NEW YORK ( TheStreet) - Is Sprint ( S) on a slow walk to bankruptcy? 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) 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.
Moffett's report adds to a whirlwind couple of months for Overland, Kansas-based Sprint. In October Sprint announced a $15.5 billion four year deal to carry Apple's ( AAPL) iPhone and keep pace with its larger competitors who already had subscribed millions of users. That deal, a commitment to improving smartphone services through a program called "Network Vision" and a multi-billion dollar 4G build with Clearwire are Sprint's 2012 focus, after it walked away from a $7.3 billion acquisition of MetroPCS ( PCS) in February. Sprint upped its investment in Clearwire to $1.6 billion in December and issued nearly $2 billion in a February debt offering, in a move that the company said could help fund an increasing stake in the budding wireless network. That investment is expected to increase after Sprint walked away from a troubled 4G partnership with LightSquared, a company with designs to convert airwaves used by satellites into a network to handle mobile phone calls. In February, the FCC said that the network would interfere with the Global Positioning System used by airlines, the military and others. LightSquared was to pay $9 billion and give an additional $4.5 billion in credits to Sprint to build out the network in the partnership, which was ended on Mar. 16. Even without failed acquisitions and the financial struggles of its network partners, Sprint has been struggling with its strategy to compete with national carriers by carrying the iPhone. In fourth quarter earnings, Sprint reported its largest quarterly loss in three years as iPhone-driven subscriber growth cut at margins. With the iPhone, Sprint added subscribers, ending a run of three consecutive quarters of customer losses. But Sprint posted a $1.3 billion loss. Sprint also reported bringing on 720,000 iPhone subscribers in the quarter, short of initial projections of roughly 1 million. Sprint's revenue is expected grow over 4% to $35.1 billion in 2012 as its annual loss narrows from nearly $3 billion to $934 million, according to consensus estimates of analysts polled by Bloomberg. That loss is expected grow back to near $3 billion in 2013, even as sales continue to grow. Meanwhile, Clearwire is expected to lose roughly $500 million in 2012 and 2013, according to analyst estimates. For more on Sprint and wireless carrier shares, see why the iPhone is causing telecom hangups. For more on the wireless industry, see why AT&T is still hungry for more spectrum and how a tower deal twists industry consolidation. -- Written by Antoine Gara in New York