Analyst: Sprint selling some of its 2.5 GHz spectrum won't be its financial salvation

Sprint (NYSE: S) could look to sell some of its 2.5 GHz spectrum but a sale would not deliver a huge funding cushion for the carrier because of the declining market value of those airwaves, according to MoffettNathanson analyst Craig Moffett.

"For a company that we expect to burn through another $4.5B in cash this calendar year, selling some 2.5 GHz spectrum would certainly provide some level of near-term relief," Moffett wrote in a blog post. "But it would not change the longer-term outlook. Sprint needs a better network. They need to finish repricing their base. And they need low band spectrum. They don't have enough money for any of these, let alone all three. A modest infusion of cash from selling spectrum wouldn't change the equation. Nor even would a massive equity raise. It is not enough for Sprint to fund its burn rate. It needs to show that it can reverse its burn rate."

"Oh, and dare we even ask, who would be the buyer?," he added.

Sprint revealed in early May that it burned through $914 million in cash in the first quarter. The company ended the quarter with $7.5 billion in liquidity, including cash, cash equivalents and short-term investments of $4.2 billion, as well as $2.8 billion of undrawn borrowing capacity under a revolving bank credit facility and around $500 million of undrawn capacity under a service receivables financing agreement.

After the first quarter ended, Sprint changed the service receivables facility and increased its size from $1.3 billion to $3.3 billion by including equipment receivables. Additionally, the carrier has $1.4 billion available under its network vendor financing deals that can be used to buy 2.5 GHz LTE network equipment.

In February, Sprint Chairman and SoftBank CEO Masayoshi Son and Sprint CEO Marcelo Claure said they were open to the idea of selling some of Sprint's 2.5 GHz airwaves.

"We are open minded to business arrangements that could generate long-term shareholder value," Claure told Bloomberg. "But, first and foremost, spectrum is to be used for Sprint, and then we will look at extra spectrum to see if there's any interest."

Sprint controls an average of 120 MHz of the spectrum in 90 of the top 100 markets, and at last count had deployed it to 125 million POPs. However, Sprint's deployment of 8T8R (eight-branch transmit and eight-branch receive) radios in its 2.5 GHz TDD LTE spectrum is resulting in increased data throughput as well as coverage, according to a report last month from Signals Research. 

"It's no secret that Sprint's 2.5 GHz spectrum hasn't lived up to the hype of two or three years ago, at least so far," Moffett wrote. "Siting and other deployment hurdles have continued to trip up 2.5 GHz deployment in dense urban centers, arguably where the high-capacity spectrum would be the most valuable. Never mind that Sprint has been so cash-strapped that any serious network upgrade would have had to have been shelved anyway."

Moffett added that Wi-Fi networks, which Sprint has lately embraced as a "fourth layer" of its network, have undercut the value of the 2.5 GHz spectrum in urban environments. Moffett noted that high-band spectrum like 2.5 GHz spectrum's weak propagation characteristics "are further exacerbated by the presence of in-building obstructions such as walls, glass, and, in high rise settings, floors and ceilings. All that has made the spectrum virtually useless without a cocktail of metrocell and microcell and femtocell repeaters, targeted precisely to where additional capacity would be the most needed." He noted that most urban sidewalks can be covered from rooftops on buildings of less than seven stories tall.

Further, Moffett noted that Canada's recent auction of 2.5 GHz spectrum raised around $613.5 million (755.4 million Canadian dollars). "An analysis of that 2.5 GHz auction serves as a much more appropriate benchmark for Sprint's 2.5 GHz value than the U.S. AWS-3 pricing, particularly in light of Dish's (NASDAQ: DISH) participation distorting final spectrum prices in the AWS-3 auction," Moffett wrote.

"The Canadian auction comprised of seven paired blocks of 20 MHz of 2.5 GHz spectrum, and two 25 MHz unpaired bands," he wrote. "We can ignore unpaired spectrum for the purposes of creating a comparison for Sprint; historically, unpaired spectrum has sold at a discount to paired spectrum, given the fact that most operators prefer the ability to have both downlink and uplink channels."

Moffett came to the conclusion that national, paired 2.5 GHz spectrums sold for 41 cents per MHz-POP. He noted that the AWS-3 auction in the U.S "drew an eye-popping $2.53 per MHz/pop (for paired spectrum, net of designated entity discounts, or $2.71 per MHz-POP on a gross basis), setting records and causing spectrum valuations like those investors apply to Dish Network's holdings to spiral higher." 

A month later, the Canadian equivalent auction generated a similar amount, closing at $2.40 per MHz-POP for the "open block" (non-set-aside) component of the auction.

"With that in mind, the Canadian 2.5 GHz auction provides at least some useful input as to what Sprint might be able to charge if we assume any type of parity in spectrum prices," Moffett wrote.  "At $0.41 per MHz-POP, Sprint's entire 163 MHz trove of 2.5 GHz would be worth $20.9B. Selling a quarter (~40 MHz of national spectrum) would generate about $5.2B in cash. (By comparison, we are modeling $10B in spectrum spend from Sprint in the 600 MHz auction.)"

For more:
- see this MoffettNathanson blog post (sub. req.)

Related articles:
Sprint gets OK from SoftBank to move ahead on network densification plan
Signals Research: Sprint's 8T8R radios in 2.5 GHz increase throughput, coverage
Sprint's Claure: In 18-24 months, we'll be No. 1 or 2 in network performance
Sprint: 16 of 30 rural LTE roaming partners have now launched LTE service
Sprint's Claure: We've got enough money to attract customers and improve our network
Sprint hints at upcoming network densification strategy using 2.5 GHz spectrum

Correction, June 11, 2015: This article was updated because Signals Research did not test Sprint's 8T8R radios coupled with 4x2 MIMO as originally noted. It just tested the 8T8R radios in 2.5 GHZ TDD LTE spectrum