NII Holdings - Sale Of Nextel Peru Triggers A Short Squeeze

| About: NII Holdings, (NIHD)

Shares of NII Holdings (NASDAQ:NIHD) rose more than 20% in the final trading session of the week. The provider of mobile communication services in Latin America announced the sale of Nextel Peru to Empresa Nacional de Telecomunicaciones S.A.

It has been a volatile week for shareholders in the troubled company, but shares did manage to gain some 25% for the week on the back of the sale and a short stock squeeze earlier during the week.

The Deal

NII Holdings announced that is has agreed to sell its operations in Peru, named Nextel Peru, for $400 million to Empresa National. The divestiture is part of NII's strategy to focus its capital and attention to the main markets of Brazil and Mexico. The proceeds of the divestment will be used to invest in the deployment of next generation networks in the core activities.

CEO and Chairman Steve Shindler commented on the deal, "The sale of Nextel Peru is an important step in the evolution of our business and aligns with our strategic goal of increasing value for stockholders through focused investments on our new next generation network deployments. The proceeds that we generate through this sale allow us to prioritize investments in our largest markets that offer the greatest opportunity for strong, long-term returns."

The deal is expected to close in the second half of 2013 and is subject to normal closing conditions including regulatory approval.

Valuation

NII Holdings ended its fiscal 2012 with $1.59 billion in cash, equivalents and short term investments. The company operates with $4.87 billion in short and long term debt, for a net debt position of roughly $3.3 billion. Given the sizable debt position, the proceeds from the sale are more than welcome.

The company generated full year revenues of $6.09 billion for 2012, down almost 10% on the year before. The company reported a $765 million loss on the back of declining revenues, increasing allowances for doubtful accounts, and a $330 million impairment and restructuring charge.

Factoring in the 15% jump on Friday, the market values NII around $2.3 billion. This values the firm around 0.4 times annual revenues.

Given the poor operating performance, NII does not pay a dividend at the moment.

Some Historical Perspective

Long term holders in NII have seen quite some volatility. Shares rose from $5 in 2003 to a peak around $90 in 2007. From that point in time shares fell back to $10 in the 2009 recession, to recover to $40 in 2010 and 2011. Over the past two years, shares have slipped away to current levels around $5.

Between 2009 and 2012, NII increased its annual revenues by almost 40% from $4.4 billion to $6.1 billion. The company reported decent profits over the past few years, before reporting a massive loss for the year of 2012.

Investment Thesis

Investors applaud the divestiture of Nextel Peru, in which NII essentially swaps underperforming assets, which allows it to pay down some of its expensive debt.

The $400 million price tag for Nextel Peru appears rather high. Over the past year, the division reported $314 million in annual revenues, valuing the business at 1.3 times annual revenues. This multiple is really nice, considering that the average revenue per user came down to just $16.

The mix of a declining operating performance and the significant debt position has put a large overhang on the company. The lower revenues, stagnant operating expenses, and one time charges resulted in severe losses over the past year. A strategic re-focus of its customer base furthermore put the ARPU down to just $38, while the monthly churn ratio rose by 90 basis points to 2.64%. As such, NII loses almost a third of its customer base per annum.

The cash proceeds from the deal are more than welcome given the fact that NII recently paid an interest rate of 11.25% on a $750 million senior note. The nice selling price, bodes well for a possible sale of the Argentina activities which are roughly twice as large.

Given the large short position initiated by many market participants, news about more divestitures could hurt short sellers even more in the coming months. At these levels, speculative investors could initiate a long position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.