Daily Double
October 11, 1999

VoiceStream Wireless Corp.

Ticker: (Nasdaq: VSTR)
Phone: 425-653-4600
Website: www.voicestream.com
Price (10/8/99): $76 1/16

By Paul Larson (TMF Parlay)

How Did it Double?

Though today's Daily Double is called VoiceStream Wireless, the moniker "VoiceStream Gravityless" may be more apt for the stock. Since VoiceStream was spun off from Western Wireless (Nasdaq: WWCA) this past May, the company's stock has gone from an opening price of $21 all the way to a new high of $78.50 last week. VoiceStream's market capitalization is now roughly double that of its old parent company.

The newly formed firm has been extremely active on the mergers and acquisitions front, using its strong stock as currency to purchase other regional cellular companies. On June 23, less than two months after getting thrown free from the Western Wireless nest, VoiceStream announced that it was acquiring Omnipoint (Nasdaq: OMPT), a GSM wireless service provider with a major presence in the Northeast. The deal is expected to close within the next few months.

Not content to sit on just one blockbuster deal, on September 20 VoiceStream announced that it was purchasing Aerial Communications (Nasdaq: AERL) in a stock-swap transaction valued just shy of $2 billion. Aerial is another GSM wireless company that has most of its operations in the Midwest.

With these two major acquisitions of companies having complementary operations outside of VoiceStream's core markets in the Western states, VoiceStream is on its way towards becoming a major player on the nationwide wireless scene. Since wireless companies with a national footprint trade at a premium to the smaller, regional firms, it should come as little surprise that VoiceStream's stock has been strong as the company has been patching together a nationwide network of cellular services.

Business Description

VoiceStream Wireless is one of the nation's up and coming wireless phone companies. The firm has approximately 450,000 subscribers in major cities across the western U.S. The company's network currently operates on the GSM cellular standard, the digital cellular technology most commonly used around the world today.

When VoiceStream's mergers with Omnipoint and Aerial are completed, VoiceStream will have over 1.5 million subscribers and, more importantly, will be close to having a nationwide wireless network. When the deals close, VoiceStream will have cellular licenses in 22 of the country's 25 largest cities.

The company is based in Bellevue, Washington, and was spun off from Western Wireless this past May. Hong Kong-based conglomerate Hutchison Whampoa is VoiceStream's largest shareholder and will own roughly 23% of the stock after the mergers are completed.

Those living in markets that VoiceStream serves may recognize the company as the wireless firm that has actress Jamie Lee Curtis as its spokesperson for its "Get More" ad campaign.

Financial Facts

Income Statement
12-month sales: $273.5 million
12-month income: ($343.2 million)
12-month EPS: ($3.61)
Profit Margin: N/A
Market Cap: $7,267.6 million

Balance Sheet
Cash and Equivalents: $79.9 million
Current Assets: $156.0 million
Total Assets: $1,371.4 million
Current Liabilities: $141.3 million
Long-term Debt: $1,025.0 million
Total Liabilities: $1,166.3 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 26.6

How Could You Have Found This Double?

One way to have possibly found VoiceStream before it doubled was to simply look at the fundamental structure of the company. Here was a company with extremely strong and experienced management, operating in an exploding industry, and with the financial backing to take advantage of the opportunities ahead of it.

Probably a greater signal of what was ahead was VoiceStream's strategic plan. Once free from the Western Wireless fold, VoiceStream was able to go ahead and attempt to roll up the regional GSM service providers to patch together a fourth national network to compete with the likes of Sprint PCS (NYSE: PCS), Nextel (Nasdaq: NXTL), and AT&T (NYSE: T). Since the national carriers carried higher market valuations than the regionals, it only makes since that VoiceStream's stock would also see a higher valuation as the company transformed itself from a regional to a national cellular company.

Where to From Here?

Even though VoiceStream is close to having a national network, it still has some holes in its network. The most notable holes are in the Southeast, where the combined VoiceStream will only have a limited presence. Many are betting that it is only a matter of time before the most prominent regional firm in the Southeast, Powertel (Nasdaq: PTEL), gets eaten up by VoiceStream. The odds on that bet appear fairly short. Between VoiceStream's strategy and the location of Powertel's current cellular licenses, the two firms look like a good fit. A merger here would give VoiceStream one of the last pieces of its puzzle towards creating a nationwide GSM network.

Additionally, VoiceStream has its strong stock as well as ample funds to continue on the acquisition trail. VoiceStream shareholder Hutchinson infused nearly $1 billion into the company this past June, and Finnish firm Sonera has agreed to purchase $500 million worth of VoiceStream's stock to keep its relative share of the combined company after the Aerial merger is completed. Aerial debt-holder TDS (NYSE: TDS) has also agreed to retire its debt for VoiceStream stock. Any way you cut it, VoiceStream has more than enough ammunition to continue on the acquisition trail and to organically grow its network.

From a valuation standpoint, VoiceStream is up there with the best of them. Trading at nearly 30x sales and without profits, Wall Street is obviously thinking that VoiceStream's future appears bright. From this Fool's point of view, those thoughts appear grounded in reality, yet much of that optimism is already priced in the stock. Only those with a high tolerance for risk and a strong belief in VoiceStream's vision should consider buying the stock today.

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