The past week saw quite a few developments in the telecom sector. Sprint (NYSE:S) announced it was able to successfully raise $1.5 billion from the bond market to refinance some of its existing debt as well as fund its network upgrades and LTE expansion plans. Meanwhile, the Justice Department signed off on Verizon’s (NYSE:VZ) $3.9 billion spectrum purchase from cable companies but added a few conditions to its cross-marketing arrangements.
Sprint raises more debt
Sprint’s Network Vision plan received a boost last Friday as the carrier accessed the bond markets for the third time in the past 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. (see Sprint Raises Additional Debt To Fund Network Upgrades) 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 and AT&T (NYSE:T). It is also shutting down its outdated iDEN network and plans to use that spectrum to augment its LTE network and cut costs.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 come 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. (see Sprint’s Stock Surge Capped At $4 With Growth Risks Ahead)
Verizon’s cable deals near final approval
Verizon has secured the Justice Department’s approval for its $3.9 billion spectrum purchase from cable operators Comcast, Time Warner Cable, Bright House Networks and Cox.  The FCC has not voted yet but Chairman Julius Genachowski has said that he supports the deal. Once FCC approval is received, which we believe is only a matter of time, Verizon will be able to get its hands on a huge swath of unused AWS spectrum it needs for LTE expansion. However, the DoJ has applied a few conditions to the cross-marketing deals between the companies that it believes could hurt consumers by reducing competition and increasing prices.
Going forward, Verizon will not be able to sell TV and broadband services from the cable companies in areas where it offers its own FiOS service. Also, the service providers can co-market each other’s services for only the next five years, after which they would have to re-apply to extend the deal. Verizon’s FiOS service, however, is not widely available and the carrier doesn’t plan to expand into newer markets; so this wasn’t a deal-breaker for either party.
From Verizon’s perspective, we believe that the spectrum purchase is the more important aspect of the deal since it impacts Verizon’s LTE expansion plans and gives it much-needed spectrum to fight the crunch that is plaguing the industry. With AT&T clawing at its heels and Sprint entering the fray soon, Verizon will need to maintain its LTE advantage in order to stay ahead. This does not mean that the cross-marketing deals are not important since they would help Verizon’s services gain more prominence, but LTE and spectrum seem to be the priorities for now considering the current market dynamics.Notes:
- Regulators OK Verizon’s $3.9B bid to buy cable spectrum, CNET, August 16th, 2012 [↩]