NII Holdings Bare Bones Value Of $9.69 Could Be Much Greater

| About: NII Holdings, (NIHD)

We reiterate our recommendation to go long NII Holdings , Inc. (NASDAQ:NIHD) for its growth and potential asset value opportunities. NIHD has recently completed a $750 million notes offering. The availability of additional cash makes implementation of its refined and focused business plan a matter of implementation.

NIHD recently appointed its Chairman Steven Schindler as CEO who is quoted here:

"I am fully committed to the continued success of NII Holdings and am excited to serve as the company's interim CEO," Shindler said. "In this new role, I will focus my attention on the build-out of our 3G network, high-quality subscriber growth, key financial metrics including revenue and margins, and providing a quality product and superior customer experience, all with the goal of driving success for our customers, our employees and our shareholders. We have a great brand, a tremendous group of fully engaged employees and a loyal customer base that expects the best possible service from us. I am excited to see what we can all accomplish together."

More importantly, the successful $750 million notes offering shows investor confidence for the plan delivered by management on the company's most recent road show.

Here is a snapshot of EBITDA from NIHD's latest 10Q:

Click to enlarge

Here is how NIHD explains the numbers in the 10Q:

1.Operating revenues

The $500.2 million, or 10%, and $248.3 million, or 15%, decreases in consolidated service and other revenues on a reported basis in the nine of three months ended September 30, 2012 compared to the same periods in 2011 resulted from weaker average foreign currency exchange rates.

On a constant currency basis, consolidated operating revenues increased by 2% from the nine months ended September 30, 2011 to the same period in 2012 as a result of additional revenues generated from an 11% increase in our consolidated subscriber base, partially offset by a decrease in average revenue per subscriber due to an increase in the number of subscribers on lower rate service plans, as well as adjustments to commercial offers and increased retention efforts in Brazil in response to a more competitive environment.

2.Cost of revenues

Consolidated cost of service decreased $96.4 million, or 7%, and $67.2 million, or 14%, in the nine and three months ended September 30, 2012 compared to the same periods in 2011 as a result of the following factors:

•$90.8 million, or 13%, and $44.1 million, or 19%, decreases in consolidated interconnect costs related to weaker average foreign currency exchange rates and reductions in mobile termination rates in Mexico and Brazil;

•$39.0 million, or 18%, and $14.6 million, or 21%, decreases in consolidated service and repair costs resulting from weaker average foreign currency exchange rates, the utilization of more refurbished handsets and a lower number of overall repaired handsets; and

•a $27.1 million refund of excess fees recognized by Nextel Mexico in the third quarter of 2012 due to the government's delay in granting spectrum license renewals.

What we learn is that dropping currency exchange rates negatively affected the revenue but cost of service also declined. Absent the currency drop, revenues actually increased. With currency exchange rates reversing in NIHD's favor, this should help in the future.

In addition, JPMorgan (NYSE:JPM) reported that Anatel, the Brazilian telecom regulator did finalize rules in November 2012 to reduce Mobile Termination Rates {MTR} which will reduce their Brazilian interconnection fees with incumbent telecom operators. Here are excerpts from JPM's report:

Click to enlarge

Click to enlarge

Bloomberg also reported on this earlier last year. Here is an excerpt:

"Carla Simoes & Crayton Harrison - Bloomberg, 03/12/2012

Fees charged by Brazil's mobile carriers may drop almost 80 percent through 2018 as the country's regulator seeks to catch up with other nations' moves to cut prices and boost competition in the industry."

Let's look at subscriber counts in the thousands: Click to enlarge

These subscriber counts show that Brazil, the company's largest market, is growing the least. NIHD's ongoing upgrade to 3G WCDMA technology is underway and will provide fertile ground for sub growth in Brazil. Moreover, the 3G platform will also provide popular 'push to talk' {PTT} service with lower base station costs and lower handset costs also helping NIHD to improve cash flow. In addition, the new 3G can be upgraded to 4G when and if performance issues from large subscriber growth occurs. This is prudent resource management by NIHD. 3G speeds for users on an un-crowded network 3G performs as well if not better than 4G technology on a heavily crowded network as a recent article explained about the US where 4G is already being hyped:

"And even with higher speeds, 4G networks won't fix pre-existing network problems with dropped calls, coverage gaps and slow speeds at peak times. Some experts expressed worries that 4G networks will end up overwhelmed in the same way 3G networks were when AT&T first introduced the iPhone to its networks."

...

"Even though carriers are already praising the benefits of 4G, experts say that by 2015, only about five percent of mobile Internet users will be on the higher-speed network. The future of the wireless web may be fast, but it's not speeding to get there."

We think the company's strategy of upgrading to 3G is solid. NIHD's performance enhancements, cost reductions, equipment cost reductions and well seasoned and talented management will result in EBITDA coverage that will easily service the outstanding debt and give the company a chance to increase shareholder value. As we see above, Brazil is the biggest NIHD market both in terms of subscribers and in terms of opportunity as it continues to grow and prosper. Here is a chart from a recent Latin America telecom report:

Click to enlargeAs you can see, there is explosive growth in mobile in Brazil while the penetration rate says something strange is happening here. The entire country seems to be transitioning from fixed services to mobile services which can be attributed to multiple devices per person. It seems like a mobile operating company is good growth business.

With that as a backdrop, another way to look at NIHD is a large pool of assets which can be trimmed down to focus on its largest opportunity. The strategy for the company to pursue sales of Peru, Chile and Argentina together with Mexico would leave Brazil as the main focus. We believe that the company may be open to this alternative strategy which may also be why the notes offering had excess demand and increased the size of the deal from $400 million to $750 million. The offering also alleviated the question of the cash funding gap in 2014 needed for the rollout of the 3G infrastructure and associated marketing plan. We believe this offering gave the company two additional years of "runway" to achieve its EBITDA goals and become cash flow positive with a combined strategy of better marketing, more efficient operations, cost reductions plus the possible sales of non-core assets and territories.

