Wednesday, July 16, 2008

Sprint (NYSE:S): Colour on recent SK Telecom chatter

On July 15, CNBC reported that SK Telecom is in talks with Sprint (NYSE:S) to acquire part or all of Sprint. The report added that no deal is imminent and no price has been set at this juncture. Meanwhile Reuters reported that SKT is in talks with Sprint on a technology alliance, rather than a takeover.

- Citigroup notes SKT remained silent on this news, but they view it is highly likely that SKT is looking for opportunities around Sprint to scale up its US presence. Combining Helio with Virgin still leaves it with a subscale US presence. Firm thinks SKT believes it has competitive
edge in technology to make a difference.

SKT's market cap of $15bn compares with Sprint's $25bn. Citi believes SKT would have to be part of a buyer consortium rather than going it alone. Assuming, say, a 20% stake in Sprintis acquired at current levels and SKT takes half, the required $2.5bn of investment would be more easily digestible.

- Goldman Sachs believes at ~$45 bn in enterprise value, and $25 bn market cap, the size of a potential outright acquisition of Sprint would be problematic given SK Telecom's smaller size ($15 bn market cap). This deal would require a sizeable cash component, an unlikely scenario in current capital market conditions.

SK Telecom partnered with Providence Equity and approached Sprint last November with a proposal for an equity infusion of $5 bn, and possibly more. Firm notes that the previous funding offer was made when Sprint stock was at ~$15, 70% above current levels.

Remains Neutral on the stock, and believes the risk/reward is not compelling. Firm's analysis leads them to a potential of breakup value of $12 Sprint for Sprint and an ~$5 value value for assets.

- Cowen is most positive of the bunch saying they expect Q2's results to show improvement and see upside to estimates. Moreover, SK Telecom's interest highlights strategic possibilities.

Firm believes churn dropped steadily in Q2. They project postpaid churn of 2.4% vs. Q1's 2.5%. They also believe the Instinct handset, plus the new ad campaign, boosted store traffic; they have seen that in our store visits. cowen projects postpaid net ad losses to slow to (1.0)MM from (1.1)MM in Q1, but also think the number could be (0.9)MM or lower.

Firm continues to view Sprint with 53MM subs and T- Mobile with 31MM subs as being at a scale disadvantage to VZ with 79MM subs (pro forma for Alltel) and AT&T with 71MM. With the WiMAX spin-off to Clearwire, Sprint appears to need a 4G migration strategy, which a partner could help.

Notablecalls: NCN Telco is convinced the deal will take place this year (pinged me last night). Some of his comments:

- SK Telecom has been aggressive with its international strategy. I think recently increased its stake in China Telecom

- Now that valuation is way down from $25 when the nextel merger announced, it makes total sense.

- Currency is relatively strong now. So looking at an acquisiton in the US is a good move. I think it will happen.

- Private equity firms are wiling to do deals with korean firms. SK is one of the top 4 firms in south korea.

- Just remember that South Korea has a very forward thinking /aggressive president in the office. He will even try to broker the deal if he believes it will bring more recognition and growth to korean economy.


The HardHead Fund said...

Koreans don't want our beef. They won't allow Apple to sell the iPhone. American products that are sold are heavily taxed. If it were up to me I would ban Korea from American markets until they allow free trade. Try to buy an American car here... ouch double the cost for a piece of junk.

Note: Foreigners offloaded a net $19.3 billion worth of shares in the domestic market during the January-June period, according to the Korea Exchange (KRX) Monday.

I hope this deal FLOPS!!!

HH from Korea

The HardHead Fund said...

Just how stupid (protectionist) Koreans can be:
Advertisements promoting Japanese condoms have been removed from Korean underground trains amid a rekindled territorial dispute.