Sprint's Future Gets Staticky With SoftBank Investment in ARM

After the $32 billion acquisition of ARM Holdings, investors are concerned that SoftBank will be less willing to lend wireless carrier Sprint a hand.
By Chris Nolter ,

SoftBank (SFTBY) Chairman and CEO Masa Son's assurances that Sprint (S) - Get Report has a rosy future have been little consolation to investors in the fourth-largest U.S. wireless carrier this week.

Son, who announced SoftBank's $32 billion purchase of chip designer ARM Holdings (ARMH) on Monday, doused hopes that the Sprint majority shareholder would inject more cash into Sprint, much less buy out minority shareholders.

"[Sprint] is becoming free cash flow positive by the end of this year or next year," Son told investors during a presentation of the ARM acquisition. "It does not even need SoftBank additional funding. It is self-sufficient, so why do we need to even discuss that?"

As the focus returns to Sprint's long, slow turnaround, shares of the wireless carrier declined 13 cents, or 2.7%, to $4.62 on Tuesday, following a 5% drop on Monday.

Sprint CEO Marcelo Claure, whom Son said is running Sprint "beautifully," can back up his boss's praise with some numbers next week, when the carrier reports fiscal first quarter earnings on July 25. In addition to subscriber gains and profitability, investors will look for the impact of Claure's cost-cutting campaign, as well as the carrier's strategy for managing its $33.4 billion debt load.

T-Mobile USA (TMUS) - Get Report CEO John Legere has shaken up the wireless market with binge-crazed video packages and other disruptive offerings. Verizon (VZ) - Get Report is focusing on its go90 mobile video tech offering, and could bolster its tech capabilities depending on the results of the Yahoo! (YHOO) auction. And AT&T (T) - Get Report is priming for online video services that make use of its DirecTV acquisition, but could also face a subscriber squeeze this quarter.

To lure new subscribers, Sprint hired Verizon's old pitch man, offered complimentary Amazon Prime service and free streaming of the Copa America soccer tournament.

Sprint acknowledges in its new ads that its wireless network is a hair behind Verizon's, but pitches subscribers on a 50% bill reduction.

In Sprint's first fiscal quarter, Wall Street calls for the carrier to post a net gain of 136,000 new post-paid subscriptions, including tablets and phones. Analysts expect Sprint to add 89,000 new phone subscriptions.

Wells Fargo analyst Jennifer Fritzsche calls for an increase of 225,000 post-paid subscribers, and 100,000 new phones. The carrier is "within fighting distance" of AT&T and Verizon, she noted, in turnover of phone subscribers.

Amir Rozwadowski of Barclays forecasts a more modest 130,000 net post-paid additions, with 80,000 from phones.

While Sprint has made progress towards Son's goal of positive free cash flow, Rozwadowski noted that questions remain about whether the carrier could damage its long-term competitive position for "a near-term financial reprieve" of better margins.

Sprint must also answer the $33.4 billion question that sits on its balance sheet.

SoftBank has invested tens of billions of dollars in Sprint already. To ease shareholders' concerns about the risky telecom investment, SoftBank said in March that it is putting the Sprint investment, an Alibaba (BABA) - Get Report stake and other non-Japanese investments into a separate unit with distinct management. SoftBank would still own the international business, but the restructuring could lay the groundwork for a full spin off.

While Son will not pay off Sprint's debt, SoftBank has used its financial heft to help the subsidiary in the past. Sprint has sold networking gear and other assets to SoftBank-backed entities, while the carrier leases back the network infrastructure from the SoftBank-backed group. The deals allow Sprint to effectively tap the debt markets at more attractive interest rates than it could obtain on its own.

Son told SoftBank investors that he could not have made the ARM investment a year ago, because of Sprint's difficulties.

"Sprint has [a] very good future," Son said.

Judging by the dip in the telecom's stock, Sprint investors think the future would be brighter with more help from SoftBank.

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