Sprint (NYSE: S) parent SoftBank considered selling Sprint at one point but is resolutely backing the carrier now, according to SoftBank CEO and Sprint Chairman Masayoshi Son. Meanwhile, financial analysts are divided around how much the leasing arrangements for handsets and network gear Sprint and SoftBank are creating will help Sprint.
"There were times when I considered selling Sprint as an option, but I have no intention of selling it now," Son said during a news conference following the release of Sprint's quarterly earnings, according to the Wall Street Journal.
Reuters had a slightly different wording to Son's comments, reporting that he said: "There was a time when I lost confidence in managing Sprint. Now I have no intention of selling."
According to the Journal, the news conference was almost entirely dedicated to explaining SoftBank and Sprint's efforts to turn around Sprint. Son repeatedly expressed his confidence in Sprint's future, as he did on Tuesday when he spoke in a surprise appearance on Sprint's quarterly earnings conference call. The SoftBank chief said he is expecting to see "significant improvement" in Sprint's networks in around two years.
Son noted that Sprint is seeing net additions in postpaid customers and that it and Sprint are putting plans in place to reduce Sprint's debt. Son added that large reduction in operating expenses would be key to improving Sprint's finance, as well as improving the efficiency of capital expenditures, according to the WSJ.
Sprint disclosed this week that it is working SoftBank and other unnamed partners to set up a leasing company that will finance its devices leased by customers on "attractive terms." The structure of the company is expected to be finalized in the next few months, and SoftBank is expected to be a minority equity investor in the leasing company. Sprint also expects to establish a similar leasing company to finance the purchase of network gear for its network densification program.
With additional expected expense reductions and what it says is capital-efficient deployment of the network densification project, as well as funding from the proposed leasing company, Sprint said it currently does not expect to raise additional capital through the public debt or equity markets in the foreseeable future, nor does it currently expect to sell any of its spectrum.
Sprint CEO Marcelo Claure said on the call that Sprint is on track to cut $1.5 billion in expenses in fiscal 2015. Sprint also expects additional "aggressive" expense reductions in 2016, according to outgoing CFO Joe Euteneuer.
Some analysts are optimistic that leasing agreements will rebound to Sprint's financial benefit. "We feel that the pending deal with a new LeasingCo funded by SoftBank and an unnamed partner will finance at least 80 percent of the gross leasing capex spent on handsets each quarter," Macquarie Capital analysts Kevin Smithen and Will Clayton said in a research note. The Macquarie analysts think Sprint will start generating positive free cash flow by next March but could continue to draw on $6.8 billion from the device leasing facility by March 2017. "This is not debt of Sprint, as LeaseCo will own the handsets, but we do include the cash interest expense at a 5 percent after-tax funding rate" in their long-term free cash flow forecasts, the analysts said.
"We believe that the Street is going to very surprised at how quickly S can fix its cash flow problems and that the shares will likely be much higher in 6-9 months when the market figures this out," the analysts added. "With the risk of expensive equity or debt issuance off the table and phone sub growth now positive, the S story has been significantly derisked for long-term value investors."
Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein said in a research note that Sprint could be doing more with leasing in the near future. They wrote that "while more details on this are yet to come, it is clear leasing is a key pillar of its forward looking strategy. We also believe Sprint has more up its sleeve in terms of how these initiatives will translate in a unique and differentiated offer to the consumer. We sense such an offer will be announced soon."
The Wells Fargo analysts think SoftBank's commitment to Sprint is a positive sign. "While not a quick fix, hearing Sprint's non-executive Chairman Masa Son on the call expressing his support in the story and the assurance that Sprint does not plan to tap the debt or equity markets for the 'foreseeable future' are very positive data points supporting our Outperform rating on Sprint," they added.
Other analysts are more skeptical of how helpful the leasing arrangements will be, and think Sprint will just be adding more debt, even though the leasing deals will not be on Sprint's balance sheet. "The creation of off-balance-sheet entities with outside investors highlights our concern with Sprint's funding and its apparent difficulty in raising capital in the public markets at reasonable rates," Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata said in a research note. "While we view the equipment leasing entity as another iteration of a factoring facility, we believe the network financing entity could be complex, with an uncertain form (lease or debt), and collateral offered. We would expect to treat any off-balance-sheet network facility as debt."
- see this WSJ article (sub. req.)
- see this Reuters article
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