Sprinting To Bankruptcy?

Oct.11.11 | About: Sprint Corporation (S)

Let's face it, Sprint (NYSE:S) is in big trouble.

They recently disclosed they expect to need to access the capital markets, having decided to ditch their (foolish) reliance on WiMax in favor of LTE. They're losing customers. Their stock price is in total meltdown; after spiking to $3.39 Friday on the iPhone announcement it is now trading at $2.10, a nearly 40% loss in less than 48 hours and a loss of almost 70% from the high of $6.45 just a couple of months ago . And today their already-junk credit rating was placed on negative review.

Either Sprint breaks the model that the telecommunications companies have followed in the wireless space, literally pretty much right now, or they're dead within the next 12-18 months.

Wireless phone service is a highly-capital intensive business (much like the ISP business of the 90s) and you literally bet the company on each iteration. Sprint may survive one bad decision (WiMax) but it will not survive two. We're talking about a company hanging on by its fingernails right now staring down the need for major capital expenditures over the next 24 months and no ability to fund them from base operating revenue.

In no particular order any of the below events will kill them - not all of these events, any one:

  • A credit-market freeze. This is looking increasingly likely and will cut off access to the capital markets for any firm with a deteriorating credit and market picture. There's no way Sprint will be able to borrow anew or roll over maturing debt if this occurs given their current market posture.
  • Further credit downgrades. Sprint is ok on capital for the next year, roughly. But beyond 2012 they're not. They have lines maturing they must deal with. Refinancing those on commercially-reasonable terms will be impossible if their market and thus credit posture does not improve - and fast.
  • Further customer losses. They simply have no margin in this regard of any sort. The bleeding must be stopped right now and be reversed. They need "buzz" and they need it immediately.
  • They bet the firm on the iPhone with its committed buy. This is amazingly dangerous. The iPhone is a mature product and is being attacked severely by Samsung and others in the Android space. This bet in 2008 might have made sense. In 2011 it's ridiculously dangerous and if the consumer turns fickle toward the device without major customer cushioning capability the company is finished from this move all on its own. A below-cost blowout of the devices would destroy what remains of the balance sheet at this point in time.
  • Delisting. Get into the pinks, you're finished with capital market access. A reverse-split won't do jack and crap for this situation as it will be (properly) seen as a desperation move.

What Sprint needs to do is break the model and they need to do it right now. They cannot afford any more 10% down days, and they've had too far too many of them in the last couple of months. They need to generate a series of 10-20% up days and there's only one way: Big-time customer buzz and customer acquisition without insane marketing costs.

I know of only one way to do this: Allow anyone to bring any technically-compatible phone on your prepaid network without fear or favor.

Sprint now has the iPhone. Leave the subsidized model for those who want it, but for those who don't give them the option without losing their device.

Specifically target Verizon (NYSE:VZ) with this tactic since they have many compatible devices. If the device can be OTA-updated with the Sprint PRL then allow it to be activated. Period.

Yes, I know the carriers make less per customer on "no-contract" service. But they're profitable customers and right now the key is to steal as many customers as you're able.

Wireless service is a mature market - your "growth" is going to come at someone else's expense. The only carrier with compatible technology that matters is Verizon, so you attack them specifically by allowing any handset you can support to be activated on your Virgin Mobile service - including your own high-dollar handsets and those bought on the aftermarket.

I recognize that this is a "Hail Mary" maneuver and it risks cannibalizing Sprint's own contract customer base. But this much is a certainty - if Sprint doesn't stop the bleeding right now in the stock price they're going to get locked out of the capital markets as credit conditions in the market in general are deteriorating at a frightening rate, Europe is going to blow up and the company is, on the present path, going to get downgraded.

Either management acts right now or Sprint is done.

It's that simple.

Disclosure: The author has a position in this security and often trades in the telecommunications space on a daily basis, and with this situation this fluid disclosure of specific positions and intent would be pointless since those position(s) could change literally within minutes.