Bear, Stearns & Co. Inc. Announces Investment Opinion on MGC Communications, Inc.

NEW YORK--(BUSINESS WIRE)--April 6, 1999--

Bear, Stearns & Co. Inc.

MGC Communications, Inc.(a,b) (MGCX-$11 5/8-BUY)

MGC Announces xDSL Initiatives, New Strategic Investor

-- Providence Equity Partners Will Take A 16.6% Stake In MGC For

$37.5 Million.

-- New Capital Will Be Used To Pursue Rollout Of Business-Centric

xDSL Strategy.

-- We Reiterate Our BUY Rating With A Raised Year-End 1999 Target

Price Of $35. -0-

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Enterprise Value Data                 Relative Value Data
Common Stock Price      $11.625       1999E Revenue       $45.7
Fully-Diluted Shares     25.1         2000E Revenue      $129.3
Market Cap.            $292.0         TEV/1999E Revenue     6.1x
Debt & Cap. Leases     $157.3         TEV/2000E Revenue     2.1x
Cash & Equivalents     $171.8         4Q98 Gross PP&E     122.9
Total Entpr. Value     $277.5         TEV/Gross PP&E        2.3x

     Source: Bear, Stearns & Co. Inc. Financial data is based on MGC's
4Q98 results and Bear, Stearns & Co. Inc. estimates and is pro forma
for the $47.5 million equity investment announced on April 5, 1999 by
Providence Equity Partners and two other entities. All financial data
is in millions except multiples and per share amounts.
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-0- INVESTMENT VIEWPOINT

New Partners & A New xDSL Strategy. MGC Communications, Inc. announced on April 5, 1999 that Providence Equity Partners and two of its existing investors will make an equity investment of $47.5 million in the company. Concurrent with this positive news MGC announced that it would employ the proceeds of this investment in order to rollout a business-centric digital subscriber line (xDSL) offering in order to further leverage the substantial central office (CO) collocation assets that it has deployed. Based on this very positive news and the upside that it creates to MGC's business plan, we are reiterating our BUY rating on MGC and raising our year-end 1999 target price to $35 per share. The following paragraph outlines our thoughts on this news and the investment case for MGC Communications:

Providence Is A Strong & Seasoned Partner. We believe that Providence Equity Partners will play an instrumental role in driving the growth and development of MGC going forward. Providence is the leading private equity investor in the CLEC and competitive telecom arena. The company is very much a "hands on" investor that has played an vital role in the funding, growth, strategic development, and M&A initiatives of success stories such as Brooks Fiber Properties, MetroNet Communications, and Verio. As such, we think that Providence can make a very positive impact on MGC by providing strategic guidance, recruitment of key senior executives, and establishing commercial relationships with its other portfolio companies. It is worth noting that MGC is Providence's only US CLEC investment, which, given the large number of players in this landscape, speaks volumes about the opportunities that it sees at the company. Moreover, given the typical required rates of return for a typical private equity shop, it is fair to say that Providence expects to make at least 3x its investment at $9.00 per share. We think that public investors should feel very comfortable going along for the ride.

xDSL Business Plan Creates Significant Upside. We believe that MGC's new business-centric xDSL rollout is a logical move for the company that will add a significant amount of upside to the original business case. MGC is better positioned than any other CLEC to rollout xDSL as a result of its extensive network footprint. At year-end 1998 MGC had the largest number of central office (CO) collocations of any company in the industry. Its 207 collocations in 7 first-tier markets enable the company to target a base of 11 million ILEC access lines. We expect the company to upgrade its existing collocation facilities for the provision of xDSL service by year-end 1999 while it simultaneously moves into 15 new markets. By leveraging the unbundled network elements of the ILECs coupled with xDSL technology, we believe that MGC be able to offer a bundle of local, long distance, data, and Internet service to small and medium-size businesses across its territory. The ability for MGC to lease a digitally conditioned 64 Kbps unbundled loop for $15 per month and to use xDSL technology to soup up the capacity of that line to 1.54 Mbps (i.e., equal to the capacity of 24 phone lines) provides a powerful cost structure for offering voice service coupled with high-speed data and Internet. We expect to hear more about the timing and mechanics of MGC's xDSL rollout after it finalizes its strategy during the next 30 days.

Financial & Operational Outlook. The Providence investment and the rollout of its xDSL strategy comes at a point when MGC has been demonstrating substantial acceleration in its financial and operational performance. MGC's 4Q98 results exceeded our expectations for revenue growth and access line installations. The company posted 32.7% sequential revenue growth and installed 11,387 access lines. In a call with management yesterday we gained comfort that the company is on track to meet or exceed our 1Q99 estimates for revenue of $7.8 million (up 20%) and 17,000 access line installations. The momentum that MGC is demonstrating in growing its business and provisioning local dialtone provides us with a high degree of confidence that it can successfully deploy xDSL. The company possesses the key collocation real estate necessary to gain access to the ILECs' unbundled loops. More importantly, MGC has developed the rare core competencies (i.e., both personnel and systems) necessary to provision those loops in a timely and cost effective manner. We would expect management to provide some revised guidance to its financial targets over the next 30 days as it fine-tunes its new business plan. Revisions to revenue and EBITDA guidance should be expected as the company will likely slow its focus on residential consumers going forward and increase operating expense and SG&A in order to ramp up its product portfolio, network resources, and sales staff for the xDSL strategy. That being said, we think that any incremental expenses incurred in the near term are well worth while given the significant value that will be created in the expansion of MGC's business plan.

