Sprint’s (NYSE:S) Network Vision plan received a boost last Friday as the carrier accessed the bond markets for the third time in the last year to raise $1.5 billion in debt. The third largest U.S. wireless carrier said that it plans to use the money to refinance some of its existing debt as well as fund its network upgrades and LTE expansion plans.  Some of the funds might also be used to finance ailing partner Clearwire’s LTE plans. In addition to its own LTE network, Sprint plans to tap Clearwire’s to make up for the huge gap in LTE coverage between itself and rivals Verizon (NYSE:VZ) and AT&T (NYSE:T). It is also shutting down the outdated iDEN network and plans to use that spectrum to augment its LTE network and cut costs.
Sprint has $800 million of debt maturing in 2013, $1.4 billion in 2014 and $2.6 billion in 2015. The bond sale will help Sprint retire a portion of the near-term maturities early while conserving cash for its expensive network upgrades and iPhone subsidies. However, it also adds on to the huge pile of debt it has accumulated. Sprint has a net debt load of about $26 billion on its balance sheet, which compares poorly with its current market capitalization of $15 billion.
A highly leveraged balance sheet increases the stock’s sensitivity to any change in capital expenses, as can be checked by moving the trend-line in the forecast chart below and seeing the corresponding impact on its price estimate. A bulk of Sprint’s capital expenditures this year (almost two-thirds) is expected to happen in the second half of the year. With the impending shut down of the iDEN network in mid-2013 and LTE deployment expected to continue until 2014, we expect the figure to taper down but still remain high in the next couple of years. This can negatively impact cash flow generation in the near term. Keeping these risks in mind, we have a $4 price estimate for Sprint’s stock, a discount of about 20% to the current market price. (see Sprint’s Stock Surge Capped At $4 With Growth Risks Ahead)
Sprint’s lagging LTE plans get boost
However, it does provide Sprint the cash it needs to bridge the LTE gap between itself and rivals Verizon and AT&T. Verizon’s LTE network covers about 230 million Americans currently and AT&T’s about 80 million. Verizon plans to cover another 30 million and AT&T another 70 million by the year-end. Sprint, on the other hand, has just launched its LTE network and has it live in all of its 15 markets in the U.S. (see Sprint Sets July 15 LTE Launch Date) While that is a small number compared to Verizon’s 337 and AT&T’s 47, Sprint expects its accelerated LTE deployment schedule to help it catch up with the two before the end of 2013.
The carrier is also trying to phase out iDen gradually and consolidate its network holdings into one 2G/3G/4G network using a combination of CDMA and EV-DO. In fact, Sprint has announced that it is planning to shut down the iDEN network completely by next summer. The freed up iDEN spectrum will then be used to boost its LTE network in 2014. (see Sprint To Build LTE Over iDEN’s Grave)
The announcement of iDEN’s impending shutdown in about a year’s time will however cause the remaining iDEN subscribers to jump ship and may deepen the market share loss in the short term if Sprint is unable to transfer enough of them to its CDMA network. However, the iPhone’s addition has helped the company report three strong quarters of postpaid net adds on its core Sprint CDMA network since the 4S launch. (see Sprint’s Earnings Show Strong iPhone-Led Turnaround But Risks Remain) We expect CDMA’s strong showing to continue and help Sprint stem the overall postpaid losses in due course of time as iDEN is gradually phased out.
Margin Improvement and ARPU increase
A successful implementation of the Network Vision strategy will reduce the operating expenses substantially by eliminating duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN would be made available for the CDMA/LTE network.
As LTE adoption rates rise and the iPhone brings in the highly lucrative postpaid subscribers, Sprint will also see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans will help it maintain its niche and differentiate itself from rivals’ tiered data plans. Unlimited plans will likely be more valuable for LTE than they were for 3G since LTE is a higher-speed technology and will make subscribers easily overshoot their monthly quota for tiered plans. (see Sprint Promotes Unlimited Plans As Verizon, AT&T Move To Shared-Data Plans) The iPhone, for its part, will bring in high data users and continue to have a positive impact on ARPU levels. Sprint’s postpaid ARPU in the most recent quarter jumped $4, or 7%, versus the same period last year as the iPhone accounted for a large number of new subscribers to Sprint.
- Sprint Sells $1.5 Billion To Refinance Debt, Fund Clearwire, Bloomberg, August 10th, 2012 [↩]