Sprint's Secret Transformation Isn't Enough to Buy

Wireless industry investors are likely transfixed by Sprint Nextel's (NYSE: S  ) current limbo regarding acquisitions and suitors. Beyond overt headlines, Sprint has a covert secret that makes its business more interesting for the long term -- and even transformative for the wireless industry at large. Given this factor, I wish I could put Sprint on the watchlist for the real-money Prosocial Portfolio I'm managing for Fool.com.

However, I am paying attention to this stock, but I just can't buy. Here's why.

Headline drama
Who will acquire Sprint has been making major headlines this week. Japan's SoftBank made a $20.1 billion offer for the wireless company, but DISH Network (NASDAQ: DISH  ) made an unsolicited $25.5 billion offer.

DISH has criticized the SoftBank deal, floating the argument that if the Japanese company buys Sprint, it could open the U.S. up to security issues, such as Chinese cyberattacks.

Regardless, this week a U.S. security committee cleared the SoftBank deal despite the hysteria. Meanwhile, Clearwire (UNKNOWN: CLWR.DL  ) , a provider of 4G services, has postponed its shareholder vote regarding Sprint's overture to buy its remaining stake for $3.40 per share, citing DISH Networks' bid to buy it for $4.40 per share.

This situation is messy as it is.

Mobile power
I wish it wasn't so. Sprint CEO Dan Hesse has impressed me with his forward-thinking views on the transformative powers of the wireless industry as well as green initiatives already in action.

At the beginning of May, Ceres' annual sustainability conference in San Francisco brought together representatives from investment firms, major corporations, and various non-governmental organizations. The goal was to discuss the opportunities and threats related to climate change.

Hesse was one of the speakers, and he pointed out that the wireless industry is driving us to an interesting future, which we may not always recognize while we post on Facebook, share our photos, play Words with Friends, or text our buddies. It's already changing the way people use health care, education, and banking, for example. Some of the new technologies enable positive social impacts as well as environmental ones.

He pointed out that messaging can warn the Red Cross about disease impacts or natural disasters, and when Haiti's tragic earthquake occurred, mobile users could easily text disaster relief donations. Mobile applications can help us use our own resources more efficiently, too. Take GPS systems that allow people to circumvent traffic and waste less fuel. Wireless applications could also allow for quick rescheduling of traffic lights given traffic loads, further easing congestion.

Even beyond far-reaching impacts from wireless technology overall, Sprint has plenty of initiatives that have been ahead of the curve. It's saved 700 tons of paper through its eco-friendly, reusable envelope. It has come up with initiatives to reduce packaging size (and, therefore, save fuel and other transportation costs) and it utilizes environmentally friendly recycled materials and soy-based inks. Such initiatives not only reduce carbon footprints but they also reduce costs over the long run.

Hesse pointed out a sad fact from participating in 20 quarterly conference calls with investors as Sprint's CEO: He's never been asked about sustainability initiatives. He cemented what many of us knew already: Short-term traders focus on shareholder return and disregard stakeholder return.

That's a sad commentary on how little Wall Street analysts and investors think about sustainability, despite many clear signs that green initiatives save money, resources, and the environment.

Hesse stated the desire to reach out to socially responsible investors and change the dialogue with Wall Street. Right now, socially responsible investors are the ones who would most keenly understand the ramifications of what Hesse is trying to do, even while some investors remain oblivious.

A risky environment indeed
The Prosocial Portfolio I've been managing for Fool.com seeks to take ESG (environmental, social, and governance) factors into consideration. Given Hesse's interest in investors who cheer companies evolving into a greener future, I'd love to truly consider the stock for the portfolio.

Unfortunately, I can't get past the fact that Sprint faces many challenges on an ongoing basis.

It's not just the complexity of the dealings with SoftBank, DISH Networks, and Clearwire, although those are serious risks. For example, according to Sprint's most recent Form 10-K, Sprint could face steep fees if it backs out of its deal with SoftBank. Should the SoftBank deal go through, "NewSprint" will still be a publicly traded company, but investors will own just 30% and Softbank will own the remaining 70%.

Sprint has faced a brutal competitive landscape over the years, and it shows. The company's shareholder return over a five-year period has lagged the S&P 500. Although it's grown its revenues again as of its most recent fiscal year, it's been operating at annual losses for years. The company is also highly leveraged, and I try to avoid high levels of debt in the stocks I purchase, especially if the business faces challenges.

