Sprint: Is Now The Time For A CEO Change?

Feb.28.12 | About: Sprint Corporation (S)

Shares of Sprint (NYSE:S) were up on Monday, but the future of the company's leadership is in question after the events of the past few days. Sprint's board has rejected CEO Dan Hesse's plan to buy out MetroPCS (PCS), which has investors and traders wondering if the CEO still has support from the board.

The Sprint-MetroPCS deal fell through late last week when the Sprint board failed to approve the deal. The deal supposedly would have represented a 30% premium for PCS shareholders, before Thursday's rally. That would imply a price somewhere in the $13 to $14 range. This represents the second failed deal in the space recently, with AT&T's (NYSE:T) purchase of T-Mobile being shot down as well.

So why did the board vote down the deal? Well, Sprint isn't exactly in the best shape financially. The company reported a huge loss in its most recent quarter, causing me to question the firm's supposed turnaround. The company posted the largest quarterly loss in some time, and guidance for 2012 hinted that losses would be even more this year than last. In late September, Sprint was forecasted to have a 68 cent per share loss in 2012.

That was before the iPhone deal with Apple (NASDAQ:AAPL) was confirmed. The Apple deal is very costly for Sprint, and many argue that the company is betting its survival on the iPhone. While they did sell a good amount of them during the quarter, the costs involved with getting the phone were tremendous, and are going to lower gross margins going forward. Before Sprint reported that quarter, analysts were expecting a $1.17 loss in 2012. Estimates for that loss have increased by a quarter since that time, and now stand at $1.42. Apple's iPhone is going to get more subscribers to Sprint, and that will help revenues, but Sprint paid a large cost for them. Also, the company is in the midst of a huge costly network upgrade, which is costing several billion dollars per year.

Also, on Monday, Sprint announced a private placement of $2 billion in notes. The notes will be due in 2017 and 2020. This is the second time since November that Sprint has raised money. That deal raised $4 billion, due in 2018 and 2012, and cost Sprint approximately 9.625% interest (pre-tax). Given Sprint's latest quarterly loss and the increased quarter over quarter debt load, the interest on these notes will be at best (for Sprint) about 7%. I think that a 10% interest rate is likely, although terms have not been released yet. That would be another $200 million of pre-tax expenses per year for Sprint, meaning another roughly 4 to 7 cents a share loss going forward for the company can be added to predictions.

We recently saw that Research in Motion (RIMM) decided a CEO change was due, and Sprint may be getting to that point. The losses are still piling up with no real estimate on when, or if, this company can return to profitability. CEO Dan Hesse will be speaking at a Mobile World Conference on Thursday, and I'm guessing investors will be interested in what he has to say.

Sprint has entered a new phase of its history after getting the iPhone just a few months ago. The company, after Monday's debt deal, is expected to lose about $4.5 billion this year, and estimates for this year and next continue to get worse. Dan Hesse had reportedly spent the past few months trying to get this MetroPCS deal done, and it seems like a huge failure to me for him that the board shot it down. Given the stock's continued decline in the past few years and the questionable financial flexibility of this company, the deal seemed risky to me at best. When you combine the iPhone addition in, Sprint just seemed like it had too much on its plate.

Sprint's board shot down the deal last week, and this may be the start of a transition at the top. The company is in transition to begin with currently between the network upgrade and the iPhone addition. It wouldn't be surprising if the company decided to change their leader, given the new phase of the company we are now in. Dan Hesse has been at the helm since 2007. When he took over, Sprint was losing tons of subscribers. They are now doing a better job on that front, however, they are still losing billions of years. I would not be surprised if Sprint decides this year that a change at the top is necessary.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.