More Woes for Sprint and Clearwire

English majors, rejoice: I have only a few more cliches left to describe the dire economic straits that both Sprint Nextel (NYSE: S  ) and Clearwire (Nasdaq: CLWR  ) constantly find themselves trying to escape. Unfortunately, though, I'll have to throw one more hackneyed phrase into their saga: "piling on."

That's what it may seem the credit ratings agencies are doing to both companies. As if they didn't have enough woes, Sprint and Clearwire will each have an even deeper ratings hole to climb out of if they want to survive.

The junk bond man cometh
Moody's Investors Service, a division of Moody's (NYSE: MCO  ) , downgraded Sprint well below investment grade, from Ba3 ("Speculative Grade:  Questionable") to B1 ("Speculative Grade:  Poor"). This came about, in part, because of Moody's displeasure that Sprint isn't working with Clearwire to produce an upgraded 4G network together. By going it alone, Moody's indicated, Sprint will need between $6 billion and $8 billion by 2013 to build its own 4G network and pay off its debt as it matures.

Sprint blew it by not reaching a "win-win arrangement with Clearwire," according to Moody's.

As for Clearwire, Moody's downgraded it one notch to Caa2 ("Speculative Grade:  Very Poor"), mainly for the likelihood that Sprint won't extending the present 4G agreement it has with Clearwire. As such, the company will have to find another partner or sell of its most valuable assets, its spectrum licenses, to pay its debt obligations after next year.

Standard & Poor's Ratings Services, a division of McGraw-Hill (NYSE: MHP  ) , also jumped on the pile, last week threatening Sprint with a downgrade. It didn't like the increased debt load that Sprint would have to take on with its plans to accelerate its own network upgrade. It also wasn't crazy about the profitability hit Sprint will suffer with its agreement to sell Apple's (Nasdaq: AAPL  ) iPhone.

Bleak houses
These downgrades come at a vulnerable time for both companies. For Sprint, if it's not trying to stop the merger between AT&T (NYSE: T  )  trying to figure out what to do with the unwieldy deal it made with LightSquared, whose proposed LTE 4G network is so embroiled in controversy, it may never get built.

For Clearwire, losing Sprint as its main wholesale customer will be a huge blow. It now has to raise enough money -- an estimated $600 million -- to add an LTE network to its slower WiMAX network in order to have any chance at all of staying alive. This downgrade from Moody's, which almost sounds the depths of junk-bond status, will only make any money-raising attempts more difficult and much more expensive.

Sprint Nextel and Clearwire would obviously be very speculative buys right now. Check out a list of five stocks that Motley Fool analysts picked for the Fool to buy for its own portfolio.

Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Moody's, Apple, and AT&T, creating a bull call spread position in Apple, and writing puts in Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (3)

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  • Report this Comment On October 18, 2011, at 6:34 PM, jhf678 wrote:

    Same old story isn`t it? Why now after Sprint has a record sales day of the iPhone? Why now when Clearwire is having a break?

  • Report this Comment On October 18, 2011, at 6:46 PM, OutThisLife wrote:

    I think fool just wants to short.

  • Report this Comment On October 18, 2011, at 7:16 PM, XMFDRadovsky wrote:

    Unfortunately for Sprint, Fitch Ratings also piled on today, downgrading Sprint deeper into junk territory. It did so for pretty much the same reasons that Moody's and Standard and Poor's downgraded Sprint's credit rating.

    I'm sorry I didn't see this earlier or I would have included it in the article.

    Dan

  • Report this Comment On October 18, 2011, at 8:07 PM, bozobills wrote:

    then just keep on shorting it "FOOL" and when you have to cover you can have mine!! ha-ha !!

  • Report this Comment On October 18, 2011, at 8:59 PM, Aryabod wrote:

    @ Dan. Thanks to people like you I'm able to buy Sprint cheaper by the day. Keep on piling on the negative news, the more the merrier or else I wouldn't be able to get my hands on so many stocks at this price.

    If I could sell everything I had today I would buy Sprint for all the reasons the Anal-cysts decided to downgrade the stock.

    Mr. Hesse's move to complete his 'Network Vision' by 2013, which when consummated will cover 277 million subscribers with TD LTE 4G, was brilliant. This in tandem with contracting the iPhone for the forseeable future will be a game changing move on Sprint's part, however the fruits won't begin to manifest themselves for another 6 quarters. When they do they will be sweet. Not only will they have extra cash flow from subscriber growth but they will also benefit from increased savings associated with eliminating Backhaul fees and 28,000 excess towers.

    As a reminder 15% compounded over 5 years doubles your money. However I will wager with anyone that Sprint could quite easily quadruple your money in less than 5 years.

    Let the clock begin.

