In its third quarter 2019 earnings statement this week Sprint CEO Michel Combes said, “I continue to be impressed by the commitment of Sprint employees to deliver results during this period of uncertainty.”
Indeed. It is always difficult for employees to keep chugging along in a corporate environment of total uncertainty. If the deal with T-Mobile goes through, who will lose their jobs? If the deal with T-Mobile doesn’t go through, who will lose their jobs?All eyes are currently on U.S. District Judge Victor Marrero of the Southern District of New York, who is weighing the arguments in the case brought against the merger by 13 state attorneys general and the District of Columbia.
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After Sprint reported its earnings this week, some analysts adjusted their opinion on whether the deal will go through. KeyBanc's Brandon Nispel predicted the chance of merger approval is 50/50. He also predicted that if the deal falls, Sprint would undergo a significant reorganization and try to finance the business through spectrum sales.
In November 2019, New Street Research did a pretty thorough analysis of Sprint’s prospects if the T-Mobile merger doesn’t happen. New Street analysts led by Jonathan Chaplin wrote, “If the deal is blocked, we believe the business needs at least $5-$10 billion in new capital to engineer a turnaround. Even with the requisite capital, a turnaround would take years and may not succeed. SoftBank is adamant that they won’t invest another penny in Sprint. If this deal fails, and if we take SoftBank at their word, Sprint is in a bleak spot.”
What are some of its options?
Sprint may need to sell spectrum. “We think they would have to sell 40 MHz to 60 MHz of the 2.5 GHz to draw real interest," wrote the New Street analysts. There would probably be several interested buyers for this spectrum, including T-Mobile and Verizon and potentially Dish and cable operators.
“We think the intrinsic value of 2.5 GHz is very high,” wrote New Street. “60 MHz could easily be worth $25 billion to $30 billion." But the analysts likened a spectrum sale to “burning the boat” that’s keeping the company afloat. After it sells its most prized asset, then what?
The company could seek relief through bankruptcy.
“Investors and regulators seem to think that Chapter 11 will be a quick fix for Sprint,” wrote New Street. “We are doubtful.” The analyst firm says that Sprint’s financial problems run deeper than just its debt, which currently costs $2.5 billion a year. The carrier would still need to spend billions to upgrade its network. In addition, New Street says, “Sprint’s ARPU [average revenue per user] is patently unsustainable. They are bringing subs on at prices well below their average ARPU.”
In its Q3 earnings, Sprint said its postpaid phone ARPU of $50.37 remained stable.
Wireless analysts at Cowen said that while Judge Marrero ponders his verdict, “sentiment appears to now assume a no-deal scenario.”
“We peg deal breakage at 60% and believe if a deal does not occur Sprint will shift to ‘Plan B,’ which may include downsizing its focus to top markets and essentially becoming more of a super-regional player, and asset/spectrum monetization,” wrote the Cowen analysts.