Sprint's spectrum leaseback increases liquidity, but long-term prospects still uncertain

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Image: Flickr user Mike Mozart

Analysts agree that Sprint is highly likely to increase its liquidity by raising as much as $7 billion by initiating a private placement of spectrum-backed notes, essentially using its airwaves as collateral.

But whether the move truly increases the carrier’s long-term prospects is far from certain.

Sprint announced this week that it will place 14 percent of its spectrum into three vehicles that will then lease the airwaves back to Sprint under a long-term agreement. The carrier said the spectrum has been estimated by a third party to have a value of $16.4 billion, and Sprint will initially look to raise $3.5 billion but could raise as much as $7 billion under the structure.

Sprint has established similar structures to leverage its device-leasing program and its network assets. The moves are all part of a strategy designed to help Sprint meet debt obligations including roughly $2.3 billion due in December and $4.6 billion that will come due in the next 18 months, according to UBS.

“We expect Sprint to generate 235K postpaid phone adds in 3Q and $2.31B in reported EBITDA, boosted by its use of handset leasing,” UBS wrote in a research note to investors. “We expect ARPU to slowly stabilize and the company to return to service revenue growth in 2017, which should help further assure investors that the debt load is manageable given the new sources of capital.”

Analysts were quick to note the high valuation of Sprint’s spectrum. BTIG Research observed that the deal appears to value Clearwire spectrum at six times the price Sprint paid when it acquired Clearwire in 2013, and Jennifer Fritzsche of Wells Fargo Securities said the $3.5 billion Sprint looks to raise is “at the higher end of the expected” range of $2 billion to $4 billion.

But while the unexpectedly high valuation of spectrum may bolster Sprint’s shares in the eyes of investors, it doesn’t guarantee the carrier will survive. Sprint posted 173,000 net postpaid phone additions in the second quarter, but it also recorded a $302 million net loss, significantly larger than the $20 million loss it posted in the second quarter of 2015. And analysts continue to question whether Sprint can continue to add customers even as it significantly cuts back on its network investments.

“In our view, this latest move continues what we consider a ‘Hail Mary’ strategy for Sprint as it further levers up a debt-laden balance sheet through creative financing techniques,” Jefferies analysts wrote in a research note. “The bet is clearly on getting the network quality on par, and improving subscriber trends in hopes of buying back these assets in the future, but with no end in sight to competitive pressures, we remain highly skeptical, and maintain our Underperform rating on Sprint shares.”

Related articles:
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UBS: Sprint has 'largely put to rest' liquidity concerns, but other questions linger

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