Nii Holdings and Nextel Peru Case Study

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1. How would you describe NII Holdings and Nextel Peru’s recent competitive and operational performance, and how do you think it affected the purchase price?  

In 2010, NII Holdings launched its first WCDMA network in Peru increasing its operating costs for investment in spectrum and network reconfiguration. However, despite these large investments, the company's operating performance had begun to decline due to the competitive business environment of the market, and as a result, this competition had had a negative impact on its financial results;

1. NII’s total revenue had decreased from $6.7 billion in 2011 to $6.1 billion in 2012.
2. Its net income had swung from a profit of $225.2 million to a loss of $765.2 million.
3. Its stock price had decreased 65% over the year.
4. Finally, NII announced that it would reduce the headcount at its headquarters by 20%.

The operations of Nextel Peru were similar to those of NII as a whole. After the launch of the WCDMA network in 2010, Nextel's subscribers had increased significantly from about 1 million in 2010 to nearly 1.5 million in 2012, however;

1. The average revenue per user(ARPU) declined due to promotional data card plans.
2. Supporting both old network and new WCDMA network resulted in an 8% increase in the cost of service and a 14% increase in selling and marketing expenses.
3. As a result, Nextel Peru's 2012 EBITDA margin had decreased by 14%.

Intuitively, these negative financial results and competitive positon are believed to be factors in lowering the purchase price from the perspective of acquiring the firm.

2. To what extent do you think markets are globally integrated or segmented, and to what extent should d’Anconia be concerned with estimating a country risk premium?  What would be your estimate of such a premium?  

Despite the globalization of investors and firms, we do not think that markets are fully integrated with world capital markets because global diversification is not sufficient to diversify country risk. Highly developed markets such as the US market can be fully integrated with the world capital markets, but we think that this is not the case with emerging markets. We believe that emerging market countries such as Peru are segmented markets because they have different country risk based on various considerations including: political stability, market liquidity, sovereign credit rating, size of the economy, and inflation. Not surprisingly, the monthly stock market returns data from the case Exhibit 6 give evidence that there is a low correlation between Peruvian market and US market which is highly correlated with global market (Table 1). In addition, this table shows that Peruvian market is not correlated even with Chilean market which belongs to same Latin American market. Therefore, we think that the country risk premium should be considered based on solely the Peruvian local market.