Wireless Must Wonder Where the Money Will Come From

Updated from 9:32 a.m. EST

If you're Sprint PCS ( PCS) or Nextel ( NXTL), you're looking at Qwest's ( Q) reported money-borrowing difficulties and swallowing hard.

Nextel is sitting on $15.6 billion in long-term debt and more than $1 billion a year in interest payments to service it. Sprint PCS faces a monstrous $16.5 billion in long-term debt and $4.4 billion in short-term debt of its own, according to Securities and Exchange Commission filings, though its representatives have assured Wall Street it can tap more if needed.

Wireless companies aren't going to grow as fast in 2002, but they're going to need as much money as ever. At the same time, investors are waking up to the fact that wireless-subscriber growth is slowing and that mobile-carrier balance sheets are mighty suspect. Investors are going to make the equity market a tough place to raise money, exacerbating an already tricky 2002.

Wireless stocks have been under selling pressure recently, and they were dropping again Tuesday. Nextel, the most active stock on the Nasdaq, was losing 23.5% to $3.72, and Sprint PCS was down 9.7% to $8.36. Both stocks hit 52-week lows earlier in the session. AT&T Wireless ( AWE) was off 2%, while handset makers Ericsson ( ERICY), Motorola ( MOT) and Nokia ( NOK) were also dropping.

With accounting scrutiny turned up, the high-growth wireless industry is under the magnifying glass. Take Nextel, which reports on Thursday. The company is expected to report full-year revenue of $7.4 billion and a loss of $1.98 a share for its fourth quarter of 2001, according to Multex.com. The company was on track to spend $2.5 billion on its network in 2001 -- we'll get its 2002 plans on Thursday.

Nextel decided to forgo a technology upgrade to CDMA back in October to save money, opting instead to use a Motorola enhancement of its iDEN network to expand calling capacity, which Motorola will deliver in 2003. Analyst estimates for the CDMA tune-up ranged from $3 billion to $6 billion, a prohibitive amount for Nextel. At the end of its last quarter, management disclosed in its quarterly 10-Q filing that Nextel would "pursue a less aggressive growth strategy that targets conservation of cash resources" and added that it would nonetheless have outlays greater than its cash flow in the next few years. Meanwhile, debt service payments loom.

Sprint PCS shares lost 12% Thursday and 9% Friday on fears the company would suffer from a Qwestian constriction of capital options. Overall, the Sprint family spent $3.75 billion on its network in 2001, and it plans to dole out another $3.4 billion for equipment in 2002. Also, factor in that Sprint PCS had $1.51 billion in earnings before interest, taxes, depreciation and amortization in 2001 -- the number wireless carriers prefer because of their capital outlays on network equipment.

Counting on Wall Street to fuel its growth spurt, Sprint PCS was challenged throughout 2001 to meet the cost of its network. Sprint was able to raise $2.3 billion in a PCS offering in August, but in its fourth-quarter press release the parent company said it was still $1.75 billion short of capital expenditure spending requirements. It's going to get even harder to raise the money from PCS shares, though, as their value has dropped 65% since the beginning of August.

Last spring, management boasted of the potential sale of its tower arm, with estimates running around $2 billion in potential proceeds. Unfortunately in the intervening months, tower companies such as American Tower ( AMT), Crown Castle ( CCI), SpectraSite ( SITE) and Pinnacle Holdings ( BIGT) have seen their shares dissolve by 87%, 77%, 90% and 99%, respectively.

Sprint PCS announced Friday that it would eliminate five call centers and the 3,000 workers employed at them, totaling 9% of its workforce, to save $60 million annually. Standard & Poor's followed the announcement by saying that the moves won't have any impact on the company's credit rating or outlook.

Hard Up for Subscribers

It's a brand-new year for wireless carriers, bringing slowed subscriber growth -- though it is still much better than the hardscrabble existence of mature markets like long-distance calling. AT&T Wireless hopes to grow EBITDA more than 30% in 2002, and Sprint PCS has 98% EBITDA increases projected.

Capital spending budgets are still intact, signaling that U.S. carriers are determined to keep growing. Normally, this would be a good thing. But their highly leveraged tactics, mildly controversial among investors during a period of fast growth, have fallen out of favor with investors who have been despondent since realizing the fourth quarter of 2001 was slower-than-expected and 2002 will follow suit.

A year ago, Sprint PCS shares traded around $24, but they slipped to $9.27 at Friday's close. AT&T Wireless was once at $22.72, but finished at $10.12 Friday; Nextel was living the high life a year ago at almost $30, incredible heights considering its current position of $4.86.

It seems that investors are losing their patience and have lost their faith in a business that will undoubtedly witness good, if not astronomical, growth in the years to come. AT&T Wireless management lamented the carrier's share price on the company's latest earnings conference call. But a pitch that captivated investors as recently as a few quarters ago can't get reception where it stands right now.

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