Tuesday, March 18, 2008

Sprint Nextel (NYSE:S): Comments from a former telco analyst

On March 10th a NCN member I'm going to call NCN Telco sent me an email regarding Sprint Nextel (NYSE:S). NCN Telco is a former sell-side telco analyst and has more than 10 years of industry experience both in engineering and finance. He now works independently.

Anyway, I thought you would enjoy these:

Lots of Spint buyout rumors swirling around. I think these speculations are completely legit. Even before these stories hit the wire, I was reaching out to my telco contacts to see if Sprint would be a good pick-up. So far I haven’t had much luck and when I did get a hold of one very credible source, he would not elaborate much. It is entirely possible that dialogues have already begun since Sprint is not participating in the 700MHz spectrum auction.

Buying Sprint makes a lot of sense for any company. It's a cash cow with depressed value per sub. Sprint can offload about $7B of Nextel debt (as well as Nextel Partners) debt when it divests iDEN, leaving Sprint's CDMA with about $10B in net debt (factoring in $2B cash on hand). This is a much more manageable amount for a potential suitor. We should not also forget about the attractive LD assets that Sprint brings to the table. And potential merger synergies from decommissioning all those duplicative radio towers, equipment, call centers, etc. I smell billions of dollars.

It seems most telco analysts are downplaying the possibility that Sprint is an acquisition candidate and here is why I disagree. I will use VZ as an example. I believe VZ was considering its options with regard to ALLTEL last year but ultimately decided against it as it became too pricey (didn't want to compete vs. private equity money). It was a true blessing in disguise that VZ didn’t go after ALLTEL because for the same money it can now potentially get a national wireless company with 3x CDMA subs (ALLTEL’s market cap was about $19B vs. Sprint’s $20B as of Friday’s close). Attributing 2/3 (based on sub mix) of Sprint’s market cap to CDMA, Sprint’s CDMA is worth about $14B which is a steep discount to where ALLTEL stood a year ago. It would be crazy for VZ (or for that matter DT or Carlos Slim) to let this opportunity of a lifetime slip thru its fingers.

One big question that needs to be answered is will VOD want to partake in this potential acquisition or want out from its existing partnership with VZW to make a play for Sprint on its own. It might not be a bad deal for VZ to pay $20B to bring VOD’s 45% stake in-house. Either way, VZ stands to gain and Sprint will still be in play. I like the thought of DT, VOD and Carlos Slim duking it out with their strong currencies, don’t you?

Here are some additional comments NCN Telco submitted:

- I also liked how VZ CFO doreen toben tried to bash S by saying yesterday that VZ is seeing pockets of weakness in the midwest... midwest is mostly Qwest... Qwest uses Sprint network... that kind of comment seems to suggest Doreen wants to see even cheaper price on S shares... I love her... she is not flashy and everything she does is telegraphed... haha.

Notablecalls: Hope you enjoyed this as much as I did.

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