Sprint's strange deal with Ericsson

Douglas McIntyre

Jul 10th 2009 at 10:00AM

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It may seem like an odd decision: Sprint (S) will outsource much of its network maintenance to Ericsson (ERIC). The deal is worth almost $5 billion to Ericsson and will stretch over seven years.

The strange part of the transaction is that, according to the Financial Times, "Under the deal's terms about 6,000 Sprint employees will be transferred to Ericsson during the third quarter." Sprint may not be doing terribly well by signing the contract if it is trading worker costs for $5 billion. Keeping the workers may be less expensive.

Sprint claims that the transaction will allow it to focus on customer service and the sales of handsets. Sprint has received low customer service marks in independent surveys for the last several years. Perhaps the company should have made the decision to get out of the business of maintaining its network a long time ago.

The issue investors should have with the deal is one of transparency. How much does Sprint save by moving the costs of employees off of its books? How does that compare to the payments to Ericsson? What are the risks of having key functions for maintaining Sprint's critical network in the hands of another company?

Sprint will paint the Ericsson deal as being critical to its turnaround. If there is not a major earnings benefit, that is probably not fair.

Douglas A. McIntyre is an editor at 24/7 Wall St.