Sprint (NYSE:S) is accessing the bond market for the first time in more than two years as the third-largest U.S. wireless carrier looks to finance expensive network upgrades and subsidizes Apple’s (NASDAQ:AAPL) iPhone for its customers.  Sprint’s next scheduled debt maturities of $2.3 billion are due in March 2012, and it needed to show its investors that it could access the capital markets and raise the cash needed to take care of that debt.  The company also said that it may use the proceeds from the notes offering to fund partner Clearwire (NASDAQ:CLWR), sending shares in the cash-strapped wireless firm up 8 percent on Friday. The debt sale gives Sprint additional financing as it struggles to compete against larger rivals Verizon (NYSE:VZ) and AT&T (NYSE:T).
In its Q3 earnings call late last month, Sprint announced that it had come to an agreement with Clearwire in order to help roll out Clearwire’s own 4G LTE network that Sprint’s subscribers will be able to use. It was later reported that the companies were near an agreement to extend their existing network-sharing agreement for three to five years. 
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Sprint-Clearwire deal will help reduce Sprint’s costs
Clearwire needs about a billion dollars to finance its own LTE network upgrade and Sprint may help finance a part of that amount as part of the deal. The deal would also provide an ongoing stream of revenue for Clearwire, increasing visibility about its revenue outlook and improving its risk profile, which should help the company obtain the remainder of the funding requirements.
As for Sprint, which currently pays Clearwire about $10 per GB of data downloaded on its network, we expect it to negotiate for cheaper rates in return for signing a long-term deal. The company will also be hoping to better manage its fixed network costs and support the huge data usage of its iPhone customers by maintaining its access to Clearwire’s existing 4G WiMAX network (Sprint iPhone users can’t currently use the network but many other Smartphone customers do) and massive spectrum position. Clearwire holds an average of more than 100MHz of spectrum in markets across the U.S.; more spectrum generally allows for more network capacity. 
Sprint’s own LTE network is set to launch commercially in the middle of next year and be mostly complete by the end of 2013.
If we tweak the Trefis model for Sprint to include increasing capital expenditures in the next five years, we can see that the stock price forecast plummets, showing a high sensitivity to increasing network costs.
High debt may derail the stock
Sprint already has a highly leveraged balance sheet with net debt of $11.9 billion compared to a market cap of $8.6 billion. Adding an additional $4 billion of debt to its books will make the balance sheet look even less attractive and further cut into the company’s flexibility with respect to spending. Historically, the company has been able to finance its operations much more cheaply than the 9-11.5% levels at which it priced these bonds, but the company’s credit ratings were downgraded last month after its announcement that it required additional capital to fund the LTE network upgrade. Consequently, debt investors have demanded higher yields on the company’s bonds.
Q4 will be instrumental for Sprint as it tries to reassure its investors that the iPhone deal wasn’t such a huge gamble after all. Our $4.25 price estimate for Sprint stock is about 50% above market price.Notes:
- Sprint Prices $4 Billion Notes Offering, Bloomberg, Nov 5th, 2011 [↩]
- Sprint Amends Terms of Credit Agreement, SeekingAlpha, October 26th, 2011 [↩]
- Sprint Said Near Deal With Clearwire for New Long-Term Pact, Bloomberg quoting three people familiar with the matter, Oct 29th, 2011 [↩]
- Sprint Aims to Use Clearwire’s LTE Network, PC World, Oct 2011 [↩]