By MARTIN PEERS
Is Sprint finally picking up speed?
This week's government court challenge to the AT&T purchase of T-Mobile was a huge victory for the long-embattled wireless carrier, Sprint Nextel. Sprint CEO Dan Hesse was the most vocal opponent of the deal, which could have made life very difficult.
Reuters
If the deal had gone ahead, Sprint would have been a distant No. 3 battling two behemoths. Based on June 30 numbers, its 52 million subscribers would be dwarfed by AT&T/T-Mobile's combined 132 million and Verizon Wireless, with 106 million. In an industry where scale is everything, Sprint would have been permanently hobbled. No surprise, then, that Sprint shares are up 9% this week.
Sprint still faces near-term problems. With a costly upgrade of its network underway, free cash flow remains relatively weak and debt-refinancing needs loom. Sprint's already-weak profit margins will likely suffer next year as it starts to offer, and subsidize, Apple's iPhone.
In addition, the end of the AT&T/T-Mobile deal might cost it some options. One potential partner for Sprint is a group of cable-TV operators that hold valuable wireless spectrum. The cable group may now choose to hold off doing a deal, waiting to see whether T-Mobile stays unhitched. Its spectrum fits better with T-Mobile's.
But investors who focus on these negatives are missing a longer-term opportunity. The network upgrade already underway should lift Sprint's profit margins—based on earnings before interest, taxes, depreciation and amortization—by 10 percentage points over the next few years, Credit Suisse analyst Jonathan Chaplin estimates. That is because it eliminates Sprint's biggest problem: having to operate two separate wireless networks, including one it acquired when it bought Nextel.
Because the technologies aren't compatible, Sprint has had to operate far more cell sites than bigger rivals: 68,000, compared with Verizon's 46,000. Mr. Chaplin estimates Sprint's cost $5,000 a month each to operate. Sprint will shutter about 20,000 cell sites as a result of the upgrade.
The profit improvement will also come from elimination of an estimated $1 billion in payments made to Verizon to cover customer use of its network in areas where Sprint's main service has poor cell coverage. Applying these cost savings to this year's estimated Ebitda would put Sprint on a multiple of 3.2 times, says Credit Suisse, compared with AT&T at 5.3 and Verizon Communications at 4.1.
And Sprint has strategic options to boost scale through possible partnerships, even beyond the cable operators. It could even try to buy T-Mobile itself. The government's opposition to AT&T doesn't mean a Sprint/T-Mobile deal couldn't get through, says Andrew Lipman, head of the telecom group at Bingham McCutchen. Indeed, one possible argument is that three strong competitors are better for a market than two dominant companies and two laggards.
The long distance investor should keep Sprint in mind.
Write to Martin Peers at martin.peers@wsj.com
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