Sprint: Buy Before The Momentum Shift

| About: Sprint Corporation (S)

One of the biggest deals in recent times was announced in October when SoftBank (OTCPK:SFTBF) revealed a complex $20.1 billion deal to acquire majority control of Sprint Nextel (NYSE:S). This transaction will combine Japan's fastest-growing cellphone service provider with the troubled carrier which is the third-largest in the U.S. The rationale is to provide Sprint with a strong partner with deep pockets which can help finance its network upgrade while pursuing additional mergers to facilitate business growth. SoftBank, an internet and communications company is making a bet that it can break the dominance of Verizon (NYSE:VZ) and AT&T (NYSE:T) in the United States in a similar fashion to the duopoly that long ruled the Japanese market. The two companies combined would generate around $80 billion in revenues and $18 billion in earnings before interest and tax. Sprint's customer base would nearly double to 96 million which would give it much larger economies of scale.

This is an unconventional transaction in which Softbank will acquire control of Sprint through a three-step process consisting of buying $3 billion in bonds that will be repaid with stock, $5 billion in new Sprint shares and $12 billion to buy out existing Sprint shareholders. After this is accomplished, Softbank will own 70% of Sprint, with the rest publicly traded. The buyer controlled by Masayoshi Son, an eccentric billionaire ranked by Forbes as Japan's second-richest man, will add Sprint to a collection of different properties that include Japan's third-largest mobile operator, a piece of Yahoo Japan. and a stake in Chinese e-commerce giant Alibaba Group Holding Ltd. At the time Softbank acquired the Japanese operations of Vodafone (NASDAQ:VOD) it was the smallest major carrier in Japan and losing customers. Softbank chipped away at its bigger rivals with aggressive marketing techniques and discount pricing and then outwitted them to become the exclusive Japanese carrier for Apple's (NASDAQ:AAPL) iPhone for more than three years. It earned $2.5 billion before interest and taxes in its 2012 fiscal year

For the third quarter of 2012, Sprint reported wireless service revenues of almost $7.3 billion during the quarter which is an increase of roughly 6 percent year-over-year.

Wireless service revenues for the Sprint platform grew 14 percent year-over-year driven by postpaid ARPU growth of $3.01 per user and ongoing subscriber growth. The company reported a net loss of $767 million and a diluted net loss of $.26 per share for the third quarter of 2012 as compared to a net loss of $301 million and a diluted net loss of $.10 per share in the third quarter of the previous year. Sprint's third quarter 2012 results included accelerated depreciation of $397 million, or negative $.13 per share (pre-tax), mostly related to Network Vision, and the expected shutdown of the Nextel platform.

The Sprint platform postpaid subscriber base grew for the tenth consecutive quarter, with net additions of 410,000 spurred by a postpaid Nextel recapture rate of 59 percent and the best ever third quarter churn. Sprint sold approximately 1.5 million iPhone in the third quarter with 40 percent representing new customers. The company had also sold 1 million LTE smartphones sold prior to the launch of the iPhone 5. Adjusted OIBDA amounted to $1.28 billion even as the company continues to invest in Network Vision and provide a platform for future growth. As of September 30th, 2012, the company's liquidity was approximately $7.5 billion consisting of $6.3 billion in cash, cash equivalents and short-term investments and $1.2 billion of undrawn borrowing capacity available under its revolving bank credit facility.

Sprint's Network Vision initiative continues to generate momentum and the number of sites that are ready for construction or with construction already underway has more than doubled in the last three months to more than 13,500 To date nearly 4,300 sites are on-air and hitting speed and coverage enhancement targets. Sprint now expects to bring 12,000 sites on air roughly one quarter later than originally planned. Sprint has launched 4G LTE in 32 cities and expects that 4G LTE will be available in more than 115 additional cities in the coming months. Sprint has also launched or announced 13 4G LTE devices to date. The Sprint platform has gained (excluding Nextel) more total subscribers than Verizon, AT&T, Deutsche Telekom (OTCQX:DTEGY), MetroPCS (PCS) and U.S. Cellular (NYSE:USM) combined.

Sprint has already started using the cash injection from Softbank to make some smart strategic moves it has announced a $480 million deal with the premier wireless service providers and a subsidiary of Telephone and Data Systems (NYSE:TDS), United States Cellular. The agreement involves the sale of U.S. Cellular's Chicago, St. Louis, central Illinois and Midwest markets to Sprint subsidiaries. In addition, the deal includes the handover of personal communications service spectrum and approximately 585,000 customers, accounting for about 10% of U.S. Cellular's customer base.

The transaction is expected to close in the middle of 2013. For Sprint; the agreement would mean more spectrum that to support its LTE coverage and services in important markets like Chicago and St. Louis. By far, the most intriguing prospective deal involves Sprint's majority stake of 50.5% in Clearwire (CLWR) though Sprint does not yet have control of the board. What Clearwire does have is lots of spectrum all of which can be used for 4G operations. It also brings to the table a close working relationship with China Mobile (NYSE:CHL). China Mobile, Clearwire and Softbank all share the same spectrum bandwidth and are building the same kind of 4G networks and this could lead to expansion into China for both Sprint and Softbank. I would definitely regard Clearwire as a prime acquisition candidate in the future for Sprint.

I firmly believe that Sprint's troubles are now behind it and that after a long time we can finally look forward to growth in share value. The stock currently trades at around $5.58 and I can really see no downside because, at the worst, you can always sell your stock to Softbank at their offer price of $7.30. I would recommend that you buy Sprint stock now because the current price undervalues both the Softbank offer price and the growth prospects.

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.

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