A Very Compelling Relative Valuation. We believe that MGC offers investors the most attractively valued play in the CLEC space. The company possesses scarce and strategic assets that we expect to deliver returns on invested capital higher than any fiber- based CLEC in the market today. Moreover it now plans to leverage those key assets to deploy xDSL technology in order to pursue one of the largest and most potentially profitable business opportunities in the telecom space. In light of its compelling valuation, the introduction of a key strategic investor, and the new xDSL strategy, investors should take a fresh look at MGC. We believe that the stock offers significant upside based on our discounted cash flow (DCF) model and based on the fact that company trades at a dramatic discount to any of its "smart build" or xDSL-centric comparables. MGC trades at only 2.3x its gross PP&E and 2.1x 2000E revenue while the other "Smart Build" comparable Allegiance Telecom trades at 10.5x gross PP&E and 5.7x 2000E revenue. In the xDSL pureplay space Covad trades at 66.9x gross PP&E and 21.7x 2000E revenue. Rhythms NetConnections is expected to trade at least in Covad's range when its vastly oversubscribed IPO finally prices this week. We expect that MGC will at least partially narrow the gap between its current depressed level and the levels of its peers of the next number of months.

We Reiterate Our BUY Rating With A $35 Target Price. Another way to look at the relative valuation is in terms of enterprise value per addressable line. This measure looks at the enterprise value of the company divided by the number of lines that it can address through its CO collocations - similar to looking at POPs in the early days of the cellular industry. xDSL pureplay Covad Communications Group currently enjoys $725.00 in enterprise value per addressable line. Allegiance Telecom's enterprise value is equal to about $450.00 per addressable line. Rhythms NetConnections is expected to come out at about $137.00 per line - and will no doubt double in its first day of trading. By contrast, MGC's enterprise value per addressable line is only $25.00. Does MGC deserve a discount because it does not offer marquis management like Allegiance Telecom's Royce Holland or Covad's strategic partners like AT&T and Qwest? Sure it does. But does it deserve a 95% discount? No way. We expect that investors will be willing to pay significantly higher multiples for MGC based on the introduction of Providence as a strategic investor, the company's new xDSL strategy, and the accelerating operating momentum that the company is demonstrating. As such, we are raising our target price to $35.00 per share. At $35.00 MGC would have a total enterprise value of $864 million equal to $79.00 per addressable line - still a healthy discount to the group. Please refer to table 1 for a look at the relative valuations in this sector. -0-

Table 1.  CLEC Relative Valuation ($ in millions except for
network stats and per share data)

                       ALGX       COVD       MGCX        RTHM
Stock Price            $30.00     $70.00     $11.63      $17.00
Fully-Dil. Shares       62.5       64.0       25.1        75.0
Market Cap.          1,875.0    4,480.0      292.0     1,275.0
Long-Term Debt         471.7      347.6      157.3       158.3
Cash & Equivalents     731.4      480.5      171.8       335.4
Enterprise Value     1,615.2    4,347.2      277.5     1,097.9

Markets In Operation     9          6          7          10
Targeted Markets        15         16         15          40
Total Markets           24         22         22          50
CO Collocations        101        168        207         200
Addressable Lines        3.6        6.0       11.0         8.0

1999E Revenue           92.5       56.7       45.7        12.5
2000E Revenue          285.0      200.5      129.3        55.0

EV Per Addr. Line     $448.70    $724.50     $25.20     $137.20
EV/1999E Revenue        17.5x      76.7x       6.1x       87.8x
EV/2000E Revenue         5.7x      21.7x       2.1x       20.0x

     Source: Bear, Stearns & Co. Inc. ALGX data is pro forma for the
company's pending offering of 10.0 million shares of common stock.
COVD data is pro forma for the company's IPO and follow-on high yield
offering. MGCX is pro forma for the Providence Equity investment. RTHM
is pro forma for the company's IPO assuming the successful pricing at
the high end of the range this week.

-0- Company Mentioned: Allegiance Telecom, Inc.(a) (ALGX-$30) AT&T Corp. (T-$77 7/16) Covad Communications Group(a,b) (COVD-$70) MetroNet Communications (METNF-$54 1/8) MGC Communications, Inc.(a,b) (MGCX-$11 5/8) Qwest Communications (QWST-$78 1/16) Verio, Inc.(c) (VRIO-$44 1/8)

(a) Bear, Stearns & Co. Inc. is a market maker in the security of

this company and may have a long or short position in the

security.

(b) Within the past three years, Bear, Stearns & Co. Inc. or one of

its affiliates was the manager (co-manager) of a public offering

of securities of this company and/or has performed other banking

services for which it has received a fee.

(c) The foregoing discussion is provided for informational purposes

only. Please be reminded that this company is currently on Bear,

Stearns & Co. Inc.'s (BSC) corporate finance restricted list, and

as such, neither solicited nor proprietary trading shall take

Stocks priced April 5, 1999

Note: MGC Communications, Inc. is an early stage provider of

integrated communications services offering a bundled package of

local, long distance, and related vertical services to small

business and residential customers in the suburban areas of

select tier-1 markets across the United States.