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?
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."
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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