Sprint Picks Up The PaceKevin Kelly
For years, Sprint Corp. has been an afterthought in the long-distance market. With only about 9% of the business, it trailed so far behind AT&T and MCI Communications Inc. that it was sometimes literally overlooked. When MCI unleashed a torrent of discount plans in the early 1990s, its catchy ads targeted AT&T, never even acknowledging Kansas City (Mo.)-based Sprint. Meanwhile, poor customer service, ineffective marketing, and billing problems kept a lid on growth and put Sprint's long-distance profits on a roller coaster.
Nobody's overlooking Sprint today. In the past six quarters, its workaholic chairman, William T. Esrey, has pumped new life into the company. Esrey, a former New York investment banker who never leaves home without his laptop computer, chopped $150 million out of Sprint's cost structure, boosting long-distance operating margins by 69%. A string of new products and services--including a phone card that works
with voice commands and an international calling program aimed at high-end customers--have skewed revenue toward more profitable overseas and credit-card calls.
"AN OPPORTUNITY." Granted, Sprint is still a distant third to its long-distance rivals. Its share of the U.S. market crept up from 9.2% in 1991 to 9.4% in 1993. But in the second quarter of this year, Sprint's long-distance revenue growth outpaced MCI's, growing 12.3%, vs. MCI's 11.6%, according to S.G. Warburg & Co. Merrill Lynch & Co. analyst Daniel P. Reingold predicts that Sprint's 1994 earnings will soar 32%, to $911 million, on sales of $12.7 billion (chart). That is the kind of news Wall Street loves. Sprint's stock trades at around $37, up from 31 last fall.
But what's really putting Sprint in the spotlight are Esrey's moves to position the company for a brave new telecommunications world. Watching the ferment roiling the global telecom industry--deregulation, Information Superhighways, new technology--Esrey sees his chance. "It's an opportunity to transform the company greater than our move into long distance" in 1982. That's when Sprint, nee United Telecommunications Inc., was a local phone company. It jumped into long distance with the Sprint service, a partnership with GTE Corp., which sold out in 1992.
So Esrey, who took the helm in 1990, is wheeling and dealing to make Sprint a global player just like AT&T and MCI. The first move was swapping $4.2 billion in Sprint stock for cellular operator Centel Corp. But the most important deal came in June, when Esrey arranged to sell 20% of Sprint to France Telecom and Deutsche Bundespost Telekom for $4.2 million.
The deal, if approved by U.S. and European regulators, will immediately launch Sprint into a higher orbit. For starters, it will gain badly needed cash to expand. More important, it will make Sprint a top player, along with AT&T and the MCI-British Telecommunications alliance, in the $30 billion market for so-called global networks. This is the business of selling voice, data, and other communications services to connect offices of far-flung multinational corporations. Joint ventures with carriers in Canada and Mexico are extending Sprint's global-network reach throughout North America as well.
THE GETAWAY. Today, Sprint carries only 3% of the long-distance traffic of the biggest multinationals. But the French and German phone monopolies together carry 14%, close to AT&T's 16% share. "The benefit to Sprint's long-distance business is huge," says Oppenheimer & Co. analyst Michael Elling.
The partnership wants to run worldwide information networks for corporations also. That was the objective of the deal that got away--Esrey's proposed merger in June with Electronic Data Systems Corp., the computer-systems-integration and consulting giant. The combination would have created a technology colossus, with more than $20 billion in annual sales, capable of delivering one-stop shopping for information and communications services. The deal cratered when the companies couldn't agree on price, and both sides say talks have ceased. But sources close to Sprint believe an alliance with EDS is still likely. Esrey will only say "an EDS-like" deal remains possible, with EDS or another company altogether.
Certainly, Esrey could use another deal--for growth and for defensive reasons. Over the next few years, the Regional Bell Operating Companies (RBOCs) are almost certain to gain entry into long-distance services. And as the distant third in the U.S. market, Sprint could be the most vulnerable.
Consolidation has already turned LDDS Communications Inc., the nation's No.4 long-distance carrier, into a much more dangerous rival. On Aug. 22, the company sealed a deal to buy the WilTel Inc. long-distance unit of Williams Cos. for $2.5 billion. Instead of sending traffic over leased lines, LDDS will now have its own 11,000-mile fiber-optic network.
