Sprint (NYSE:S) is accessing the bond market for the second time in less than four months as the third-largest U.S. wireless carrier looks to finance expensive network upgrades and subsidizes Apple’s (NASDAQ:AAPL) iPhone for its customers.  The company further said that it may also use a part of the proceeds from the $2 billion notes offering to fund partner Clearwire’s LTE plans, sending shares in the cash-strapped wireless firm up more than 4 percent Tuesday. The debt sale gives Sprint additional financing as it struggles to compete against larger rivals Verizon (NYSE:VZ) and AT&T (NYSE:T).
Sprint-Clearwire relationship on firm footing
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Sprint and Clearwire have both been in dire straits of late after their bet on WiMax failed to pose any threat to AT&T and Verizon, who have now taken a lead in rolling out their next-generation LTE networks. Though late to the party, Sprint is trying to aggressively build its LTE network to make up for lost time and is also looking to augment its network with Clearwire’s in the future. Moreover, Sprint’s potential partnership with Lightsquared soured after the startup failed to secure regulatory approval for deploying its LTE network, making Clearwire Sprint’s only LTE partner.
This makes it imperative for Sprint to help Clearwire with the cash required for its LTE plans. Sprint is laying out its own LTE network, but it needs Clearwire’s additional spectrum to lay out a LTE network robust enough to compete effectively with Verizon and AT&T. And Clearwire’s current financial position leaves it with little funding choices apart from Sprint.
Sprint’s balance sheet getting more stretched
But Sprint has its own debt concerns as well, though they are not as serious as Clearwire’s. Sprint has about $12 billion debt on its books, which compares with a total market cap of around $7.6 billion. Despite these concerns, Sprint had managed to raise about $4 billion in November to meet a maturing debt obligation as well as finance its LTE upgrade plans. It had also used up about $350 million of the funds to finance Clearwire’s equity offering.
With Sprint now much more dependent on Clearwire than before, it became necessary to increase Clearwire’s financing. But adding another $2 billion debt to its balance sheet means reduced flexibility for the company as it now has to be very careful with what it does with the cash.
During the latest earnings call, Sprint guided for an aggressive 2012 with respect to capital expenditures, saying that it will probably be investing over $6 billion in network upgrades and LTE deployment. We believe that the capital expenses will remain at elevated levels for the next couple of years, before declining rapidly as the company completes its LTE build-out and gradually phases out the iDen network. Sprint’s stock is, however, highly sensitive to its capital expenditures.
You can see how the stock price plummets when you tweak the trend-line to increase capital expenditures over the forecast period in the chart below. We think the current market price reflects this sensitivity, as the market likely doesn’t have confidence in management’s guidance.
We have a $3.68 price estimate for Sprint’s stock, which is almost 45% higher than the market price.Notes:
- Sprint to Raise $2 Billion Debt, May Use to Fund Clearwire, Bloomberg, February 28th, 2012 [↩]