Sprint’s Quest For Spectrum Could Lead To Dish Compromise

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In an interview with Bloomberg, Sprint’s CEO Dan Hesse disclosed the company is actively looking to acquire spectrum in addition to Clearwire.  This is an encouraging sign of Sprint’s increased aggressiveness in trying to compete in a tough market, but much of this plan hinges on the Softbank-Sprint merger. In October 2012, Sprint announced a 70% stake sale of the company to Japanese telco Softbank. The complex $20 billion agreement allows Softbank to purchase 55% of Sprint at $7.30 per share, and infuse a total of $8 billion in cash at $5.25 per share in two separate transactions. Sprint has already received $3.1 billion in convertible debt as part of the deal and the rest of the cash transaction is to be done after  regulatory approval. With the CEO’s latest comments, Sprint may be open to reaching a compromise with Dish and perhaps even partnering to meet its spectrum needs.

See our complete analysis for Sprint

Hurdles To Softbank Merger

On January 28th, the U.S. Department of Justice (DOJ) sent a letter to the Federal Communications Commission (FCC), asking the commission to hold off its review for the Sprint-Softbank merger. The merger is being investigated by the DOJ, the Federal Bureau of Investigation (FBI) and the Department of Homeland Security (DHS), for any potential impact on national security, public safety or law enforcement. As the matter is still under investigation, the commission has been asked not to review the merger until the investigation is complete. Significant long-term delays in the merger could potentially impact Sprint’s competitive position as AT&T and Verizon continue to pull ahead. With shrinking market share in the postpaid segment, Sprint needs the capital infusion from Softbank to compete aggressively going forward.

iPhone Strategy Is Burning Cash

Sprint has been incurring heavy annual postpaid subscriber losses for some time now, and it was expected that carrying the iPhone would help plug the leak. So far this hasn’t worked out for the company; while Sprint has been showing net subscriber additions on its CDMA network, losses from Nextel have generally exceeded those gains. The iPhone deal was a massive bet considering the company has a highly leveraged balance sheet, with over $24 billion in long-term debt, and that the iPhone is experiencing significant competition in the smartphone segment. Sprint reported it sold 2.2 million iPhones in the fourth quarter and 6.6 million in 2012.

Unlimited Plans

We expect Sprint’s average revenue per user (ARPU) to remain around $63. However, the company’s data plans may not be as profitable as those of other carriers as Sprint offers unlimited data plans. AT&T and Verizon both offer tiered data plans, so subscribers who use substantial amounts of data are charged accordingly, in order to make up for the huge smartphone subsidies. Sprint’s rationale behind the unlimited plans is to differentiate itself from AT&T and Verizon and draw in new customers. However, so far it hasn’t allowed the company to capture additional share, as both AT&T and Verizon have been adding subscribers in record numbers while Sprint’s numbers have largely disappointed.

 

Is Sprint Signalling A Settlement With DISH

While the CEO’s announcement can be perceived as corporate speak for strategic acquisitions, it could be a signal to DISH Network (NASDAQ:DISH) that Sprint is willing to mend fences. DISH has significant wireless spectrum and has been clear about its intention to enter the wireless business. The initial market speculation was a potential partnership between DISH and Sprint. However, DISH’s 11th hour offer to acquire Clearwire, outbidding Sprint, was expected to hamper any collaboration between the two companies. We think it is in the best interest of both parties to collaborate as rolling out a new network would be very expensive and time consuming for DISH, while Sprint would hugely benefit from DISH’s wireless spectrum.

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