September 29, 2009 / 3:17 PM / 9 years ago

ANALYSIS-NII's 3G investment to pay off over long term

* NII could spend $2.5 billion on 3G: analysts

* 3G will expand addressable market, enable advanced services

* Analysts say NII likely to win spectrum in Mexico

By S. John Tilak

BANGALORE, Sept 29 (Reuters) - Latin American wireless carrier NII Holdings Inc’s (NIHD.O) 3G investment is expected to hurt margins in the short term, but pay off for the company and its investors over the long haul.

The company, which uses Motorola Inc’s MOT.N iDEN network, is counting on 3G technology to help it offer more advanced services and increase its customer base.

NII is building a 3G network in Peru and has won 3G spectrum in Chile. The company — which targets business customers in Mexico, Brazil, Argentina, Peru and Chile under the Nextel brand

— is also looking to invest in 3G technology in Mexico and — is also looking to invest in 3G technology in Mexico and Brazil, its biggest markets.

“The 3G network potentially changes the playing field for NII,” Soleil/Nelson Alpha Research analyst Michael Nelson said. Currently, NII users are mostly postpaid subscribers from small and medium businesses, with a key selling point being its push-to-talk service. Push-to-talk is a walkie talkie-like service and allows users to talk to multiple users at the same time.

“A 3G network would potentially expand the addressable market to the entire wireless market in those countries, which would include individual customers, heavy data users and prepaid customers,” Nelson said, adding that its potential market could quadruple as a result of 3G.

NII hopes the 3G technology will position it better against rivals, such as Mexico’s America Movil (AMXL.MX) (AMX.N) — controlled by billionaire Carlos Slim — and Spain’s Telefonica SA (TEF.MC), which already operate a 3G network.

However, the road to offering 3G services will not be without hiccups.

Short term, it will have a negative impact on margins as they get their business up and running, Stifel Nicolaus analyst Christopher King said. “But we do expect 3G to result in higher margin products.”

“Developing a push-to-talk product on a 3G platform is going to be a technological challenge that they’re working on right now,” King said.

MONEY BACK

NII could spend about $2.5 billion on 3G over the next few years, analysts said. This includes acquiring spectrum and building the network. NII did not immediately respond to a request for comment.

The company, formerly Nextel International Inc, has grown rapidly even without 3G technology.

NII grew 30 percent in 2008, 39 percent in 2007 and 36 percent in 2006. For 2009, the company has forecast revenue of $4.1 billion, a 4 percent drop, to $4.3 billion, a 1 percent rise.

Growth on the existing iDEN network might be a reason it has been late to the 3G party.

But the benefits of 3G are clear.

“They’ll be able to offer broadband and laptop cards, which will play very well for their business market. It will allow them to expand geographically,” Stifel’s King said.

“Shareholders could (get) their money back within five years easily,” King said.

To build 3G networks in Brazil and Mexico, the company will first have to win spectrum.

The Mexican spectrum auction could happen as early as this month, while the Brazilian spectrum auction is expected early next year.

The spectrum auction in Mexico could be a catalyst for the stock as NII could acquire spectrum at a very reasonable price, Wells Fargo analyst Gray Powell wrote in a note to clients.

Analysts and investors think NII will be able to win spectrum in both these markets.

“I’m very confident they’ll get spectrum in Mexico and Brazil,” said Ben Gordon, head of telecom and media investments at GMT Capital, an investor in NII stock. “In Mexico, there’s a lot of spectrum available and the rules will favor new entrants for bidding.”

Investor sentiment, which slumped during the peak of the economic crisis that hurt Latin American economies, has shifted.

NII shares have risen 189 percent since hitting a 52-week low of $10.23 in March.

The company has historically earned relatively good return on investment capital and has a very strong focus on that, Gordon said. “So I’ve very strong confidence in the management team to execute on the buildout plans over time.”

Reston, Virginia-based NII’s first 3G challenge is in Peru, where it is expected to complete the network buildout later this year and could start adding 3G customers next year.

“How that progresses should give an indication of what the company can do in the other markets,” Gordon said.

(Editing by Jarshad Kakkrakandy)

((john.tilak@thomsonreuters.com; +1 646 223 8780; outside U.S. +91 80 4135 5800 +1 646 897 1898; Reuters Messaging: john.tilak.reuters.com@reuters.net)) Keywords: NII/

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