Sprint Secures Capital To Fund Network Vision Equipment Upgrades; Fair Value $3.75

Sprint (NYSE:S) seems to have overcome a major financial hurdle in the execution of its Network Vision plans. The third largest wireless carrier in the U.S. announced last week that it has secured a $1 billion credit deal with Deutsche Bank and a syndicate of other banks to purchase network equipment from Ericsson. The deal could be backed by another $2 billion, meeting Sprint’s April 25th earnings call guidance that they were looking to secure vendor financing in the range of $1-$3 billion. ^[1] Sprint has already tapped the debt markets twice over the past seven months and believes that its funding requirements have been “largely addressed” following this deal.

This goes a long way in allaying investor concerns regarding a funding of $5-$7 billion that Sprint has said it faces in implementing its Network Vision strategy. Sprint is aggressively trying to build out its LTE network in order 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 It is also shutting down the outdated iDEN network and plans to use that spectrum to augment its LTE network and cut costs. We have a $3.75 price estimate for Sprint’s stock, which is about 50% higher than the market price.

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Sprint’s lagging LTE plans get boost

Sprint expects to launch its LTE network in ten cities by the mid-year and has announced only six of those initial markets. In comparison, Verizon has its LTE network up and running in about 196 markets across the U.S. and covers about 200 million Americans currently. AT&T is behind Verizon in terms of LTE coverage but it still covers about 75 million Americans and plans to add an equal number by the year-end. As the iPhone 5 launch draws near, it has become highly imperative for Sprint to have LTE ready in at least a few cities before the launch. (see Sprint’s LTE Plans Are Coming Up Short As iPhone 5 Approaches)

In order to bridge the gap, Sprint is aggressively executing on what it calls its Network Vision strategy to get most of its LTE network ready by the end of 2013. The carrier is 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 two strong quarters of postpaid net adds on its core Sprint CDMA network since the 4S launch. (see Sprint’s iPhone Bet Is Starting To Pay Off, $3.75 Fair Value) 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 the 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 now be available for the CDMA/LTE network.

As LTE adoption rates rise and 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 cause subscribers to 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 the high data users and continue to have a positive impact on ARPU levels. Sprint’s postpaid ARPU for its core CDMA platform in the most recent quarter jumped $3.70, or 6.6% versus the same period last year, as the iPhone accounted for a huge number of new subscribers to Sprint.

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1. Sprint Nextel Gets $1 Billion Loan To Finance Equipment Purchase, Bloomberg, May 29th, 2012 [↩]