At This Price, Sprint Is a Steal for the Right Suitor

How low can the stock price go before Sprint gets taken out?

There are lots of possibilities and scenarios for Sprint (S) to be in play at its current market capitalization and stock price.

With a market capitalization last week hovering around $17 billion, Sprint Nextel is certainly a company in deep distress and may be a steal for the right suitor. Regardless of the initial positive leadership shown by CEO Dan Hesse in these early days of his tenure, with a stock price hammered to the $6 range, the Street may be betting that even a good captain would not be able to save Jack and Rose, I mean, the Titanic, from inevitable disaster. This week, the Sprint has a market cap that has bumped up to around $18.5 billion. The bump happened immediately, almost to the hour, when the 700 MHz spectrum auctions closed. I originally thought the bump was due to imminent takeover activities. Today (being a little on the slow side), my belief is that the stock price jump might only be reflecting the final updated market value on Sprint's spectrum, which would still be an input in calculating any breakup price for the company.

The underlying intrinsic assets, such as Sprint's spectrum holdings, internet backbone and still positive cash flow from the dwindling post-paid customer base, may also lead one to the conclusion that, at this point, Sprint's breakup value might be higher than the whole. As an analogy, it might be instructive to think of Eddie Lampert's play for a depressed-at-the-time Sears (SHLD). Mr. Lampert was correctly able to understand where the intrinsic value was for Sears - in its underlying real estate holdings - while others focused too much on poor operations.

As mentioned in my previous Sprint Nextel Watch analysis, there may be more suitors than meet the eye, especially for the piece parts. A selected list of scenarios could be the following, in no particular order:

• Clearwire (CLWR) / Craig McCaw / Intel (INTC) / Google (GOOG) buys Sprint's WiMAX business and, potentially, the iDEN network. Rationale: VoIP on the WiMAX network might not be available in handset devices for a few more years. A WiMAX / iDEN dual mode device play would give a standalone WiMAX entity a differentiated voice offering until VoIP devices are available.
• Public Safety Spectrum Trust [PSST]: This group might be comprised of any combination of Morgan O'Brien, other ex-Nextel executives swimming around the Northern Virginia ecosystem, Tim Donahue, and private equity players. The aim would be to buy iDEN and use it as an interim public safety / first responder system. iDEN today does not fulfill the full feature requirements set for public safety, but, assuming the 700 MHz D-Block has no takers, then iDEN may be the next best short term alternative.
• Alltel (ALTEO.PK) or Verizon (VZ): The scenario here is that either company (in the event Verizon does not win spectrum at 700MHz or Alltel in any case) purchases Sprint on the cheap and spins off iDEN and / or the WiMAX Xohm business to pay for the deal. Verizon can pass Justice Department and FCC muster in the case of AT&T (T) or Google winning the C-Block AND by divesting iDEN.
• Tim Donahue and the undisclosed management team he had previously assembled as part of the SK Telecom (SKM), Providence Equity syndicate in a bid to invest $5 billion in Sprint around last Thanksgiving. That $5 billion bid would have bought about 11% of the company back then based on market capitalization. Based on today's market cap, that $5 billion alone would be enough to own 30%.
• Mr. Carlos Slim buys Sprint, spins off iDEN. On the other hand, Nextel International [NIHD] is a scrappy, pain in the butt competitor to the larger Mexican carriers the way pre-merger Nextel used to be. A Slim purchase of Sprint while holding onto iDEN could have a dual purpose of cutting off NIHD in the home Mexican market AND gaining entry into the U.S. I read a comment that AT&T has a 9% equity stake in Telmex, so I'm not sure how that information, if true, would play out or complicate a Slim investment.
• T-Mobile: Not likely, for reasons you can read about elsewhere.
• Lastly, there's speculation that Google might make a play for the spectrum.

The bottom line here is that there are lots of possibilities and scenarios for Sprint to be in play at its current market capitalization and stock price.

Disclosure: Long position in Sprint.

Comments

[Liam Walsh:]

why is AT&T not mentioned as a potential suitor?
antitrust issues?

2008 Mar 26 12:46 PM

[idenguy:]

3 incompatible technologies = no good

GSM - iDEN - CDMA

2008 Mar 26 05:23 PM

[just a thought:]

Why wouldn't Qwest be a suiter. They need wireless (already have 800,000 sprint wireless customers) and could use additional International services and a customer base. They went after MCI, why not Sprint?

2008 Mar 26 06:41 PM

[stuck at sp...:]

It sure would be nice to have Tim back at the helm of IDEN seperate from Sprint. Us scrappy Nextel guys would love that scenario!!

2008 Mar 26 06:44 PM

[rrich:]

YES! YES! Anyone, PLEASE!

Someone needs to use the Sprint networks to produce revenue.

2008 Mar 26 11:11 PM

[A Sprint em...:]

It is highly likely that someone will buy S, but why break it up? Sprint has, much to Gary Forsee's chagrin, finally embraced IDEN and integrated the majority of the systems to work together. And in the wake of the monster players, it would be difficult for a stand-alone Nextel to survive. Just like if Chrysler decided to spin off the Jeep line. How can a niche player survive without a bigger brother to buy them economies of scale?

So who would buy it? Not private equity groups...their source of funding has dried up. S may be undervalued, but it is still a monster number. Alltel was just bought by such a private equity group, so unlikely they have $20-30 Billion kicking around. Verizon (contrary to the author's opinion) would face severe scrutiny by the Feds, and in any case, if they don't make the move in the next month or so then they could very well roll into the next administration. And if that administration is not Republican, it is highly unlikely to be approved. And, of course, Vodafone may have no desire to be involved in all of this, and as silent co-owners, they call the shots. I think that Carlos Slim should be the one. He knows the business, it gets him an immediate base, and with the right marketing he could double (triple, quadruple) calls between his two customer bases (US and Mexico), in the only area that is NOT covered in anyone's calling plans--international long distance. Money to be made there.

2008 Mar 26 11:51 PM

[stuck at sp...:]

This may be a dumb question because I do not know the financial metrics, but is it possible that Telus and NII cold do a combined buyout of the Sprint IDEN network and from that offer a North American calling plan that eliminated international charges and was 100% IDEN based? I believe alot of business customers (high ARPU low churn) would jump on that bandwagon.

2008 Mar 27 08:14 AM

[idenguy:]

Hey Observer,

What systems, besides a little bit of billing, has Sprint and Nextel integrated?

The two networks still remain virtually independent to this day except for a few gateways that allow for QCrap and iDEN to work and the connection at the data-center that allows for Sprint CDMA users to access a few legacy Nextel systems...

2008 Mar 27 09:22 AM