Sprint plans to tap debt market -- again

Adding another $2 billion debt to its balance sheet means reduced flexibility for Sprint, but Clearwire cheers the news.

By Trefis Mar 1, 2012 2:37PM
Image: Silver globe with twinkling lights (© Tetra Images/Getty Images)Sprint (S) is accessing the bond market for the second time in less than four months as the third-largest U.S. wireless carrier looks to finance expensive network upgrades and subsidize Apple's (AAPL) iPhones for its customers. 

The company further said that it may also use a part of the proceeds from the $2 billion notes offering to fund partner Clearwire's (CLWR) LTE plans, sending shares in the cash-strapped wireless company up more than 4% on the news Tuesday. The debt sale gives Sprint additional financing as it struggles to compete against larger rivals Verizon (VZ) and AT&T (T).

Sprint Stock Break-Up

Sprint-Clearwire relationship on firm footing


Sprint and Clearwire have both been in dire straits of late after their bet on WiMax failed to pose any threat to AT&T and Verizon, who have now taken a lead in rolling out their next-generation LTE networks. Though late to the party, Sprint is trying to aggressively build its LTE network to make up for lost time and is also looking to augment its network with Clearwire's in the future. Moreover, Sprint's potential partnership with Lightsquared soured after the startup failed to secure regulatory approval for deploying its LTE network, making Clearwire Sprint's only LTE partner.


This makes it imperative for Sprint to help Clearwire with the cash required for its LTE plans. Sprint is laying out its own LTE network, but it needs Clearwire's additional spectrum to lay out a LTE network robust enough to compete effectively with Verizon and AT&T. And Clearwire's current financial position leaves it with little funding choices apart from Sprint.


Sprint's balance sheet getting more stretched


But Sprint has its own debt concerns as well, though they are not as serious as Clearwire's. Sprint has about $12 billion debt on its books, which compares with a total market cap of around $7.6 billion. Despite these concerns, Sprint had managed to raise about $4 billion in November to meet a maturing debt obligation as well as finance its LTE upgrade plans. It had also used up about $350 million of the funds to finance Clearwire's equity offering.


With Sprint now much more dependent on Clearwire than before, it became necessary to increase Clearwire's financing. But adding another $2 billion debt to its balance sheet means reduced flexibility for the company as it now has to be very careful with what it does with the cash.


During the latest earnings call, Sprint guided for an aggressive 2012 with respect to capital expenditures, saying that it will probably be investing over $6 billion in network upgrades and LTE deployment. We believe that the capital expenses will remain at elevated levels for the next couple of years, before declining rapidly as the company completes its LTE build-out and gradually phases out the iDen network. Sprint's stock is, however, highly sensitive to its capital expenditures.


You can see how the stock price plummets when you tweak the trend-line to increase capital expenditures over the forecast period in the chart below. We think the current market price reflects this sensitivity, as the market likely doesn't have confidence in management's guidance.


Sprint Mobile Capex as percent of Mobile Gross Profits

We have a $3.68 price estimate for Sprint's stock, which is almost 45% higher than the market price.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
275
275 rated 2
482
482 rated 3
656
656 rated 4
643
643 rated 5
650
650 rated 6
638
638 rated 7
485
485 rated 8
281
281 rated 9
127
127 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
HPQHEWLETT PACKARD CO10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.