Sprint: From Bankruptcy to Buyout

Softbank's reported offer would represent, at maximum, a $6 share price, according to Evercore Partners analysts, which would come at a single digit premium to Sprint's 2012 stock highs. Meanwhile, Jonathan Schildkraut of Evercore writes in a research note to clients that Softbank's deal would do little to alter Sprint's fundamental challenges, except to give it a deep pocketed financial backer.

While reports range greatly on Softbank's share stake proposal, Craig Moffett of Bernstein Reseach notes the expected takeout offer gives Sprint little credit for its in-process wireless network upgrade. "[It] is noteworthy that none are particularly aggressive if one assumes successful execution of Network Vision and realization of the EBITDA benefits that seem widely expected in 2014E," writes Moffett, in a note to clients.

On the heels of MetroPCS and T-Mobile's announced merger earlier in October, Citigroup analyst Michael Rollins added Sprint to the bank's "Most preferred List" of stocks, advocating that investors consider a pair trade where it outperforms MetroPCS through year-end.

Citigroup's bullishness on Sprint is predicated on expected improvements in the company's operating margins and its eventual success in building out a viable nationwide network.

"[We] believe the core investment thesis for Sprint remains centered around the prospects to restructure its network architecture and improve margins," wrote Citigroup's Rollins in a note to clients, assessing the impact on Wednesday's mega-merger. Rollins highlights improving finances and annual operating income growth of over 25% in the next two years as reason to expect Sprint can turn profitable and generate 65 cents in 2014 earnings per share.

Those betting on Sprint's outperformance and green shoots on its network upgrade have already been rewarded. Hidden in telecom M&A speculation is Sprint's performance as it remains on track to go from worst to first as a stock performer in the sector.

In 2011, Sprint shed more ground than any telecom within the S&P 500 Index, losing over 44% in share value, according to Bloomberg data. Now, as worst case fears like bankruptcy recede according to even bearish analyst estimates, Sprint remains on track to be the top performer in the telecom sector in 2012, beating out 40%-plus 2012 gains posted by Crown Castle (CCI), and dramatically outperforming double digit stock gains posted by larger rivals AT&T (T) and Verizon (VZ).

In fact, for those looking to play the telecom M&A guessing game on the heels of reports Sprint may be taken out, they may be rewarded by looking at second order impacts instead of nailing down the price of the deal.

Moffett of Bernstein Research highlights that the obvious winners in a deal would be Spirnt and its 4G wireless partner Clearwire (CLWR), while losers would be MetroPCS, Leap Wireless and DISH Network, given some expectations Sprint would acquire one of the companies. For AT&T and Verizon, a better capitalized Sprint might up the competition. "Incremental funding for Sprint would, in theory, re-invigorate Sprint, amplifying competitive pressure industry-wide," writes Moffett.

For telecom sector investors, Sprint's push from worst to first may now be about whether the company can execute on its Network Vision upgrade and take on smartphone subscribers profitably, over handicapping sector consolidation efforts. Those milestones may yet take precedence over M&A speculation for investors, were speculation to fall flat once more.

For more on the wireless industry, see why AT&T is still hungry for more spectrum and how a tower deal twists industry consolidation.

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-- Written by Antoine Gara in New York

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