  • Report this Comment On October 18, 2011, at 10:29 PM, jopow wrote:

    In the case of Clearwire, they could have sold spare spectrum last year for billions, but they choose to save it as a more valuable asset worth more today. The spectrum is worth tons of money today, and much more tomorrow. The shorts don't care and they are just punishing Clearwire to no end. The shorts could be crashing and burning in flames based on any number of deals that Clearwire can complete. So shorting is really an extreme risk trade.

    As for Sprint, given what AT&T was willing to pay for T-Mobile, Sprint is again a steal at these exceptionally low prices. Sprint had no choice but to get moving on 4G LTE because they have to be ready for the IPhone 5 that will be 4G LTE capable. Sprint also has to be able to sell the Androids and RIM and Microsoft phones that will be LTE 4G, not WiMax. Apple is not going to bother producing a WiMax IPhone for Clearwire, and I am not aware that there is any WiMax IPhone made at all for use overseas.

    Clearwire and Sprint really need to merge and coordinate somehow that makes sense. That may happen when all of the right conditions happen. Clearwire really needs an Apple Phone, and the only way they can get it is to be 4G LTE, either with Sprint involved, or China Mobile involved, who is going for LTE TDD. Either way, Clearwire has to get Apple products or basically go no where.

  • Report this Comment On October 18, 2011, at 11:11 PM, conradsands wrote:

    Contrary to this article, here's a fact-based article about Sprint -- http://www.thestreet.com/_yahoo/story/11281017/1/sprint-retu...

  • Report this Comment On October 18, 2011, at 11:12 PM, conradsands wrote:

    Sprint Customer Satisfaction #1

    Sprint is the only U.S. carrier to offer new and existing customers the iPhone experience with unlimited data plans starting at $79.99 per month. Sprint Nextel has been recognized as a J.D. Power 2011 Customer Service Champion — one of only 40 companies to have earned this distinction this year. To qualify for inclusion on this elite list, the companies must not only excel within their own industry, but also stand out among leading brands in 12 major industries evaluated by J.D. Power and Associates.

  • Report this Comment On October 18, 2011, at 11:12 PM, conradsands wrote:

    Consumers are finally noticing that AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon and AT&T (both in the top 5 for corporate lobbying) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists to push the U.S. market into a wireless industry duopoly -- the American consumer.

    Taking into account the whole U.S. market, a combination of AT&T and T-Mobile would increase the Herfindahl-Hirschman Index (HHI), a widely accepted measure of market concentration, to 3,216 from 2,848, according to a Bloomberg analysis. Any score above 2,500 indicates a highly concentrated market, and any increase of more than 200 points clearly enhances market power, according to federal guidelines.

    If this ridiculous deal goes through, Sprint will be the only low-priced post-paid national wireless carrier left in the United States. T-Mobile customers are already fleeing to Sprint because they know they won’t get low prices from AT&T or Verizon. But AT&T and Verizon are two of the top corporate lobbyists in the country, so beware of how things could “mysteriously” turn in this case.

    “It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window,” said Herbert Hovenkamp, professor of law at the University of Iowa, who is considered by many to be the dean of American antitrust law. “This merger clearly seems to violate them.”

  • Report this Comment On October 18, 2011, at 11:12 PM, conradsands wrote:

    AT&T’s Dirty Money at Work …

    Snippets from CNN story …

    AT&T lobbyists push for T-Mobile deal

    For years, AT&T has been one of the biggest political and lobbying forces in Washington, D.C. Last year, it spent $15.3 million and had 93 lobbyists on its roster, including six former lawmakers. Germany's Deutsche Telekom spent $3 million on lobbying for T-Mobile USA in 2010, armed with 41 lobbyists and one former lawmaker.

    Many lawmakers have a personal interest in seeing AT&T do well. AT&T ranked as the sixth most popular investment among members of the House and Senate in 2009, the most recent year for which such data is available, according to the Center for Responsive Politics.

    And AT&T is considered a heavy hitter during campaign election cycles. In 2010, donors with links to the company made nearly $4 million in campaign contributions to candidates running for federal office.

  • Report this Comment On October 18, 2011, at 11:14 PM, conradsands wrote:

    While Sprint said that it has contracts with Clearwire through 2012 and that it can only speak about the existing contracts it has, this should not be misconstrued as Sprint cutting the cord with WiMAX and Clearwire.

    It will sell WiMAX devices until the end of 2012, but that also means that Sprint customers will be using these devices for several years longer and hence Sprint will have to buy WiMAX capacity from Clearwire.

