Sprint Plunges After Saying It Needs to Raise Capital to Finance Network
Sprint Nextel Corp. (S), the third- largest U.S. wireless carrier, slumped the most in almost three years in New York trading after saying it needs to raise more capital as it spends on a network upgrade and new handsets.
“Do we need to access the markets? Yes,” Chief Financial Officer Joseph Euteneuer said at a meeting with investors in New York today. “But we have flexibility on that timing,” he said, adding that Sprint has enough money to handle debt maturities through March 2012.
The unprofitable carrier is spending on a faster network and devices such as the iPhone to lure customers from larger rivals AT&T Inc. (T) and Verizon Wireless, which also offer the Apple Inc. phone. Sprint has $19.8 billion in outstanding debt, more than half of which is due in the next five years, according to data compiled by Bloomberg. Sprint said it has about $5.3 billion in cash and credit available.
In July, Sprint posted its 15th consecutive quarterly loss and reported more contract customers defected than some analysts had estimated. The carrier this week became the third U.S. operator offering the iPhone, the new version of which is available for pre-order online this morning.
Investors and analysts who went in to Sprint’s event with questions came away mostly without answers.
“For weeks, Sprint’s management team has been avoiding all questions about their future by telling people to wait for today’s investor meeting in which they promised that all questions would be answered,” Walter Piecyk, an analyst with BTIG LLC, wrote in a research note after the event.
Sprint executives didn’t address questions about the iPhone’s impact on sales and costs, and they didn’t give sales or earnings forecasts. They didn’t say whether relationship with network partner Clearwire Corp. (CLWR) will continue longer term.
“We believe Sprint is un-investable until they can provide better clarity on EBITDA, their 4G strategy and their capital structure,” Piecyk wrote.
No ‘Good View’
Euteneuer said Sprint plans to be “opportunistic” with the timing of raising capital.
“Sometime between now and 2013 we will need to raise funding,” Euteneuer said in an interview at the event.
Sprint said capital spending, including expenses for upgrading its network, will be $10 billion over 2012 and 2013, compared with the $3 billion company projected for this year. The company said its spending plans didn’t include the iPhone.
The spending plan and Sprint’s vague forecasts means that there are many financial and strategic issues left unresolved, said John Hodulik, an analyst with UBS AG.
“People wanted guidance and there was no guidance,” said Hodulik, who was attending the show. “They did not provide a good view of 2012.”
Analysts have estimated that the customer acquisition costs tied to the iPhone, which commands a higher subsidy than other smartphones, may cut Sprint’s wireless margins almost in half. The company has committed to buy at least 30.5 million iPhones over four years, which would cost $20 billion at current rates, the Wall Street Journal reported this week.
Both AT&T and Verizon’s profitability took a hit when they began offering the iPhone. Carriers are betting that the short- term expenses are justified in return for higher-spending customers signing on for two-year contracts.
“The iPhone subsidies will have a negative impact,” said Dave Novosel, a bond analyst with Gimme Credit LLC. Novosel predicts that the spending on network upgrades and the cost of iPhone sales will drag Sprint’s free cash flow down to about $1 billion in 2011 from more than $2 billion last year.
Sprint Chief Executive Officer Dan Hesse said the iPhone will be one of the company’s most profitable devices.
Hesse also said the company will begin operating its long- term evolution network in mid-2012. Sprint has pledged $5 billion to upgrade its network and add LTE, a standard used by AT&T and Verizon. Sprint’s investment will ensure that the company is able to support devices’ increasing data demands and run them on what will be a more common network technology.
The LTE upgrade -- Sprint’s biggest investment in three years, according to Wells Fargo & Co. analyst Jennifer Fritzsche -- also signals a move away from a rival high-speed technology called WiMax. Sprint currently uses Clearwire’s WiMax network to offer high-speed services.
Sprint has more debt coming due over the next two years than any other speculative-grade company, Moody’s Investors Service analysts led by Kevin Cassidy wrote in a Sept. 23 note to clients.
The company faces $2 billion of bonds and a $250 million term loan maturing in 2012 as well as $1.77 billion of notes and a $2.1 billion revolving credit line coming due in 2013, according to data compiled by Bloomberg. It had borrowed $1.2 billion against the credit facility as of June 30, it said a filing with the Securities and Exchange Commission.
Sprint is rated B1 by Moody’s and BB-, one step lower, by Standard & Poor’s. High-yield, high-risk, or speculative-grade, debt is ranked below Baa3 by Moody’s and less than BBB- by S&P.
Contracts protecting against the company’s default for five years increased 4.5 percentage points to 15 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $1.5 million initially and $500,000 annually to protect $10 million of Sprint’s debt.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.
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