BABY TALK. That puts additional pressure on Sprint to boost its presence in overseas and cellular markets, including personal communications systems (PCS), a new wireless setup. The renamed Sprint Cellular, the nation's eighth-largest system, brought in $464 million in revenues and $24 million in operating income last year, and it will easily triple the income contribution in 1994, say analysts. But Sprint has bigger ambitions: a nationwide cellular/long-distance combine to challenge the network that a merged AT&T-McCaw Cellular Communications Inc. will create.
How to match AT&T/McCaw? Most likely through alliances with Baby Bells. By linking cellular systems and adding PCS networks in other areas, they could create a national service. Esrey isn't saying which Bells he is talking to, but the answer may emerge in October, when PCS license-bidding teams must register with the Federal Communications Commission. Nynex and Bell Atlantic have already expressed interest in a Sprint link, as have US West Inc. and AirTouch, the former Pacific Telesis Group cellular company.
Esrey's plans all look good on paper. But that doesn't mean they're easy to pull off. For one thing, it may take some doing to nail down the venture with the French and the Germans. Although U.S. regulators are expected to approve the deal, the Administration may use the opportunity to press for faster deregulation of German and French phone markets. Another potential problem: union trouble. The powerful Deutsche Postgewerkschaft (DPG) union recently objected when Sprint laid off 235 employees in a California marketing office just before the workers were to vote on unionizing. DPG wants assurances that German labor practices hold for any Sprint-DT entity in Germany. Sprint says it does not believe labor issues will derail the partnership.
Sprint still hopes for regulatory approval by January, 1995, and a joint-venture launch by Apr. 1. The next step: to find an Asian phone company to complete the worldwide network. Sprint Long Distance President Ronald T. LeMay predicts that the European alliance "will be a magnet for attracting partners in the Pacific."
The global push could have an immediate payoff--in new long-distance business and cash. The $4.2 billion will no doubt help build Sprint's cellular network. Oppenheimer's Elling predicts that Sprint will also use up to $1 billion to cut its $4.5 billion debt. Sprint has earmarked some funds to upgrade its network as well. Top of the list: state-of-the-art switches and transmission gear that will increase capacity and speed to handle data and video.
SHOOT-OUT. Expansion in Canada and Mexico will also require cash. Sprint's joint venture with cellular operator Grupo Iusacell must build a long-distance network. But that's not a big worry until 1997, when the Mexican market opens to competition. Right now, Sprint has a bigger shoot-out in Canada, where last August it bought 25% of Call-Net Enterprises and is battling AT&T and MCI, along with their Canadian partners, in the newly deregulated market.
The only Sprint division that is likely to sit pat is the local-phone operation. Serving mostly rural areas of Nevada, North Carolina, and Florida, Sprint's local operation has for years outperformed long distance. Last year, it posted operating income of $954 million on revenue of $4.1 billion. Its low costs yield operating margins in the 8%-to-10% range, compared with about 4% at most RBOCs. But Esrey has virtually ruled out expansion once Congress passes a telephone deregulation bill. He figures new players, including cable-TV operators, will rush into local phone markets.
Besides, it isn't through local phone service that Esrey can make Sprint a top-tier global player. When the consolidation that's starting in the industry is finished, he predicts, "there will only be two to five global telecom companies." And Esrey is hoping to deal himself into that group.
CENTEL Sprint swaps $4.2 billion in stock for the cellular operator in early 1993, renames the company Sprint Cellular.
CALL-NET Sprint buys 25% for $65 million in late 1993, gaining entree into the Canadian market as it begins to deregulate. Call-Net changes its name to Sprint Canada.
ELECTRONIC DATA SYSTEMS A deal to merge Sprint with the computer-services giant collapses in June, 1994, after the pair can't agree on stock valuations, but some sort of partnership still remains possible.
FRANCE TELECOM, DEUTSCHE BUNDESPOST TELEKOM The two European phone companies agree to buy 20% of Sprint for $4.2 billion, making Sprint a serious player in the growing market to provide international telecommunication services to large corporations.
GRUPO IUSACELL Sprint agrees in late July to form a joint venture with the Mexican phone company to offer national and international long-distance services in Mexico when the market liberalizes in 1997.
LOCAL PHONE COMPANIES Down the road, Sprint is expected to join a national cellular network, perhaps in alliance with several regional Bell operating companies. The company may also be a bidder for personal communications systems licenses, alone or in alliance with other companies at this December's auction.