[TrunkCom] Salomon Smith Barney on "The Nextel Plan Scam Part II-"

[iDEN-i100]

Nextel submitted a "Consensus Plan" to realign the spectrum in the 800 MHz
Land Mobile Radio Band to principally

1) mitigate public safety interference;

 2) increase the spectrum available for public safety use. This plan is a
revision to the White Paper submitted in late-2001 and has the support of
many of the participating organizations that operate within this band of
spectrum, according to Nextel and the documents filed with the FCC. The
revised plan would still create a 16 MHz contiguous block of spectrum for
Nextel in the 800 MHz band and calls for the FCC to swap Nextel's remaining
700/900/800 spectrum position for a 5 MHz x 2 (i.e. 10 MHz in total)
contiguous spectrum block in the 1.9 GHz band. The reply comments by Nextel
also includes its SMR spectrum position in each of the top 320 cities, which
has never been publicly disclosed.

Nextel owns an average of around 18 MHz of spectrum in the 800 MHz band
across this disclosed market portfolio. In addition, the company holds
approximately 4 Mhz of spectrum in the 900 MHz band and 4 MHz of spectrum in
the 700 MHz band for a total of approximately 26 MHz of spectrum. The
Consensus plan would reallocate spectrum and Nextel would effectively
relinquish 4 MHz at 700 MHz, 2.5 MHz at 800 MHz and 4 MHz at 900 MHz. In
exchange Nextel would be allocated 10 MHz at 1.9 GHz and continue to possess
approximately 26 MHz of spectrum.

Nextel's proposal now needs to be reviewed by the FCC, which should be able
to provide at least initial feedback and possibly resolution, before year-end
2002. Under Nextel's plan, the company would still need to contribute $500
million to relocate public safety over the relocation period, potentially
reimburse some entities for previous Microwave relocation activities, and
absorb transition costs to reconfigure its own 800 MHz spectrum position.
We view the news as constructive for the company, but only neutral for the
stock. The benefits are clear - a contiguous swath of spectrum in the 800
MHz band that should provide greater efficiencies over the long-term and
possibly a clean amount of PCS spectrum on which Nextel can leverage.
However, we believe the value of Nextel's business will continue to be gauged
on its free cash flow output, improvement to its financial leverage, and
ability to execute in a difficult wireless environment. Once Nextel reaches
positive free cash flow (we expect the inflection point to occur in 2003),
the value of the potential inventory of PCS spectrum can increase. The
Consensus plan is still a proposal and still needs to receive the approval of
the FCC.

We previously wrote the acquisition of clean PCS-like spectrum by
Nextel through this process would be a challenge, and despite the consensus
by the parties within the SMR band, the FCC is still the ultimate arbitrator,
which has yet to provide an indication on its willingness to comply with such
a proposal.

We maintain our Buy (1S) rating, despite our underweight rating on the
sector. We believe the stock will outperform its peers based on solid
execution, improving duration to free cash flow break-even, and its efforts
to reduce financial leverage.

THE 800 MHZ BAND (TODAY):

The 800 MHz band is currently configured in 4 different service pools:
806-809.75/851-854.75 MHz (General Category) -- contains 7.5 MHz of spectrum
encompassing Channels 1-150. Incumbents are a mixture of all radio classes,
including CMRS (commercial mobile radio service) operators such as Nextel,
Business/Industrial Land Transport (B/ILT) and Public Safety. The FCC
auctioned some of the licenses in this band with Nextel winning most but not
all of the licenses. The licensees have geographic rights but not the right
to relocate incumbents.

809.75-816/854.75-861 MHz (Interleaved Area, including the middle 80 SMR) --
contains 12.5 MHz of spectrum with 250 channels (Channels 151-400). B/ILT
has 100 channels, Public Safety has 70 channels, and SMR has 80 channels.

816-821/861-866 MHz (SMR Pool) -- Also known as the "Upper 200", this portion
of the band contains 10 MHz of spectrum encompassing Channels 401-600.
Nextel is the predominant licensee and according to the company, it has
relocated or cleared over 95% of the spectrum.

821-824/866-869 MHz (NPSPAC) -- contains 6 MHz of spectrum for public safety
use only and is comprised of 230 channel pairs.