NIHD has also told investors that it is in the process of selling its cell towers. These potential sales of territories will result in cash which can be used to pay down debt and simultaneously reduce the projected capex for each respective operating territory. The $3.22 billion total net debt, excluding the new notes offering, NIHD has as of its 9/30/2012 balance sheet is used as a target to pay off in order to determine potential net asset value per share. We will list the sales of assets and territories in order of our expected timing and probability:

#1.Cell Tower Business- In our last article, we projected a possible value for the 4500 cell towers in Brazil and Mexico at $822 million. Our discussions with operators here in the US confirm business activity in Brazil and Mexico is robust. We therefore stick with our $822 estimate for this asset.

#2.Nextel Peru- On February 18, 2013 Credit Suisse Analyst Andrew T. Campbell wrote:

We believe it is a challenge to value Nextel Peru given its transitional state and lack of Ebitda and earnings to establish a valuation. If we apply a pure wireless subscriber multiple range of US$200 to US$300, then this would imply an EV for the Peruvian operation of US$300mn to US$450mn. At the mid-point, we believe this would be a manageable acquisition for Entel, equal to about two years of FCF generation and less than 0.5x Entel's estimated 2013 Ebitda. Depending on acquisition terms, we believe this could potentially be an interesting acquisition for Entel shareholders.

We see this as a completely new data-point since our previous article and put this into our territory sale projection at the low end estimate of $300 million. Adding this to #1 brings the Subtotal of asset sales to $1.122 billion.

#3.Nextel Chile- We will use the same value per subscriber as Credit Suisse used in Peru for the 153,000 Chile customers reported in the last 10Q. This yields another $30.6 million which is very low given the spectrum and capital equipment already deployed. Chile is conceivably worth at least $100 million in a forced sale. But we will use the $30.6 million to be consistent. #1 plus #2 plus #3 brings the Subtotal of asset sales to $1.1526 billion.

#4.Nextel Argentina- Taking the 1.692 million subscribers in Argentina and using the same price per sub from above yields $338.4 million. The Subtotal of this plus Subtotal in #3 comes to $1.491.

#5.Nextel Mexico- Because we have a benchmark for potential market value from the announced but uncompleted Televisa transaction, we propose a conservative 50% discount from the total value proposed at that time and announced in the NIHD PRNewswire release as follows:

Televisa will invest $1.44 billion in cash for an initial 30% equity stake in Nextel Mexico, which reflects an implied pre-investment value of Nextel Mexico of $4.3 billion.

The 50% discount yields $2.15 billion for Nextel Mexico. Adding this to Subtotal in #4 brings total asset sales comes to $3.641 billion.

Netting the $3.22 from the $3.641 and leaving the main operating territory asset as Brazil gives us a debt free cash and asset rich company with $421 million of cash on its balance sheet and 4.138 million customers in the largest and fastest growing market in Latin America. Using the higher $300 per sub value from Credit Suisse and multiplying it by the 4.138 million customers yields $1.2414 billion and adding back the $421 million leaves us with $1.6624 billion in total value for NIHD. Dividing this total by 171.5 million shares outstanding results in a conservative net per share value of $9.69.

Of course this analysis leaves out the negative cash burn over time that would be incurred by the company's operation. However, aggressive marketing and more efficient operations would also increase subscribers, thereby increasing corresponding asset values conservatively at a 1 to 1 ratio.

Moreover, international telecom activity in the Americas is heating up as evidenced by the SOFTBANK CORP (OTCPK:SFTBF)-Sprint Nextel (NYSE:S) deal late last year. SoftBank from Japan may come and buy Sprint's old affiliate NIHD as a pure play in Brazil or as a complete Latin America opportunity. SoftBank/Sprint certainly would not be subject to the spectrum ownership caps that Anatel regulators in Brazil have placed on Brazil's large incumbent carriers. Just food for thought.

A word of caution to those considering shorting a $5.50 stock that has had a tremendous fall from grace and has a large short interest {58.9 million}: please make sure it is going to zero soon. With the luxury of time and cash on the balance sheet, lots of good things can happen at NIHD. The risk/reward ratio favors the longs in NIHD name.

Some additional background information regarding Nextel and NIHD:

Nextel has licensed its identity to NIHD, of which Sprint Nextel owned 18%. Nextel sold all of its investment in NII Holdings after it merged with Sprint in 2005. Nextel uses iDEN technology familiarly called push to talk {PTT}. PTT was marketed as "direct connect" in the US and is currently supported by Sprint Nextel. NIHD has informed investors in their latest 10Q of the following:

Sprint's Wikipedia site says:

Due to the ongoing decommissioning of Sprint's iDEN network and the desire to continue to provide push-to-talk (PTT) services to its subscribers, Sprint is offering Sprint Direct Connect, a voice-over-IP system (VoIP) which uses the CDMA network. Customers can keep their old UFMI (Nextel Direct Connect number) or use their phone number as their SDC number. Various enhancements to the PTT services include easier tracking of groups and higher voice quality. A drawback to the system is the inability to work seamlessly with all of the international locations reachable by the iDEN push-to-talk service, though international capabilities do exist.

We view this as good news as NIHD transitions to its 3G network, it will be compatible with Sprint's PTT services here in the States, extending the competitive advantage PTT brings to Latin America.

Disclosure: I am long NIHD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.