Analysts: Sprint's network lease plan remains unclear, could involve setting up REIT

So far, little is known about how Sprint (NYSE: S) might structure a network lease deal that it has talked about doing, but one thing is sure: Sprint needs to cut costs, and structuring a network lease deal could go a long way in that endeavor.

It's unclear how Sprint plans to move forward with management of its network. In 2009, it struck a 7-year network management deal with Ericsson (NASDAQ: ERIC) that is now close to being up for renewal. As part of that deal, Ericsson assumed responsibility for the day-to-day services, provisioning and maintenance of Sprint's networks, but Sprint retained full ownership and control of its network assets, network strategy and all network investment decisions. That deal was valued at $5 billion.

Recently, Sprint and parent company SoftBank have been working with investment partners to set up companies to lease both handsets and network gear for Sprint's network densification project, a move that will push debt off Sprint's balance sheet. So far, Sprint executives have talked a little bit about the handset leasing part of the equation, and Sprint is expected to reveal more about that in the coming weeks.

But it has revealed almost nothing about how its anticipated network leasing deal might be structured. "The most we're sharing right now is confirming that Sprint is working with Softbank and other parties to establish a leasing company that will help finance the network deployment. Most of our time and energy to date has been focused on the handset LeaseCo," a Sprint spokeswoman told FierceWirelessTech.

Sprint declined to provide further details. At the Wells Fargo 2015 Technology, Media & Telecom Conference last week, Sprint CFO Tarek Robbiati could only offer limited details of the upcoming handset "LeaseCo," but he reiterated that "LeaseCo" should come before the end of November and will have both financial and non-financial partners, according to a research note by Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein.

Some analysts now expect more network details to come in early 2016.

"Obviously, nothing's happened yet so we don't know what the terms are," said BTIG analyst Walter Piecyk when asked what he thinks Sprint's network lease structure might look like. It could be that Sprint would pay a lease payment to an external company that would actually own the underlying infrastructure like cell sites. But it's not at all clear how risks would be shared or dispersed.

Mike McCormack, equity analyst at Jefferies, said Sprint's cash burn certainly is a good incentive to get creative in how it structures its financing deals.

"Clearly, what they're trying to do is offload wireless capex onto a third party," he noted, and one way to do that would be through a network lease deal. Yet structurally, it's not clear how it will work, particularly when it comes to how that third-party network business will make money.

Sprint could pay some fee to the outfit that manages the network and then all the cap ex is on the network company, a little bit like what Windstream did when it set up a REIT so that a separate company owns and manages the network and Windstream is the services company. In theory, Sprint could effectively do the same thing.

Why do it at all? "They need money. They're burning a lot of cash so they're looking for any way possible to be able to fund a returned growth in their business," Piecyk told FierceWirelessTech. "When you're burning that much cash, you have to look for non-traditional ways to free up capital to try to invest your way back to growth." In a scale business like telecom, he said, it's difficult to cut your way to growth.

Sprint executives have indicated that 2015 will be the peak of its spending; Sprint burned through $2.2 billion in cash, for example, in the second quarter. Meanwhile, the company expects to cut $2.5 billion in expenses. Robbiati said last month Sprint will cut about 10 percent of operating costs to save $2 billion and he thinks the company can slash another $500 million in costs related to equipment spending.

In a newsletter to employees last week, Sprint CEO Marcelo Claure outlined how the company plans to shake up its sales organization and move to a model with four regional hubs focused on 19 key markets instead of focusing on different types of customers like postpaid and prepaid. 

Related articles:
Sprint's Robbiati vows to keep improving on the network and churn even amid cost cuts
Sprint pleased with network densification, mainly focused on small cells for now, but mum on many details
Sprint's Claure: Network improvement, awards in Denver are a harbinger of things to come nationwide
Ho's Perspective: Can Sprint get any respect?

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