Economics and Technology, Inc. -- Views and News, March 2012

March 2012

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Bankruptcy concerns raised for Sprint

Shares of Sprint Nextel stock fell more than 4% after analyst group Bernstein Research raised the specter of a future bankruptcy filing from Sprint. While not making an official prediction of bankruptcy, the downgrade noted that such an outcome was a "very legitimate risk."

Sprint's financial situation has deteriorated over several years as the company failed to capitalize on potential synergies from its merger with rival Nextel and massive customer defections arising largely from the botched transition. The company hasn't earned a profit in more than four years, although cash on hand has increased in the last two years.

The renewed concerns over Sprint's fiscal health arise largely from the enormous take or pay contract with Apple that allowed Sprint to begin carrying the iPhone. While current sales of iPhones have helped Sprint stave off some of its subscriber losses, it seems more and more likely that the summer/fall release of the next iPhone will be an LTE capable device. While Verizon and AT&T have already rolled out LTE, and T-Mobile has obtained the necessary cash and spectrum to do so, Sprint's path to LTE from its WiMax 4G debacle seems much less clear or certain. Sprint lacks both the cash and spectrum to make such a transition.

While this is not an immediate problem, Sprint will be in a difficult competitive position once consumers come to expect LTE speeds and service. If Sprint has inadequate (or zero) LTE coverage, the launch of an LTE version of the nations most popular smartphone handset could be devastating. Sprint's contract with Apple is take or pay: if Sprint does not have enough demand for iPhones, it has to pay Apple anyway. If Sprint customers defect to rival networks to gain access to LTE speeds on the iPhone, Sprint would suffer a trifecta of woes: paying Apple to satisfy the contract, losing revenue producing customers, and having to tighten its belt at a critical moment where cash will be necessary for network upgrades. Sprint's current condition is fragile enough. The company currently holds some $7-billion in current liabilities and $20-billion in long term debt, while maintaining only $11-billion in equity. After the drop in share price, the company's market capitalization fell to $8.3-billion (less than Apple is spending on its newly announced share repurchase program).

For more information, contact Colin B. Weir at cweir@econtech.com

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