondholders to complete its pending merger with Nextel and to facilitate Nextel’s purchase of other entities. In July, OneComm entered into its supplemental indenture with Bank of New York to implement the proposed waivers and amendments relating to the indenture of its Senior Redeemable Discount Notes.
Also in July, Dial Call solicited consents from bondholders, concurrently with Nextel and OneComm, in order to complete the pending merger. Dial Call got the required consent from holders of its Senior Discount Notes due 2005, but not from the holders of its Senior Redeemable Discount Notes due 2004. That meant it had to extend the expiry date for both series. Today, OneComm bondholders are deemed to be Nextel bondholders – the same will hold true for Dial Call holders if that deal goes through.
According to Smith Barney’s Phillips, the bondholders had little choice about giving consent, unless they were wiling to see a bad investment turn sour. ‘What is interesting was that the covenants were only needed for the deals to be consummated; they had nothing to do with operations,’ she adds. ‘In order to close the deals, the company had to be able to add more debt. But due to the stock decline, the debt-to-equity ratio was problematic.
Had the issue been related to an operational issue, such as debt-to-cash-flow ratios, then maybe the solicitation would have been harder to achieve.’
‘I feel exactly like someone who wrote a play and is now going to see it performed,’ Nextel chairman and founder Morgan O’Brien said in a recent interview with Dow Jones News Service. He might have added that even he did not know whether the ending would be happy or sad. Would the brainy entrepreneur become the wireless guru of America? Or would the fall of Nextel be precipitated by intense competition in a crowded sector? O’Brien founded Fleet Call in 1987, changing the name to Nextel in 1993. He noted a ‘value gap’ between prices paid for cellular licences and for radio dispatch systems, which both use the same radio spectrum. So he and his partners quietly began to buy up radio dispatch companies all over the country. O’Brien planned to parlay the radio licences into a network covering 85 per cent of the US population by replacing analog with digital systems.
Later, Motorola and cable giant Comcast supported the vision with equity investments (although Comcast dropped out this year).
By 1991, Fleet Call had received approval to begin construction of digital mobile networks and the company went public in 1992. After that, Nextel had the licences and it was time to start building the digital network. Nextel launched its first service in Los Angeles in 1994. The same year saw it sign a deal to acquire licences owned by Motorola in some 21 states; and the same month brought the MCI billion dollar pull-out, which threw O’Brien and Nextel for a loop.
Even after the MCI hit, Nextel was still seen as a leading provider of integrated wireless communications. The theme is that Nextel customers access the company’s digital services using a single handset enabling instant communication via digital dispatch.
When Nextel issued its high-yield bonds, it was just developing digital SMR units. In 1993 and 1994, Nextel floated $525 mn of high-yield bonds at 111/2 per cent for $300 mn in gross proceeds; and a further $1.1 bn at 93/4 per cent. Both of these ten-year notes behaved like zero coupon bonds during the first five years. In 1999, they accrete to par, and start paying a cash coupon.
The first junk bond transaction was driven largely by an underlying equity capitalisation of several billion dollars. By the time the second deal was completed, market cap had reached $6 bn, and MCI was rumoured to be in the picture. ‘The company had no real cashflow, no revenues – it was a concept company,’ says one top-ranked high-yield analyst. ‘It had licences and the spectrum, but the build-out requirements were substantial and capital requirements heavy.’
‘Things are still rather dicey,’ he goes on. ‘Nextel has fewer subscribers than it should at this point. Though McCaw is in place, it is not clear how successful he will be. The company is going through a transitional period, and debt paper is selling around 15 per cent, so there’s concern about risk not being embedded in the original price of debt.’ Besides that, Nextel’s credit rating of B3 and Triple C has not been changed by the rating agencies.
For his part, Blalock likes to quote the story of his new main shareholder, Craig McCaw, a wireless industry pioneer. At one point, fixed income investors were worried about McCaw bonds. Yet within a few years McCaw was selling out to AT&T for $12 bn, and everyone was walking away with a hugeprofit. As it is, the Nextel bonds have tripled in value in 1995 alone, and it has been a landmark year for all concerned.
