Sprint Says It Needs $7 Billion to Fund Costs; Loss Narrows

Sprint Nextel Corp. (S), the third- largest U.S. wireless carrier, said it needs as much as $7 billion in capital to pay for new handsets and a network upgrade after posting its 16th straight quarterly loss.

Sprint shares fell 7 percent after the company said it plans to refinance $4 billion of its debt and seek $1 billion to $3 billion in financing from suppliers. Sprint first said it has to raise funds on Oct. 7. Its third-quarter loss narrowed, beating analysts’ estimates.

The 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. (AAPL) handset. 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. It said today it has $4 billion in cash and short-term investments.

“The risk is extremely high, both for execution and liquidity,” said Michael Nelson, an analyst at Mizuho Securities USA Inc. in New York, who has a “neutral” rating on Sprint shares. “They have very little wiggle room to successfully execute against this strategy.”

The cost of the iPhone and the network expansion were cited by Moody’s Investors Service this month as it slashed Sprint’s credit rating to B1, four steps below investment grade.

Sprint, based in Overland Park, Kansas, fell to $2.51 at the close in New York. It has lost 41 percent this year.

IPhone Impact

Sprint began selling the iPhone this month and said today customer response has exceeded its expectations. The company is banking on the device to gain more of the lucrative smartphone customers that had previously gone to AT&T and Verizon.

Last quarter, Sprint lost 44,000 net monthly contract subscribers, more than the loss of 4,300 estimated by seven analysts surveyed by Bloomberg on average. The estimates ranged from a loss of 75,000 to a gain of 25,000. A year ago, Sprint lost 107,000 such users, who spend more than others. Average monthly revenue per contract user, or ARPU, rose $3 to $58.

The iPhone has upfront expenses because Sprint subsidizes the cost to consumers in exchange for service revenue. Apple sells the latest version of the device to U.S. carriers for an estimated $600, and the carriers sell them to consumers for as little as $199.99 to get them to sign up for two-year contracts.

Sprint said it has to pay a minimum of $15.5 billion to Apple over their four-year agreement. That means Sprint has to buy 25 million to 30 million iPhones over that span, or more than 6 million iPhones a year, Tavis McCourt, a Morgan Keegan & Co. analyst in Nashville, Tennessee, said in a research note. Sprint now sells about 15 million smartphones a year, he said.

Shrinking Loss

Sprint said free cash flow for the full year will be between negative $200 million and positive $100 million. In July, it predicted positive free cash flow for the year.

The third-quarter net loss shrank to $301 million, or 10 cents a share, from $911 million, or 30 cents, a year earlier. Analysts predicted a loss of 22 cents for the quarter ended Sept. 30, the average of estimates compiled by Bloomberg.

Chief Executive Officer Dan Hesse curbed marketing spending to bolster profitability. Sprint also benefited as users spent more on surfing the Web and sending e-mail, boosting ARPU.

“One of the positive highlights was the acceleration of postpaid ARPU,” Nelson said.

Sales rose 2.2 percent to $8.33 billion. Analysts projected $8.38 billion. Operating costs fell 2.9 percent to $8.13 billion.

Raising Funds

Chief Financial Officer Joe Euteneuer told analysts at an Oct. 7 investor meeting that Sprint would need to raise money before 2013. The company is expected to announce a debt deal as early as this month, said Walter Piecyk, a BTIG LLC analyst.

Hesse said today Sprint is looking to refinance and extend some of the existing maturities of its current debt.

“We have been talking to lenders, it’s our expectation we can get unsecured debt,” Hesse said in an interview.

The company is also talking to equipment suppliers about financing after it became clear that the iPhone would cause it to need more cash, Hesse said. Sprint had initially declined loan offers from suppliers, he said.

Today, Sprint said it amended a credit agreement with banks, adding $150 million to the amount it can borrow from the facility, which now totals $2.24 billion. The company also modified the covenants, allowing it to exclude some handset- subsidy costs when calculating its earnings.

“This effectively enables the company to incur significant subsidy costs for the iPhone without tripping its debt leverage covenants,” Piecyk said.

While the move is an “incremental positive,” said Mizuho’s Nelson, “it doesn’t alleviate their need to raise more money.”

Clearwire Deal

Sprint’s financial picture may also depend on the company’s possible decision on whether to help finance its 4G wireless venture partner Clearwire Corp. (CLWR) During the analysts’ day presentation, Hesse said the company would upgrade its network with LightSquared Inc., a startup wireless broadband operator.

Sprint said today it is negotiating with Clearwire about a new network-sharing agreement, sending the partner’s shares up 20 percent. Hesse said he would like Clearwire to be successful, declining to comment on whether Sprint will help the partner with financing.

(Sprint had a conference call today to discuss results. Go to http://www.sprint.com/investors for a replay.)

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net; Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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