Japanese operator Softbank expects to almost double Sprint Nextel's (NYSE:S) wireless margins over time and will also likely increase capital expenditures at the carrier this year following the completion of Softbank's $20.1 billion deal to acquire 70 percent of Sprint, according to a financial analyst.
New Street Telecom analyst Jonathan Chaplin wrote in a research note following Softbank's fourth-quarter earnings presentation Jan. 31 that Softbank CEO Masayoshi Son revealed two key elements of Softbank's strategy for Sprint. First, Softbank believes it can double Sprint's EBITDA margins "over time" to around 30 percent from around 16 percent now, and second, Softbank will likely increase capital spending at Sprint to help it accelerate the deployment of Sprint's Network Vision network modernization plan. Chaplin wrote that Sprint's 2013 capital expenditures should be between $6 billion and $8 billion, far above the consensus forecast of $5.4 billion.
Son said that at some point in the future, which he did not define, Softbank will help bring Sprint's margins up to 30 percent. "Something we will be able to share with Sprint is a proven turnaround track record," he said, according to a translation of his comments provided by Softbank. "That know-how is one of the biggest invisible assets we have which is something we will be able to share with Sprint."
New Street's Chaplin agreed with Softbank's asessment. "We would tend to agree for two reasons: Sprint currently under indexes peer EBITDA margins by a large magnitude relative to its scale, so there is room for improvement; and 2) Softbank has a proven track record in Japan of achieving high margins with relatively low scale," Chaplin wrote. "While the timeline for achieving 30% EBITDA margins is vague, if Sprint is able to get there by 2015, EBITDA would be $9.6 billion, 23% above consensus of $7.8 billion. We think they may be able to get there sooner."
Chaplin also agreed with Softbank's comments on capital spending at Sprint. He noted that the level of capital spending is likely to increase for several reasons. Capacity requirements have grown at a faster-than-expected rate for the industry in general and with more capital, Sprint can accelerate its Network Vision program. Also, if Sprint gets control of Clearwire (NASDAQ:CLWR) it will be able to add 2.5 GHz spectrum to its plans.
"We believe greater near-term spending will give Sprint a stronger network sooner, meaningfully improving their competitive position," Chaplin wrote. "In addition, the improved network should pave the way to higher margins."
Son said that Softbank and Sprint have been having regular meetings to share information and become more familiar with each other. Both companies still expect the deal, which needs to be approved by regulators, to close by the middle of the year.
- see this earnings presentation
- see this Bloomberg article
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