A Scary Note for Sprint Investors

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There was the smell of fear in the air Monday, when Sprint Nextel's (NYSE: S  ) shares dropped 4.5% in premarket trading. What caused that bit of panic? A research note by an investment analyst who carefully laid out the reasons a Sprint bankruptcy is not such a far-fetched outcome.

Bernstein Research analyst Craig Moffett wrote that Sprint has reached the point where its fight to survive as the nation's No. 3 mobile carrier could go in two totally different directions.

"In the first," he wrote, "the company successfully navigates its complicated Network Vision upgrade, stabilizes Clearwire's (Nasdaq: CLWR  ) financial position, and delivers a compelling 4G product. In the second, some combination of its gargantuan take-or-pay contract with Apple, a hobbled 4G offering, and a stupendous debt burden bring the company to its knees."

Into the light
Sprint's Network Vision upgrade includes combining multiple technologies onto fewer and smaller hardware platforms to reduce operating costs and improve its service. It also includes rolling out a 4G LTE network in 10 major cities by mid-summer. This LTE network is critical to its future success.

Unfortunately, AT&T (NYSE: T  ) and especially Verizon (NYSE: VZ  ) have quite a head start in their 4G LTE deployment. AT&T provides LTE service to 28 markets and said it plans to add 12 more. Verizon offers LTE coverage in close to 200 markets and said last week it will double that number by the end of the year.

Sprint's relationship with Clearwire is complicated. Sprint has been the majority owner of Clearwire since 2008, and Clearwire has been the provider of Sprint's 4G WiMAX network since then. Sprint was the first to claim "4G" service with WiMAX, but that technology has fallen out of favor with the advent of LTE. As Clearwire has not had the wherewithal to upgrade to LTE, Sprint has been faced with the choice of whether to help out Clearwire financially or cut it loose.

Clearwire forced that issue at the end of 2011, when it, by threatening not to pay the interest due on its $4 billion of debt, pushed Sprint into funding agreements totaling $1.6 billion. Now Sprint's finances are even more deeply entwined with Clearwire's.

But now that Sprint's original 4G LTE hope, LightSquared, could not get FCC approval for its hybrid satellite frequency/earth station LTE network, Clearwire's LTE buildout will have to fill that void for any chance of staying in the LTE game with AT&T and Verizon.

Into the dark
Sprint CEO Dan Hesse was beside himself with joy when the company won the right to offer its customers the iPhone. But the "gargantuan" -- as Moffett called it -- four-year, $15.5 billion contract that Sprint had to make with Apple (Nasdaq: AAPL  ) to get those iPhones, may end up sucking so much cash from the company that it won't be able to make its $7 billion Network Vision upgrades.

And there's Sprint's debt load: $1.8 billion maturing in 2013, $1.4 billion in 2014, and $2.6 billion in 2015. Clearwire has $3 billion in debt maturing in 2015.

The recent introduction of the LTE-capable iPad poses another question for Sprint. What will happen to its ability to sell those iPhones it has committed to buying if Apple comes out with an LTE-capable iPhone before Sprint's LTE network is up and running? Will customers rush to the competition for LTE iPhones?

Second opinions
Other Sprint watchers don't see the company's position as being as precarious as Moffett does. Pacific Crest analyst Steve Clement told Reuters, "The risk they could go bankrupt has gone up, but that's a very, very low risk."

Ping Zhao, an analyst from Credit sights, told Reuters, "I don't believe in the next couple of years they're going to be even close to bankruptcy."

Bankruptcy, really?
Even Moffett tempered his words somewhat in his report. "To be clear, we are not predicting a Sprint bankruptcy. We are merely acknowledging that it is a very legitimate risk." But he also added, "we believe that risk is rising."

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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 Apple and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 21, 2012, at 10:12 PM, mnosense wrote:

    Yeah right, all this BS came from the same Monkey.

    Can you tell us something new? Where were you before this idiot spoke out?

  • Report this Comment On March 22, 2012, at 12:40 PM, lucasmonger wrote:

    Although many of the scary points are valid, the opening line about a 4.5% drop of a $2.75 stock (12.4 cents) is hardly anything to worry about. Its just common noise in the world of Wall Street.

  • Report this Comment On March 22, 2012, at 12:51 PM, GordonsGecko wrote:

    There are Sprint investors?

  • Report this Comment On March 22, 2012, at 1:19 PM, tech3x wrote:

    Bernstein's comments on bankruptcy are over hyped. The saber rattling didn't start until Sprint did the contract with Apple. Sprint may have bet the farm with the Apple contract but I hardly think Apple won't give Sprint some concessions regarding the contract if there comes a time down the road that Sprint would go bankrupt. Sprint is a cash cow for Apple. Apple would likely yield instead of losing a cash cow.

    Some optimism

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