A prominent telecoms analyst argues that the some investors are already pricing in a 50/50 probability of a filing over the next five years as the nation's third leading wireless carrier struggles to build a network to competitively handle the iPhone.
A next generation LTE iPhone from Apple (AAPL - Get Report) may put Sprint at a disadvantage against larger carriers AT&T (T) and Verizon (VZ), moving the company in the direction of bankruptcy, argues Bernstein Research analyst Craig Moffett in a March 19 note.
That's because Sprint's still budding 4G network will be tested in a big way when Apple launches a LTE iPhone that's expected later in 2012. In contrast, AT&T and Verizon have networks with extensive national coverage that are tracking at a much quicker completion.Moffett of Bernstein Research sees two scenarios for Sprint playing out with investors split evenly on the company's prospects. "In the first, the company successfully navigates its complicated Network Vision upgrade, stabilizes Clearwire's financial position, and delivers a compelling 4G product. In the second, some combination of its gargantuan take-or-pay contract with Apple, a hobbled 4G offering, and a stupendous debt burden bring the company to its knees." That second scenario increases Sprint's bankruptcy risk, which Moffett notes is already a 50% probability according to prices on contract that guarantee the company's debt for 5 years. The crux of the problem is that as Sprint looks to bolster its smartphone services, the company may run dry on finances as it bolsters its wireless network through an increasingly expensive partnership with Clearwire (CLWR) and takes on a $15 billion plus commitment to carry the iPhone. As Sprint's debts begin to mature through 2015, the company may find it hard to raise additional capital to fund its network and selling commitments, increasing the prospect of bankruptcy, Moffett argues. While Sprint is easily able to handle its debts through 2014 with its cash on hand, in 2015, Sprint has $2.6 billion coming due and its 4G network partner Clearwire has an additional $3 billion maturing. "If Sprint's performance is not substantially improved from current levels by that time, capital may not be made available for the refinancings," writes Moffett of network based headaches that the company may face as a result of an increasingly speedy and data intensive batch of iPhones. "To be clear, we are not predicting a Sprint bankruptcy. We are merely acknowledging that it is a very legitimate risk. And notwithstanding a recent rally in Sprint shares, we believe that risk is rising." A Sprint spokesperson declined to comment on the content of Moffett's research note. Sprint's shares fell nearly 5% to $2.75 in Monday trading, putting a damper on an over 17% year-to-date surge. Still, even after a 2012 surge, Sprint shares are off nearly 50% in the last 12 months.
Prior to Moffett's Mar. 19 report where he downgraded Sprint shares to a "sell" and a price target cut to $1.75 from $2.50, other analysts noted the struggles that smartphones like the iPhone pose to Sprint and other non-dominant carriers."AT&T and Verizon are the only two companies in the U.S. wireless industry that will earn enough to cover their cost of capital "wrote Moody's in a Feb. 13 note.
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