Sprint (S) seems to be losing ground against the industrial competition as the company reported a significant loss of subscribers in its 3rd quarter. This is the first time in two and a half years that the company has reported an overall loss of subscribers. This announcement came soon after the company disclosed its deal with the Japanese cell phone company Softbank Corp. which is buying 70% of Sprint Nextel Corp. for $20.1 billion.
According to the deal, Softbank will buy shares worth $8 billion directly from Sprint, while the remaining $12 billion worth of shares will be bought from shareholders of the company. A tender will be issued for purchase of the shares from shareholders and the price that has been offered is $7.3 per share. This price is significantly higher than the current market value of the shares of the company, therefore it can be said that the shareholders are being offered lucrative premium to give up the shares of the company. The shares that are being bought directly from Sprint include $5 billion worth of primary equity that will be purchased at the same price that has been offered to the shareholders i.e. $7.3 per share. The other $3 billion will account for the convertible bond purchase.
With regard to the number of subscribers lost by Sprint, the company disclosed that it lost overall 423,000 subscribers in its 3rd quarter i.e. in July to September period. The major reason behind this significant loss is the weak product lineup by the company. The non-contract users added by the company during the quarter were 19,000 which is the weakest number of subscribers added in more than three years.
Another major factor that caused the hindrances in the way of Sprint, the third largest carrier in the country, was the industrial competition. The company seems to be following the same fate as Nokia (NOK) which is also struggling against the industrial competition. The strong product lineups and successful marketing done by Verizon Wireless (VZ), the largest carrier in the country, and AT&T Inc. (T), the second largest carrier, caused the users to move away from Sprint and toward these two giant carriers. According to the reports by Verizon, the company added an overall 1.8 million subscribers, which is a very high number when compared to industry standards. On the other hand, AT&T reported an addition of 228,000 subscribers.
The officials at Sprint seem optimistic for the performance of the company in the future after entering into the deal with Softbank. The deal has given the company a significant amount of fresh capital to enhance its operations. Dan Hesse, CEO of Sprint Nextel Corp. said, "We've constantly been playing catch-up." He went on to say, "We can do that much more effectively." This comment indicated the optimism held by the top officials of the company with regard to the inflow of fresh capital.
Sprint has been playing "catch-up" for a long time and,it can take years to reach the point where the competitors had been ages ago. For example, Sprint started selling the iPhone last fall, which is long after AT&T started selling it in 2007. The company has been trying to level the ground with its competitors for a long time and in an attempt to enhance its market position, the CEO of the company announced that the new product lineup will also include iPad and iPad Mini.
Another factor that keeps Sprint below its competitors is that the company has not upgraded its network to the latest "LTE" data speeds which are being provided by Verizon and AT&T.
It is because of the network's lack of LTE data speeds that the company remained unable to sell a plausible number of iPhones. All three major carriers in the country launched the new iPhone by Apple (AAPL) in the same quarter, however; while the other two carriers witnessed a significant jump in their quarter to quarter iPhone activations, the introduction of the new iPhone did not cause any jump in the activations for Sprint.
However, the recent deal with Softbank will allow the company to enhance its financial performance in the prospective periods. The officials at the company have indicated their plans to rise above the competition in the mobile network industry in the country. The recent deal can have a positive impact on the market price of the stocks of the company, and it can be said that the market value of the shares is expected to rise.
After analysis of the situation, in my opinion the investors should hold the stocks of the company as the financial performance is expected to be better in the future periods. This anticipation of the improved financial performance of the company will have a positive influence on the market price of the stocks. Therefore, it may be a better decision to hold the stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.