Will $3.5B Spectrum Sale, Leaseback Save Sprint?

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sprintIt’s not yet time for Sprint to pop the champagne corks but the carrier has averted a financial crisis by mortgaging some of its 2.5 GHz spectrum. Wall Street gives the carrier credit for the move which buys time to pay off creditors.

Sprint proposed a $3.5 billion sale and leaseback; the spectrum it’s mortgaging is being used in about 77 percent of its 2.5 GHz-enabled sites and 33 percent of its 1.9 GHz-enabled sites, according to Bloomberg. It’s the third and final part of the plan by SoftBank Group Corp. owner Masayoshi Son to use special-purpose entities to turn key assets into cash.

Sprint has staved off creditors for the moment but still has work ahead. Gimme Credit analyst Dave Novosel called the move “a great short-term solution … but they are going to need to generate cash flow to pay off these debts.”  

The number four wireless carrier has $37 billion in debt, seven years of losses and a mature wireless market requiring promotions and price cutting to retain customers, according to analysts. CEO Marcelo Claure has said if the company is revived it would be “the greatest turnaround in history.”

Claure took over in 2014, and has dramatically cut prices, sometimes offering half off his competitors’ rates, according to Bloomberg. Recently he cut Sprint’s unlimited family plan to $140 for four people, compared with $160 at T-Mobile.

But while the lowered rates help retain customers, they’re not enhancing Sprint’s bottom line. “At some point you have to start attracting customers without giving away the store,” said Novosel.

Analysts including Craig Moffett of MoffettNathanson LLC flagged the rate of cash burn and gave the company a year to live based on the money left to fund the business. Sprint cut 2,500 jobs, some 7 percent of its workforce, to slash $2 billion in annual costs and cut network spending by 36 percent this year to $3 billion.

The airwave deal is similar to phone inventory and network arrangements. Sprint will sell the spectrum to a wholly owned special-purpose entity, which will borrow against the asset by selling private placement notes.

“The bet is clearly on getting the network quality on par, and improving subscriber trends in hopes of buying back these assets in the future, but with no end in sight to competitive pressures, we remain highly skeptical,” wrote Jefferies LLC analyst Mike McCormack in a client note. “The financing is good on two counts: it eliminates the liquidity risk, and it lowers their cost of capital,” stated Moffett. “On the other hand, they have done nothing to put themselves on the path to real sustainability.”

A Sprint spokesman told Bloomberg the company has been making progress on several fronts including monthly subscriber growth and lower capital costs. Asset-based financing has helped raise $7.9 billion and “gives us time to stabilize the business.”

October 14, 2016

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