Telecommunications

1. Telecommunications • Stock presentation • March 8, 2005 David Lazarus Dongjun(Donny) Ma

2. Outline • Sector Recap • SIM holding and performance • Analysis on stocks • Candidates in future • Recommendation

3. Business Trends • Deregulation • Price Wars • Oligopolies • M&A (US and International) • Voice over Internet (VoIP) • Wireless Video • MP3/Internet/Camera Phones • Fiber Optic Cable • Video on Demand

4. Sector Outlook • Market Cap: $360 Billion • Local and Long Distance Phone Services, Wireless Networks, Internet/Broadband Services, Directory Publishing, Business Services • Voice over Internet (VoIP) increasing market share • Industry depends on low interest rates to fuel heavy capital expenditures

5. Consolidation Continues… • Consolidation has led to fewer carriers in local phone markets. Soon there will be just 3 or 4 large telecom providers of local phone service. • Wireless providers are also looking for partners, as large capital expenditures force them to seek economies of scale through acquisitions.

6. Verizon Communications • Verizon Communications Inc. is a provider of communications services with four operating segments: Domestic Telecom, Domestic Wireless, Information Services and International • Domestic Telecom services principally represent Verizon's telephone operations that provide local telephone services in 29 states and the District of Columbia • Domestic Wireless products and services include wireless voice and data services and equipment sales across the United States • International segment has wireline and wireless communications operations and investments primarily in the Americas • 100 Billion Market Cap, $71 Billion in sales • Currently in talks to purchase MCI for $6.7 Billion

7. Business Segments Information services is only 6% of sales, yet makes up 17% of profits. Wireless is 33% of sales and accounts for only 15% of profits!

8. Price History (5 yr) MCI Deal Announced

9. Verizon vs S&P 100 (3yr)

10. Verizon Compared to Telecom (3yr)

11. Verizon Compared to Telecom (2yr)

12. Revenue growth and earnings flat… 2004: 2.79 2005E: 2.55 2006E: 2.66

13. Margins falling…

14. Cash flows uncertain… Capital expenditures totaled $13.3 billion in 2004, compared with $11.9 billion in 2003.  In 2005, overall capital spending is expected to increase approximately 10 % to $14.6 billion!

15. And this stock is not cheap…

16. On a positive note… • Dividend yield of 4.36 % • # 2 in US wireless market with 44 million customers • Merger with MCI will increase business-access lines to 18.5 million • Leader in high speed wireless internet and video services • This company is making money, although earnings growth is expected to be only 2 - 4% • Should be one of the few left standing

17. DCF Analysis

18. Recommendation • Reduce

19. ALLTEL--Stock performance

20. Alltel--Financial Analysis (1) • Expansion trend in sales, but slow down in 2004 (Sector is declining) • Solid operating margin 24% (Sector is 15% in 2003)

21. Alltel--Financial Analysis (2) • Significant increase in cash since 2003. • Need at least 1 billion cash to acquire Western. • Will be less liquid in short-term.

22. Alltel--Financial Analysis (3) • Solid operating cash flow in accordance with stable operating income -- Quality of core earnings

23. Alltel--Valuation Analysis (Absolute Multiple) • P/E, P/S and P/Cash at average position in 4-yr. • PEG at relatively higher position

24. Alltel--Valuation Analysis (Relative Multiple) • All on average level • Correctly priced relative to sector

25. More on Alltel • On Jan 6, 2005, the company announced to acquire WesternWireless (WWCA) • This event became major driver of the stock performance in short run • Deal to be closed in mid-year

26. After combined • Fifth-largest U.S. wireless company • coverage over one-fourth of the United States' population • 10 billion revenue • 10 million domestic wireless customers in 33 states customers • 1.6 million international wireless in six countries • 3 million wireline customers in 15 states.

