NII Holdings (NIHD) released earnings last week. Short sellers are still attacking the stock based on their belief that EBITDA was below expectations. Three analysts don't agree. More on this later. This could be a very fortunate set of circumstances for cash rich acquisitive companies interested in mobile computing's future. What is important is that the company was very open on the intent and process of selling 4500 towers out of its portfolio of 9000 towers. We think this a perfect fit especially for Google (GOOG). Why? Because GOOG could pay a premium for NIHD at today's $6.77 price starting, for instance, with a $3.50 premium and settling at the low end of the range of today's analyst price targets if necessary. NIHD could reliably get a fairness opinion for a price close to its price target on the street. GOOG would get a large footprint in Mexico, Brazil, Chile, Argentina, which strategically fits its Android and Google Fiber platform initiatives. Moreover, with GOOG's extremely low cost of capital from the markets, GOOG can refinance NIHD's debt at a rate that brings the company to cash flow neutral from operations immediately. Let's assume for the moment that GOOG can get the same rates as Apple (AAPL) did on its recent offering for a ten year note:
If you retire the entire amount of NIHD's debt at the 2.4% rate, it would reduce the interest charges significantly. Let's take the total interest charges for NIHD for last year from their 10K, both expensed and capitalized, of $373 million and $128 million respectively and add another $102 million in for the recent issuance of $900 million in notes. The total interest expensed and capitalized would come to $603 million. If you issued $5.5 billion at 2.4%, total interest associated with the principle would be $132 million, or a savings of $471 million annually. This would leave NIHD's Nextel Latin America with the $1.9 billion it has today for working capital and keep the towers asset with the company if it wants.
In fact, GOOG maybe buying these debt securities right now with its $31.4 billion of offshore cash. The NIHD bonds have been appreciating recently. By buying NIHD and its bonds and notes, GOOG can generate more income from its offshore cash and get Research and development for free just from operating and building out its network. This would be a great development for GOOG's Motorola division which would have a real life test-bed for handsets and other hardware it builds. We have reported before about the relationship between GOOG and NIHD in Mexico. This relationship will only grow regardless of this potential deal. Surely, some of GOOGs $6.8 billion annual expense in R&D expenditures can be redirected into the operation of this network which will bring invaluable real world operating know-how and innovation. All of these numbers can be found in GOOG's 2012 10K filed with the SEC. We think NIHD is an opportunity that GOOG should not miss. Android is the number one listing in their 10K as follows:
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We have reported on Stifel's target price for NIHD of $23 and Wells Fargo's target range of $13-$15. The most recent price target was $9 issued by Raymond James which excludes the potential of the tower asset sale of $800+ million which would add $4.67 per share to his target and bring it above ours to $13.67 per share. GOOG should take advantage of what the short sellers are doing to NIHD and make a purchase of this spectrum rich operating company quickly before someone else does.