Monday, July 13, 2015

Sprint's "Debt Bomb"

Is Sprint facing a “Grexit” problem (unsustainable debt load) of its own? Some think so.

Ignore for the moment the statement by T-Mobile US owner Deutsche Telekom that T-Mobile US  is not sustainable as an independent firm with its current position in the market, Timotheus Höttges, Deutsche Telekom CEO has said.

Some now say Sprint’s position might well be unsustainable as well, given “severe financial distress,” according to MoffettNathanson principal Craig Moffett.

The upshot is that either a previously-unthinkable merger between Sprint and T-Mobile US a year ago could become a possibility. In order for that big a change in regulatory thinking to occur, Sprint would have to flirt with complete failure, however.

“If Sprint really is in severe financial distress, as we think they will be within a relatively short period of time, then it’s possible that the government would look at that deal differently,” said Moffett.

That is not to say Sprint’s operating performance is quite so challenged. Indeed, Sprint seems to be improving, operationally. Sprint says it stopped declines in its business in fourth quarter of 2014 (calendar first quarter of 2015). And Sprint added important postpaid accounts in the quarter, instead of declining.

CEO Marcelo Claure noted that Sprint retail net additions of 757,000 actually beat Verizon and AT&T.

In the year-ago same quarter, Sprint lost 1.1 million accounts. To be sure, Sprint postpaid net additions trailed it competitors, “but the gap to Verizon and AT&T is closing dramatically compared to the 800,000 difference a year ago, and we have closed the gap with T-Mobile by more than 40 percent,” said Claure.

The big problem is debt. In 2011 Sprint had less than $23 billion in debt. Today Sprint has more than $33 billion in debt, a 50-percent jump in just three years. Some argue Sprint does not have either the profitability or cash flow to pay down the debt.

Of course, a merger between Sprint and T-Mobile US is only one possibility.

Dish Network, Comcast or perhaps another firm might see a weakened and therefore “cheap to buy” Sprint as a strategic asset, given that both those firms intend to enter the U.S. mobile market.

What seems clear is that neither T-Mobile US nor Sprint are strategic buyers, but are strategic sellers. What is entirely unclear are the names of the eventual buyers.

If Sprint declines enough that antitrust authorities do not believe a merger with T-Mobile US is problematic, some other contender is likely to have moved first.

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