Sprint confirms $9B LTE network-hosting deal with LightSquared

Finally the rumors are a reality. Sprint Nextel (NYSE:S) confirmed that it is entering into a 15-year network hosting deal with wholesale LTE provider LightSquared valued at $9 billion. The news comes after months of rumors about the deal as well as feverish speculation over Sprint's 4G plans. However, the agreement doesn't resolve the continued uncertainty surrounding LightSquared's L-Band spectrum and its possible interference with GPS receivers.

Under the terms of the deal--which includes spectrum hosting and network services, 4G wholesale and 3G roaming--LightSquared will take advantage of Sprint's new network architecture being deployed via its Network Vision network modernization plan. LightSquared will pay Sprint to deploy and operate a nationwide LTE network that uses LightSquared's L-Band spectrum, and LightSquared will be able to sell network capacity via the arrangement to Sprint, other wireless carriers or retail customers.

The agreement, which was reported by various media outlets in mid-June, is subject to LightSquared getting FCC approval for the terrestrial use of the L-Band spectrum, which the GPS industry has been fighting. "LightSquared will have to demonstrate that they will have at least 20 MHz of usable spectrum for the deal to proceed," Credit Suisse analyst Jonathan Chaplin wrote in a research note. "In addition, we estimate the company will need to raise $3 billion in additional funding. We believe this will be difficult until they demonstrate that the spectrum can be used for terrestrial purposes."

During an 11-year period, LightSquared will pay Sprint around $9 billion in cash for spectrum hosting and network services as well as LTE and satellite purchase credits, which are currently estimated to be valued at around $4.5 billion. Sprint will also be able to buy up to 50 percent of LightSquared's expected L-Band LTE capacity. The wholesale purchase credits will give Sprint the option to obtain more capacity, should Sprint decide to use L-Band LTE capability as part of its 4G offering.

On Sprint's second-quarter earnings conference call, Sprint CEO Dan Hesse said the company will not turn on the network until the GPS interference issue is resolved. LightSquared has paid Sprint $290 million so far but Sprint has the right to terminate the deal if certain conditions are not met by year-end. If there is a material breach of the contract, or if LightSquared faces insolvency, Sprint holds a second lien on LightSquared's spectrum assets. (See related story: Sprint adds another 1.1M subs in Q2, along with 1.7M WiMAX devices)

LightSquared said its LTE network will now be deployed in major U.S. markets in the second half of 2012 and early 2013. As part of the deal LightSquared also entered into a 3G nationwide roaming agreement with Sprint.

In an interview with FierceWireless, Hesse said Sprint could decide to purchase additional network capacity from LightSquared based on its capacity needs and what the alternatives would cost. "From an economic point of view, that would be pretty hard to pass up," he said. He declined to comment on whether Sprint will be able to buy capacity from LightSquared at a lower rate than other wholesale customers, but said Sprint will not be at a cost disadvantage.

Importantly, Hesse said right now Sprint has not made a decision to resell LightSquared's network under its brand, but said Sprint might do that at some point in the future. He said that even though Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) will have a time-to-market advantage over Sprint with their LTE networks, Sprint will be able to benefit from advances in the LTE ecosystem, including potentially faster speeds, better capacity utilization and newer devices.

Sprint CFO Joe Euteneuer said on Sprint's conference call that Sprint's relationship with Clearwire (NASDAQ:CLWR) will remain unchanged. Sprint will maintain its wholesale relationship with Clearwire through the end of 2012, and might continue it indefinitely. Sprint executives will provide more clarity on the company's 4G plans at an investor conference in New York City Oct. 7.

Sprint has been using Clearwire's mobile WiMAX network to offer high-speed broadband service to its customers, but Clearwire's network buildout has stalled at around 130 million POPs. Sprint, which is Clearwire's largest wholesale customer, holds a 54 percent ownership stake in Clearwire.

Hesse said Sprint could also sign a similar network hosting arrangement with Clearwire. He said the economic benefits of doing so would be "substantial" and that Sprint has an incentive to strike such deals--to cut down on the costs of Network Vision, which is expected to cost $4 billion to $5 billion.

The Sprint chief also addressed why Sprint is waiting until October to reveal more details about its 4G strategy. "There's been new moving pieces that have surfaced more recently that may or may not change or enhance our 4G strategy," he said. "Those should be resolved one way or the other by October. A lot of the pieces are there."

As expected, Clearwire didn't seem pleased with the agreement between Sprint and LightSquared. "As the company that deployed the nation's first 4G network, and as the largest 4G wholesaler in the world, Clearwire understands better than anyone the numerous technical and financial hurdles that must be overcome by any new service provider," Clearwire said in a statement to FierceWireless. "We fail to see how the agreement announced today solves any of the significant problems facing LightSquared, such as its lack of usable spectrum for a 4G LTE network, its significant technical and regulatory problems, and its need to raise billions of dollars in additional funding to cover its obligations to Sprint. We expect to have additional information as a part of our quarterly earnings announcement next week."

Sprint and LightSquared said the deal is expected to lower network capital and operating expenses for LightSquared by more than $13 billion over the next eight years in comparison with the cost of building a stand-alone network. LightSquared expects the deployment of the nationwide LTE network to be completed more than one year ahead of the FCC mandate to cover 260 million POPs by 2015.

PRTM consultant Daniel Hays said the deal benefits both companies by cutting down on capital expenses and delivering new cash flow for Sprint.

"We believe that this network hosting and sharing deal sets the stage for additional hosting opportunities for Sprint, and that it could serve as a benchmark for future business model innovations in the wireless industry worldwide," he said. "In establishing the right to roam onto Sprint's nationwide 3G network, LightSquared also gains immediate access to virtually ubiquitous coverage, enabling its retail distribution partners to commence broad nationwide launches from day one. This is a coup for LightSquared and will surely turbocharge its entry into the market."

For more:
- see this Sprint earnings story
- see this Sprint/LightSquared release

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