Sprint borrows nearly as much as its worth

Sprint Nextel Corp. (S) recently posted positive net revenue and new suscriber numbers, helping to offset the company's latest quarterly loss and send stock cautiously upward. But late in the day shares plunged back downwards after the company revealed how much debt it plans to take on.

I. Sprint Needs to Borrow Nearly as Much as It's Currently Worth

The company's financial sheet looks very troubled.  Its stock is currently is only worth $7.7B USD (market capitalization).  Yet Sprint says it must somehow obtain $7B USD in new financing over the next few years in order to pay off its expensive iPhone contract and complete network upgrades.  If it can't get that financing, it will likely go into bankruptcy and that could be the end of the network.

Sprint has commited a massive $15.5B USD over the next four years to Apple, Inc. (AAPL), in order to get the popular iPhone on its network.  It's easy to see why Sprint would want the iPhone so badly -- the iPhone remains the best-selling single handset in the U.S. and in the world.  However, in signing away a massive amount of money to Apple, Sprint may have signed its own death warrant.

Industry analysts say Sprint was crazy to give Apple so much cash, potentially a fatal error.  Bernstein analyst Craig Moffett offers, "To meet their target, they'd effectively have to turn their entire company into an Apple shop."

Sprint iPhone
Sprint would have to turn into an iPhone store to make its huge gamble pay off, say analysts [Source: TechBuffalo]

II. Network Upgrade Also Hits Sprint Hard

Adding to the company's financial woes, its shortfall comes at a time when the industry is looking to make the transition to 4G.  Sprint was first to the 4G game, but the technology it picked -- WiMAX -- has been cast aside almost unilaterally, globally, in favor of LTE.  As a result, Sprint has been forced to shift gears and prepare itself for a costly LTE deployment, essentially losing all its hard WiMAX work.  Between that LTE deployment and financing for improved 3G coverage, Sprint expects to pay $7B USD.

This double trouble for America's third largest carrier greatly raises the risk level, according to analysts.  Michael Nelson, an analyst with Mizuho, comments, "They're betting the house on two things at the same time.  If they pull it off, great. If they don't, their financial performance would get materially worse, and they could have significant liquidity risks."

Cell tower construction
Sprint is also being hit hard with network upgrade costs as it tries to transition to LTE 4G [Source: Sun Journal]

Sprint says in the best case it may generate a $100M USD free cash flow for 2011 (worst case it would have a negative cash flow of $200M USD), and that it would have a positive cash flow for 2012.  However, those numbers don't tell the full picture as they don't include the interest payments on the big loans Sprint hopes to draw from vendor financiers.  With interest factored in, Sprint will likely be continuing to post big losses.

The network added 1.3 million subscribers in Q3 2011, but lost just a bit more than that, yielding a net decline of 44,000 customers.  Sprint may face more defections as it cuts its unlimited data plans and begins slapping customers with fines.  Sprint's tethering plans are currently the most expensive in the industry, while its 4G coverage is worse than its rivals.

III. Sprint's 4G Service Provider is in Trouble as Well

Sprint is also in the process of negotiating its contract with ClearWire Corp. (CLWR), who provides its WiMAX service.  The move is broadly seen as a good thing for Clearwire, as investors had previously feared that Sprint might bail on its partner.  

The pair have an interesting relationship; Sprint is a majority owner of ClearWire.  ClearWire paid Sprint to build its 4G network.  Then Sprint and other carriers paid Clearwire to use that network.  

However, investors have grown concerned recently that bankruptcy risk from ClearWire could lead to Sprint bailing on the relationship.  ClearWire, like Sprint is looking to take on debt.  The company -- which has a market cap. of $1.85B USD -- needs $900M USD in financing.

Ultimately it's far from game over for Sprint and ClearWire.  But both companies seem to be digging deep into the money hole and look to be headed to big losses, when you factor in interest.  

Sprint, in particular, made a huge gamble with the iPhone -- at a time when the iPhone seemed to be waning in popularity versus Google Inc.'s (GOOG) Android juggernaut.  Sprint CEO Dan Hesse promises the deal will pay off.  But Sprint admits it won't see profit from the deal until at least 2015 and that it doesn't know how many iPhones in it will sell.  Sprint better hope that number turns out to be "a lot."

Source: Reuters

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