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October 05, 2007

NII Holdings Falls Sharply on Brazil News

Yesterday NII Holdings (NIHD), one of Northlake's long positions, fell by more than 5% on huge volume. At one point in the morning the shares were off over 10%. NIHD operates Nextel service in Mexico, Brazil, Argentina, Peru, and Chile. I heard of several reasons for the sharp sell-off. Most of the concern centers on Brazil, NIHD's second largest market, accounting for a little less than 25% of EBITDA of 2Q07 EBITDA and an important high growth market for the company's future. First, Brazil completed new spectrum auctions this week and indicated more auctions are coming. Once the spectrum is built out, Brazil will have four or five nationwide carriers raising fears of increased competition. Second, on Monday, Brazil's telecom minister indicated that pricing of prepaid wireless services was way too high, above other emerging markets on an absolute basis and in relation to Brazilian post paid pricing. Independent of Brazil, I heard that Merrill cut numbers for NIHD slightly for 3Q but I was unable to confirm it.

I can see why there would be selling in NIHD on this stuff but the huge volume decline at the peak yesterday just shows how stupid Wall Street can be sometimes. Just a bunch of lemmings that see something down big and either sell without asking or short without asking. After all most of this news was out earlier this week and the spectrum auctions have been in the works for months.....

....As noted, in 2Q Brazil was less than 25% of EBITDA. Granted it is a high growth country and worth more than that in the valuation. Let’s say it is worth 40% of the valuation. Should that have been marked down by 25%? Given the fact NIHD does not do prepaid, is a small player presently and a clear market share gainer, and offers a differentiated product, it seems fears are way overdone. Furthermore, observers are saying that the likely outcome of the telecom minister's comments is a reduction in telecom taxes in return for guarantees of lower pricing from operators. The tax reduction would benefit NIHD as would the increased minutes of use as wireless becomes cheaper. It's not a sure thing positive by any means but it certainly presents a more balanced view than yesterday's trading would indicate.

The stock ain’t cheap. It has one of the highest multiples in all of wireless. It has emerging markets risk. All that makes it unusually sensitive to any issue that crops up. This new stuff may be an issue but assuming you thought so and that the market holds in there, you would get a much better chance to sell than current prices. I, on the other hand, added to the stock for new accounts and where positions too small into yesterday's decline.

Posted by Steve Birenberg at October 5, 2007 02:14 PM in NIHD