Greener pastures
Hesse's speech at the Ceres conference inspired me in many ways, and he's clearly a forward-thinking, intelligent individual who can see where the future is going for wireless and for the planet and how companies can reenvision how to do business better. Sprint's evolution into greener "pastures" is certainly smart thinking, and established companies that try to transform themselves get major brownie points in my investment book.

However, beyond social responsibility and positive business initiatives, I aim for positive returns for the Prosocial Portfolio, too. I wish I could believe that Sprint's green initiatives mitigated current risks, but I don't. Regardless, I hope more management teams will adopt Hesse's vision and more investors will recognize that these initiatives benefit profits, people, and planet.

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  • Report this Comment On May 31, 2013, at 12:21 AM, nivegulu wrote:

    It's still far from fair value ~$12 pps. http://www.reuters.com/article/2013/03/12/crest-clearwire-st...

    New Study Says Sprint Bid Vastly Undervalues Clearwire

    Tue Mar 12, 2013 12:32pm EDT

    http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e3754...

    WASHINGTON, March 12, 2013 /PRNewswire-USNewswire/ -- A new study by former

    FCC commissioner Dr. Harold Furchtgott-Roth and the Analysis Group asserts

    that the price Sprint has offered for Clearwire Corporation significantly

    understates the true value of Clearwire's technology opportunities and wireless

    spectrum holdings. The study supports Crest's contention that the public would

    be best served if Clearwire remained free to offer its spectrum to multiple

    wireless carriers.

    The study was submitted to the Federal Communications Commission today by Crest

    Financial Limited, a major minority shareholder in Clearwire, in connection with

    the FCC's review of Sprint's proposed acquisition of Clearwire.

    According to the Furchtgott-Roth Report, Sprint's $2.97 per share offer for

    Clearwire represents a value of just $0.11 per MHz pop for Clearwire's

    spectrum and significantly understates the current value of Clearwire's unique

    spectrum holdings. The Report says that applying reasonable assumptions to the

    multi-customer business plan presented by two firms advising the Clearwire board

    results in a valuation between $9.54 and $15.50 per share. These share price

    values correspond to spectrum prices between $0.31 and $0.50 per MHz pop.

    The Sprint offer also fails to account for Clearwire's unique ability to deploy

    wireless technology that offers far greater future value than the technology

    currently offered by most major U.S. carriers, the study says. In his report,

    Dr. Furchtgott-Roth explains that TDD-LTE technology allows for higher download

    speeds and efficient spectrum utilization. He also notes that "the only band of

    spectrum in the United States that can be developed for TDD-LTE services is

    the 2.5 GHz band largely controlled by Clearwire."

    The Report, which was commissioned by Crest, explains that Sprint's offer

    ignores both the value ascribed to similar spectrum in recent transactions and

    the fact that Clearwire's spectrum holdings, together with its technology

    offerings, are well-suited for use by multiple carriers. "The fragmented

    spectrum holdings of other U.S. carriers create an opportunity for Clearwire to

    offer a valuable wholesale service," the report states. The Report supports

    Crest's argument made in filings with the FCC that Sprint's acquisition of

    Clearwire would harm not only Clearwire shareholders but also the public at

    large.

    Furthermore, the Report says that for unexplained reasons Clearwire abandoned

    the lucrative multi-customer strategy in favor of the Sprint acquisition. The

    Report supports Crest's position that the public would be best served if

    Clearwire could offer its spectrum to multiple customers, thereby allowing more

    wireless carriers to pursue new technologies and mount challenges to the

    wireless market's current duopoly.

    Dr. Furchtgott-Roth was an FCC commissioner from 1997 through 2001. Before that,

    he was chief economist for the House Committee on Commerce and a principal staff

    member on the Telecommunications Act of 1996.

    The Furchtgott-Roth study echoes a separate study, also done for Crest, by

    Information Age Economics (IAE), which says that the true value of the wireless

    spectrum owned by Clearwire is two or three times higher than the value

    reflected in the price Sprint has offered to pay to acquire Clearwire.

    The Furchtgott-Roth Report can be found here: www.bancroftpllc.com/crest.

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