* 806-816/851-861 Mhz level (the General Category and Interleaved Area)
where many different licensees operate and inter-category sharing
exists (i.e. sharing between radio services), and

* 821-824/866-869 Mhz level (aka the NPSPAC band). The FCC established
the NPSPAC ("National Public Safety Plan Allocated Channels") band in
1986 for the exclusive use of public safety agencies. However,
interference around this band has grown in recent years, given its
location between SMR on one side and Cellular on the other.

Interference between public safety agencies and commercial service providers
has always existed to some degree but became more apparent after the events
of September 11th. The reasons for the interference can be traced to

1) Nextel and the fact that the FCC co-located commercial, public safety, business radio
and
SMR licensees in the same portion of the 800 MHz band, and

2) Nextel and the proliferation of digital SMR services, which is primarily a result of
Nextel's growing subscriber base. Engineers have found that interference
occurs primarily when public safety handsets are in close proximity to a CMRS
antenna (usually referred to as a "dead zone"). This phenomenon is becoming
increasingly common in the NPSPAC band as many jurisdictions are planning or
have implemented wide-area 800 MHz public safety systems that utilize the
NPSPAC channels. As these systems proliferate across the country, arising
out of the need for a greater level of communication as a result of September
11th, we expect the interference problems between CMRS operators and public
safety agencies to be exacerbated.

While Nextel has implemented several technical solutions, including raising
antenna heights, installing filter, reducing power on certain channels and
modifying some handsets, these solutions are costly on a national level and
have not been entirely successful in eliminating all of the interference. As
a result, the company filed a proposal for regulatory changes last November.


THE CONSENSUS PLAN (8/7/02)

Nextel submitted a "Consensus Plan" to realign the spectrum in the 800 MHz
Land Mobile Radio Band to principally

1) mitigate public safety interference;


2) increase the spectrum available for public safety use.

3)increase Nextel's spectrum holding and increse te value of the company.

This plan is a revision to the White Paper submitted in late-2001 and has the support of
many of the participating organizations that operate within this band of
spectrum, according to Nextel. The revised plan would still create a 16 MHz
contiguous block of spectrum for Nextel in the 800 MHz band and calls for the
FCC to swap Nextel's remaining 700/900/800 spectrum position for a 5 MHz x 2
(i.e. 10 MHz in total) contiguous spectrum block in the 1.9 GHz band. The
reply comments by Nextel also includes its SMR spectrum position in each of
the top 320 cities, which has never been publicly disclosed. Nextel owns an
average around 18 MHz of spectrum in the 800 MHz band across this disclosed
market portfolio.

Nextel owns an average of around 18 MHz of spectrum in the 800 MHz band
across this disclosed market portfolio. In addition, the company holds
approximately 4 Mhz of spectrum in the 900 MHz band and 4 MHz of spectrum in
the 700 MHz band for a total of approximately 26 MHz of spectrum. The
Consensus plan would reallocate spectrum and Nextel would effectively
relinquish 4 MHz at 700 MHz, 2.5 MHz at 800 MHz and 4 MHz at 900 MHz. In
exchange Nextel would be allocated 10 MHz at 1.9 GHz and continue to possess
approximately 26 MHz of spectrum.

One of the key differences between the Consensus plan and the original White
Paper is that the original plan would have provided Nextel with 10 MHz of 2.1
GHz. Instead, the Consensus plan would give Nextel replacement spectrum from
5 MHz of unlicensed PCS spectrum at 1.9 GHz and another 5 MHz of reserve MSS
spectrum.

The consensus plan proposes realigning the 800 MHz band into 2 adjacent,
contiguous blocks with 20 MHz allocated for public safety and 16 MHz for
commercial users, specifically SMR (see Figure 2). To facilitate this
realignment and accommodate the displaced licensees, Nextel offered to swap
16 MHz of its non-contiguous spectrum (4 MHz in the 700 band, all of its
holdings in the 800 band, and 4 MHz in the 900 band) for 6 MHz of contiguous
spectrum in the upper 800-band (currently held by NPSPAC) and 10 MHz of
contiguous spectrum in the 1.9 GHz band. Nextel's 700 MHz guard band would
be redesignated for public safety use and its 900 MHz holdings would be used
as an incentive for B/ILT and traditional SMR spectrum holders to relocate to
900 MHz. Nextel would also contribute up to $500 million for the cost of
relocation of the public safety entities operating in the upper 800 MHz band.
Public safety, B/ILT and traditional SMR licensees would remain in the 20 MHz
noncellularized block and Nextel would relocate to 16 MHz cellularized block.

