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Sprint's Wireless High Wire Act

Information Processing: TELECOMMUNICATIONS


Two cable partners want out, and talks are delicate at best

Two-and-a-half years ago, Sprint Corp. Chairman William T. Esrey saw what he thought was the communications company of the future: a joint venture with three cable-TV companies. The company would build a $9 billion digital wireless system using its personal-communications service (PCS) technology to leapfrog competitors, and it would use the cable systems to get into the local-calling business. Esrey figured the wireless part of the venture would be larger than Sprint itself by 2001.

So much for the vision thing. Sprint PCS has been plagued by delays, and its cable partners are losing their ardor not only for the venture but for the phone business, period. The alliance backed off last year from plans to sell local service over the cable companies' lines. Now, Sprint is in talks with its partners to find a way for at least two of them--Tele-Communications Inc., with a 30% stake, and Comcast Corp., with 15%--to cut their equity in Sprint PCS. Cox Communications Inc., the third cable partner, is likely to hold on to its 15% share.

TWO SCENARIOS. Fortunately for Sprint, it can afford to rescue the joint venture. Its long-distance business is going well, reflected in the 20% rise in its long-distance calling volume last year and the 22.1% gain in its stock price. Plus, selling off a 20% stake in Sprint last year to Deutsche Telekom and France Telecom for $3.6 billion has given Esrey financial room to maneuver. But if the wrangling with his cable partners drags on, Sprint could lose valuable time.

According to executives close to the talks, which have been going on for several months, two possible Sprint PCS scenarios are on the table. The cable companies could either sell their stakes in the venture directly to Sprint, which already holds 40%, or the wireless venture could go public, allowing the partners to sell their shares on the open market. In either case, the cable companies are eager to cash in at least part of their holdings. "If we'd had our way, we would have gone public six months ago," says a senior cable executive.

So far, the negotiations are amicable--all of the companies want to preserve the value of their investments. However, tensions are rising. For example, the cable partners have yet to approve a 1997 budget. That's largely a technicality right now, but if there's no 1997 or 1998 budget by next Jan. 1, the cable partners could push to liquidate. "Think of it as a bargaining chip," says the cable executive.

Sparring among the partners comes at a critical juncture for Esrey: Sprint PCS is in the midst of launching its network. The venture will go head to head with cellular companies offering less versatile and noisier analog systems, but Esrey's gamble is huge: Sprint bought more PCS licenses in the Federal Communications Commission's auctions than any other company, paying $2.6 billion to cover the entire U.S. "We have licenses for every inch of the country," boasts Esrey.

BUGS. Putting those licenses to use has not been a smooth process. After an affiliate launched digital service in the Washington area in November, 1995, Sprint PCS was supposed to start service in several cities in November, 1996. But technical problems caused a one-month delay and forced Sprint to settle for eight markets by the end of 1996 rather than the 15 to 20 it had planned. Why? One of its two equipment suppliers, Northern Telecom Ltd., found bugs in the software used to detect and diagnose system problems. The nine markets now up and running were built by Lucent Technologies. Nortel says the problems are fixed, and the first two networks using its equipment are scheduled to start up on Feb. 20. Still, the delays were a black eye for Sprint.

While Sprint PCS dithered, competitors pushed ahead. Western Wireless Corp. has started service in six markets, and PrimeCo Personal Communications--a joint venture of Bell Atlantic, Nynex, U S West, and AirTouch Communications--in 16, including Dallas, Miami, and New Orleans. Even tiny Omnipoint Corp. beat Sprint PCS to the punch in the important New York market, launching last November. Sprint is shooting for a Big Apple startup before the end of June. "Sprint has kind of dropped the ball," says Clinton McClellan, an analyst with Dataquest Inc.

Sprint concedes that its initial rollout is taking longer than first scheduled but says it shouldn't matter in the long run. "Our business plan has never counted on a big front-end bubble," says Andrew Sukawaty, chief executive of Sprint PCS. He speaks from some experience--Sukawaty helped launch PCS service in Britain two years ago. It has since taken 45% of the wireless market there from the two cellular players.

Sukawaty says Sprint PCS will offer service in 65 cities by June, including 35 of the nation's 50 biggest markets. That may be several months behind smaller rivals, but it will give Sprint a jump on its biggest long-distance competitors, AT&T and MCI Communications Inc. Stealing a march on those two is important, since all three companies hope to bundle wireless, local calling, and long distance together. AT&T plans to launch its PCS service by midyear, while MCI won't start reselling PCS services purchased from NextWave Telecom Inc. until yearend.

Sprint's cable partners still think the wireless venture will succeed. But Sprint PCS lost much of its strategic importance to TCI and Comcast over the past year. Instead, they want to devote more resources to their basic-cable business. For one thing, the technology to offer phone service over cable has been slow to develop, and trial results have been mixed. "We never got off the ground with that concept," concedes Esrey. Cox is the one partner still pursuing phone service over cable.

NAME GAME. TCI has been the most vocal about pulling back. CEO John C. Malone wants to generate close to $1 billion in free cash flow this year, and he's unlikely to achieve that if TCI makes its required contributions to Sprint PCS. TCI filed documents in January for an offering of TCI Telephony stock, which would include its Sprint PCS interest. A TCI spokesman says TCI Telephony--not TCI--will be responsible for honoring the company's remaining $440 million commitment to Sprint PCS.

Esrey is not likely to look kindly on an offering of TCI Telephony stock, though Sprint declines to comment on TCI's plans. The stock would probably dampen the market's interest in Sprint PCS' own stock sale, which Sprint would like to do eventually. "That would screw up Sprint's plans," says an analyst close to the deal. Although Malone has filed documents for the TCI Telephony offering with the Securities & Exchange Commission, no date has been set.

Sukawaty professes not to worry. The four partners have already sunk $3 billion of the $4.2 billion they've pledged into Sprint PCS, and an additional $5.1 billion in credit was secured from three lenders in October. That should be enough to finance the venture if it sticks to its plan. Besides, Esrey is willing to buy his partners out. "If more [equity] became available, we'd look favorably on acquiring more," he says. With $1.2 billion in cash sitting on Sprint's balance sheet, Esrey can make good on that pledge. Given Sprint PCS' place of honor in his strategy, it's likely there'll be a buyout--or an IPO--by yearend.By Peter Elstrom in Kansas City, with William C. Symonds in Toronto and bureau reportsReturn to top

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