    Furthermore, Sprint is Clearwire's largest shareholder and it is in Sprint's best interest that Clearwire succeeds. Both companies are negotiating on how their cooperation will develop beyond 2012. Considering that Clearwire's stock declined substantially more than Sprint's, we can assume that the terms will be more favorable to Sprint than before, but still ensure Clearwire's survival and its transition to TDD-LTE. With Qualcomm's(QCOM_) MDM9615 chipset that combines TDD- and FDD-LTE, EV-DO, and HSPA+ on one chip, the future of sufficient devices that can navigate Clearwire's and Sprint's networks should be set.

    Lightsquared

    Lightsquared is an easy opportunity for Sprint to create pure upside. If Lightsquared can fix its GPS issues then Sprint will profit from the cooperation from both companies. If Lightsquared is unable to resolve its problems, then Sprint will not lose anything.

  • Report this Comment On October 18, 2011, at 11:15 PM, conradsands wrote:

    AT&T and T-Mobile Together ... Bad idea on many levels …

    Pricing: Controlling approximately 80 percent of the market and 90 percent of its profits, the deal would give the Twin Bells significant, unchecked leverage to increase prices for consumers for voice and data.

    Last Mile Access: Control of most of our nation’s vast wireline infrastructure and the critical “last mile” offers the duopolists the ability to raise competitors’ costs, reduce their network quality and quash competitive alternatives.

    Choice: Next-generation smartphone and tablet manufacturers would be discouraged from partnering with any company other than AT&T or Verizon because of their massive scale, limiting choice to consumers and opportunity for manufacturers.

    Innovation: Content and application developers would lack incentive to create content for companies other than the Twin Bells, diminishing innovation and harming developers as well as the capital markets that fund them.

  • Report this Comment On October 18, 2011, at 11:17 PM, conradsands wrote:

    In a poll that asked 4,040 smartphone users how many dropped calls they had experienced in a three-month period, AT&T — carrier of Apple's iPhone and iPad mobile devices — came in dead last among the country's four largest carriers.

  • Report this Comment On October 18, 2011, at 11:19 PM, mnosense wrote:

    Ok Dan, you're truely a FOOL. AT&T is dying, since it runs out of steams.

    To buy T-mobile means it's desperate. Can you figure out how much it will cause ATT to build LTE? Can you see its debts are growing billions each quarters?

    The day ATT slides, the day Sprint shrines.

  • Report this Comment On October 23, 2011, at 9:01 AM, Telecombob wrote:

    I will let you guys in on a few dirty little secrets, that shouldn't be secrets all that much.

    1. No carrier wants to migrate to 4G. They have no choice, but they really aren't in the hurry that they would like us all to think that they are. Costs are significant and pricing to recoup said costs is problematic. The "upgrades" typically are overloaded within a short period of time. They would be happier selling us all what they already have, and not sink any more cash into their networks, at least for a little while. They don't even really want to build anymore sites, even in areas with poor coverage. They whine when the government gets on them about doing it.

    2. Sprint has determined that it will need to utilize LTE for its "long term evolution," not Wimax. Whether Sprint builds its own LTE network, or uses Clearwire's network, equipment will have to be repurchased. Clearwire, allegedly has installed dual radios in some markets, but last I heard, there was some question as to how well they would work when not running Wimax. You may assume that Clearwire and Sprint's networks share a strong overlap of sites, you would be wrong. Certainly, integration is possible, but we have all seen how well Sprint handled that with Nextel. Best to work within their own network of sites.

    3. As inept as Sprint may be, Clearwire has shown itself to be even more inept. So long as Dr. John Saw works at Clearwire, you can bet that the wrong decision will be made. Look how the rush to Wimax has turned out for them. At best, it has given Sprint a short term bump. Think of it this way, consider how much more Clearwire would be worth if they only held their spectrum and didn't build a network and accumulate so much debt.

    4. Lightsquared is not a viable alternative for anyone. Lightsquared will never construct a national LTE network. The model is nonsensical. They don't have the cash or financing. Their best bet is to sell their interests in space and move on.

    5. The wholesale LTE model likely will not work. Costs are too high. Actually it would cost the wholesaler basically the same amount to construct its network, as it would any retailer. 10.00 per month from all three major carriers won't get the job done, let alone from one.

    6. Clearwire is always touting the value of its spectrum. While, it is a limited resource that could have great value, this is only the case when there is an interested and well heeled market for it. The problem for Clearwire is that the demand is not so strong. Unless, a new player would enter the game, the big carriers likely will be able to get along fine, until the spectrum becomes available via Clearwire's inevitable bankruptcy. Even then, the price of the spectrum may turn folks off a bit. This is more of an old industry adage than it is a reflection of true market factors.

    7. Finally, there exists this notion that the U.S. government will not allow the playing field to be reduced to 2 major carriers. Of course, this depends on who is in charge at the time. I will predict this, however, Dan Hesse's big upgrade plans will not come in on schedule, nor at the cost he stated, and may not come in at all, at least not for Sprint.

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