The Consensus plan would also create a guard band in the 814-816 MHz and 859-
861 MHz band for low-power systems and other B/ILT licensees. The plan would
also provide a 5-year period in which public safety agencies could acquire
the remaining channels vacated by Nextel, which could create additional
channel capacity for the agencies.

Nextel's proposal would appear to benefit public safety agencies as their
spectrum allocation would be increased to 20 MHz from 9.5 MHz currently and
they would be located closer to the 700 band, which the FCC has already
earmarked for public safety use. However, the implementation of a guard band
would reduce the public safety allocation by 2 MHz to 18 MHz. The plan would
benefit Nextel by providing the company with 6 MHz of contiguous spectrum in
the upper range of the band where NPSPAC was located.

The Consensus Plan would offer Nextel an improvement in its current spectrum
position, in that it would provide the company with two blocks of contiguous
spectrum (816-824/861-869) and (1910-1915/1990-1995). This could potentially
be beneficial to Nextel since it gives the company contiguous spectrum, which
is needed for 3G technologies. Regardless of whether or not Nextel actually
launches 3G services, it could potentially sell the spectrum to interested
suitors sometime in the future.

While the Consensus Plan seeks to resolve the interference issue with public
safety agencies, one group that does not benefit from Nextel's plan are the
incumbent Business, Industrial and Land Transport (B/ILT) users currently
occupying the 806-816/851-861 MHz band. These users would be relegated to
secondary status, or if they are unwilling to accept that status, would be
relocated to spectrum that Nextel would make available in the 700 or 900 MHz
bands. In fact, Nextel's proposal to contribute $500 million to pay the
costs of relocation applies only to public safety licensees and does not
address the incumbent B/ILT users that may have to be relocated.

POTENTIAL STUMBLING BLOCKS

Despite the support that most affected parties have exhibited for the
Consensus plan, there still remain several stumbling blocks to hurdle before
any spectrum swap will occur.

* Continued Opposition by Several Existing Commercial Wireless Carriers --
Many interested parties argue that the Consensus plan, as well as the White
Paper, is inequitable, costly, and disruptive to current spectrum holders.
Opponents claim that Nextel's plan is an attempt to displace other SMR and
B/ILT licensees, thereby forcing its SMR competitors out of business and
leaving many B/ILT licensees without options other than taking service from
Nextel. They argue that any spectrum swap that would provide Nextel with
contiguous spectrum would give Nextel an unfair competitive advantage.

* Who Will Bear The Cost of Realignment? -- Although Nextel has agreed to
contribute $500 mil. to pay the costs of relocation, it is unclear where
the additional funds would come from. Nextel has said that it will not pay
anything over the $500 mil. offer and has suggested that additional monies
be pledged by the federal government for public safety purposes. However,
it is vague as to whether or not the government will contribute the funds
and it is also ambiguous where any additional funds would come from.
Additionally, opponents argue that realignment would impose great expense,
disruption, and hardship upon licensees but will not necessarily resolve
public safety interference.

* The FCC -- Any plan still needs to receive approval of the FCC. Despite
the consensus on relocation, the FCC is still the ultimate arbitrator,
which has yet to provide an indication on its willingness to comply with
such a proposal.

TIMELINE

The FCC now needs to review the Consensus Plan, as well as all other comments
filed by affected parties. It is our understanding that the FCC should
provide initial feedback, and possibly resolution by year-end 2002. Whatever
the outcome, we believe that the retuning process will take at least 3-years.
As Nextel retunes the public safety channels, the company would then acquire
the new spectrum. Nextel indicated that 10% of the $500 mil. payment would be
kept in escrow, which the company would replenish as the funds are needed
throughout the retuning process.