27. Detail of the deal • Purchase price: $ 39.25 per share 0.535 shares of Alltel stock plus $9.25 in cash for each Western share. • Western shareholders will have an option for all cash or all stock subject to proration. • Deal to be closed in mid-year WWCA current price is $ 39.30, with P/E (forward) of 18.28 which is a little bit higher than Alltel’s Is it a good deal for Alltel?

28. Western Wireless $2.5 to $39 1400% return in 2.5 years !!!

29. Western Wireless • Loss in 2002 and 2001, because of one-time or special charge • Rapid growth in sales • Solid operating margin

30. Western Wireless • Improved in liquidity

31. Western Wireless • Solid operating cash in-flow

32. Western Wireless • Multiples at relatively higher position

33. Pro Forma Combined Financial Measures

34. Valuation on Acquisition • Synergy: • Revenue: opportunity to increase penetration; opportunity to offer high-value service plans; expanded roaming relationships • Operating expenses: corporate overhead; IT operations; network operations; sales and marketing; handset/network purchasing • Operating synergies: $50M-$60M in 2006, $60M-$70M in 2007, and $70M-$80M in 2008 • Special charge for restructuring in 2005 • Fair acquisition? Some analysts estimate that the stand-alone value of WWCA is around $39 per share

35. Summary on Alltel • Cost of acquiring Western is close to fair value, at least close to its stand-alone value • Market over-reacted to this acquisition, but it will take time for the market to get the confidence back • Restructuring cost in short run, synergy in long run. Less surprise before second quarter of 2006. • Unlikely to surge before the acquisition is closed—limit potential in 1-year horizon Recommendation– sell 50%

36. Look For Other Candidates Portrait of Targets of acquisition: • Wireless, long distance business or international business • Attractive customer base • Improving (or stable) operating cash flow—solid business operation • Middle or large market cap.

37. Look for Potential Targets (1) 330 Public companies in Telecom Service sector • Market cap >2 billion • Excluding ADRs • Not involved large M&As recently 13 companies qualified • Business Analysis 4 companies They are: BCE,CTL,CZN,USM • Financial Analysis • Detail Business analysis 1 candidate to watch USM

38. Look for potential targets (2)

39. Analysis on USM--Profile United States Cellular Corporation (USM) • Seventh-largest wireless service provider • A business unit of Telephone and Data Systems, Inc. [AMEX: TDS], which owns 82% of the company • 4,409,000 customers in 26 states • 182 majority-owned wireless licenses • CDMA technology

40. Analysis on USM--Segment

41. Analysis on USM--Balance sheet Need cash!

42. Analysis on USM--Annual Report Operating income decreased 58% in 2003 and 11% in 2002. Due to: • Loss on impairment of intangible assets Increased costs of acquiring, serving and retaining U.S. Cellular’s customers, • Ongoing development of the Chicago market • Losses on assets held for sale related to the exchange and sale transactions entered into with AT&T Wireless • Increased costs related to the acquisition of and subsequent brand launch in the Chicago market.

43. Will TDS SELL USM ? In 2003, USM contributes to TDS: • Provides 74.8%of TDS' consolidated revenues • Provides52.8% of TDS’ consolidated operating income

44. Will TDS SELL USM ? Your industry keeps on consolidating. Would you sell U.S. Cellular? I’m not the guy that would consider it. The company is heavily owned by TDS, and they would make that decision. As of right now and as far as I know, there is no interest in selling. I’m not advising them to do that. But I’ve worked in industry long enough that I’ve had three companies acquired out from under me. So I know the realities of life. If somebody decides they got an offer they can’t refuse, I’m sure that the TDS board would give it consideration, and so would our board. --JOHN ROONEY, CEO of USM April, 2004

45. Recommendation on Sector • Underweight • S&P 500: 3.1% • SIM: 4.7% • Reduce to 2.0%

46. Recommendation Sell sector to underweight: • Sell 50% Alltel • Sell 50% Verizon Watch: • USM • Nokia