Sprint's Treasure Hunt -- Looking for $3 Billion

Sprint PCS (PCS) turned in encouraging numbers Tuesday, but it may be Wednesday's rate cut that gets investors excited about the stock.

The wireless network operator reported that in its first quarter ended March 31, it signed up users like gangbusters, despite the softened economic market. It was able to sustain the amount of money wrung out of each customer per month at $60. But what was missing from management's discussion of the rapidly expanding wireless competitor was its current mastery over the financial markets.

Sprint PCS may have well-laid plans, but it doesn't have the money to fund them through the end of the year. The company has been waiting for the market to play nice for the past two months, hoping stock prices would go up enough to support a planned 152 million-share secondary offering of Sprint PCS shares. Without the $3 billion planned receipts, Sprint PCS is looking at some hard choices in its near future.

Last November, parent Sprint (FON) announced that it would need $5 billion to finance the expansion of its nationwide network and the Sprint PCS build-outs and upgrades to next-generation wireless technology. A timely January debt offering took advantage of that month's rate-cut inspired stock market climb to raise $2.4 billion. But a February plan to sell $3 billion in PCS stock turned few heads among deflated investors. Sprint PCS' tracking stock has dipped from the mid-50s a year ago to the high teens in early 2001. Renewed market vigor could change all that. If not, all the big dreams turn into teeth-grinding nightmares.

Street sentiment holds that selling more debt is not an alternative, because it would have Sprint sacrificing a relatively good debt rating. That leaves Sprint PCS with dramatic options, namely selling off big assets that are tangential to its business or shutting down the bulldozers that are digging across the nation for its network upgrades.

"A lot of wireless carriers are reluctant to back off plans they made six to nine months ago or a year ago, for fear it's a wrong signal," explains senior telecom analyst Rick Grubbs of Credit Lyonnais Securities. Sprint PCS was given its own tracking stock to highlight its growth, and scaling back might not feed into that hard-charging image. Investors are excited about Web-based content, text messaging and other services enhanced by speedy newer networks. "It's a fine line they have to walk. They also have to do what's prudent to build business and be fundable at the same time."

Grubbs points to two big potential sales for Sprint that could raise the $3 billion: its local phone business and its wireless tower business. He estimates the 18-state-wide local phone network's price tag at $3 billion, the magic number, and explains that it's an attractive market for investors looking for lower growth opportunities that are cash flow positive. "Regional local phone companies, the ILECs, have done the best lately. They don't have funding issues and they've been ignored for the past two years," Grubb says.

Likewise, tower players are eyeing Sprint's 4,800 towers, which Grubb values at over $1 billion. Not all wireless carriers have their own towers, but instead rent space from tower operators such as Crown Castle (TWRS) and American Tower (AMT).

The dark horse in all this is the stock market itself. Given a little stock strength, Sprint PCS could sell those $3 billion in shares to public investors and Sprint wouldn't have to sell anything. Keep an eye on the effects of that rate cut; Sprint PCS is just one more onlooker with acute interest in a bounceback.

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