Sprint Just Signed Its Own Death Certificate
Oct 10th 2011 3:45PM
Updated Oct 10th 2011 4:06PM
On its analyst day last Friday, Sprint Nextel (NYS: S) sure gave investors something to talk about. Far from reassuring anybody, however, the event instead unleashed a torrent of analyst downgrades plus a 30% haircut to the share price.
The nation's third-largest mobile network operator (after giants AT&T (NYS: T) and Verizon (NYS: VZ) ) basically gave up on its WiMAX high-speed data network, sending shares of WiMAX partner Clearwire (NAS: CLWR) down by a drastic 40%. In its place, Sprint wants to deploy a network using the other 4G networking standard -- the LTE technology currently being deployed by Verizon.
Explaining their downgrades, the analyst chorus boils down to two words: "expensive" and "uncertain."
Nomura Securities, for example, notes that the network upgrade plan results in a negative $2.3 billion of free cash flow next year, probably forcing Sprint to find as much as $3 billion in funding through new debt or dilutive stock sales. That's a lot of capital pressure for a company with a $6.4 billion market cap. And in the words of Kaufman Bros., "This is not necessarily a strategy we view as prudent for shareholders."
Shares have lost more than 60% of their value in the last three months, so it's obvious that investors generally agree with Kaufman's opinion there.
Sprint has joined the increasingly less exclusive club of Apple iPhone distributors, but still can't figure out how to remain relevant in the duopoly-like state of the American wireless market. The Clearwire-fueled 4G advantage has come and gone without elevating Sprint to the majors.
Perhaps Sprint shifted network gears to make itself more compatible with the competition, painting takeover crosshairs on its own back. Or maybe this Hail Mary strategy shift is exactly the misguided comeback attempt that it looks like.
I think that Sprint presented this plan with a perfectly straight face. My CAPS portfolio doesn't contain many thumbs-down positions, but Sprint just became one. If the company ever finds a buyer, the final price for this debt-riddled and befuddled also-ran should be well below today's prices.
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At the time this article was published Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and AT&T, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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