Sprint to get $1.1B in cash thanks to handset leasing vehicle

Sprint (NYSE: S) will get $1.1 billion in cash from a handset leasing company that has been set up by parent company SoftBank and other investors designed to put the financing of leased devices off of Sprint's balance sheet and provide it with more liquidity. Sprint plans to immediately turn to setting up a similar structure to finance the purchase of network equipment.  

Under the first round or tranche of the arrangement, Sprint sold $1.3 billion worth of leased device assets to the handset leasing company, called Mobile Leasing Solutions or MLS, in a lease-back arrangement. In return, Sprint will get back $1.2 billion in total financing.

Sprint said the transaction, which is expected to close in the first week of December, will "immediately improve the company's liquidity position and the funding comes at an attractive cost of capital, which is well below Sprint's alternatives in the high-yield debt market."

Sprint CFO Tarek Robbiati told investors on a conference call that the mechanism for selling leased device assets – basically contracts that Sprint customers have made with Sprint to lease smartphones – is repeatable and will provide Sprint with funding to execute its turnaround plan. He said that Sprint will likely sell leased devices to MLS on a quarterly basis, with the next round coming in March 2016. The first tranche covers 2.5 million devices, and Robbiati said Sprint is not limited on the size of the tranches or how frequently it can sell the leased devices.

Robbiati said Sprint's majority owner, SoftBank, was influential in bringing  together equity investors to create MLS and is a key investor in the vehicle itself. MLS has secured debt financing from three Japanese banks and six different leasing companies, he said.

"The deal effectively allows SoftBank to provide support for S, while not financing it directly," Evercore ISI analysts Jonathan Schildkraut and Justin Ages said in a research note.

Brightstar Corp., the wireless device distributor founded by Sprint CEO Marcelo Claure that is now also majority-owned by SoftBank, provided support in structuring the transaction, including assisting in the formation of MLS, which is utilizing Brightstar's lease management and tracking system. Brightstar will implement a forward purchase contract with Foxconn to buy devices, which Robbiati said protects MLS from downside risk.

Brightstar, which is the world's largest device distributor, will provide reverse logistics support and will be the sole agent for reselling devices on the secondary market upon their return to MLS.

As a result of the deal, Sprint lowered its expectations for fiscal year 2015 adjusted EBITDA to be between $6.8 billion and $7.1 billion, down from a range of $7.2 billion to $7.6 billion. However, Robbiati said the deal will improve Sprint's free cash flow.

Wells Fargo analyst Jennifer Fritzsche said in a research note that "we view the release of this information as a positive as this was a clear 'wait and see' moment for Sprint. At this point Sprint is a liquidity story more than anything else. While we recognize that optically a lower EBITDA is not positive, it should not be unexpected. This transaction is accretive to Sprint's free cash flow -- a point that should not be missed. The formation of LeaseCo increases cash flow by reducing the volatility in working capital and provides financing at more attractive rates than alternatives in the high-yield debt market." 

Sprint is aiming to cut $2.5 billion in costs, including up to $2 billion in operating expenses, and is expected to slash thousands of jobs. Also, the carrier has more than $8 billion in loans coming due in the next three years, Bloomberg noted, which is why SoftBank set up an alternate source of financing.

"If we show performance on our plan, we should be able to refinance without an issue. At the same time if we use our balance sheet better we could start to de-lever the company," Claure told Bloomberg, adding that phone costs run $10 billion to $12 billion annually, and are Sprint's biggest use of cash.

Analysts have said Sprint needed to strike the handset leasing deal to avoid burning through more cash. Robbiati acknowledged that Sprint, like other carriers, is spending a great deal of capital right now on financing devices. The arrangement goes "a long way to actually address the capital intensity coming in from devices," he said on the call.

"It was critical that they get the deal done ... but it is smaller than investors would have hoped for," MoffettNathanson analyst Craig Moffett told Reuters. "Coupled with their recent 50 percent off price cut, it's not really enough to stop the bleeding."

For more:
- see this release
- see this Bloomberg article
- see this Reuters article 
- see this Kansas City Business Journal article 

Related articles:
Analysts: Sprint's network lease plan remains unclear, could involve setting up REIT
Navigating the new world of smartphone economics
Sprint to cut bills in half for Verizon, AT&T and T-Mobile subs who switch - through 2018
Sprint to move to 4 regional hubs model, streamline sales organization as part of restructuring
Sprint's Robbiati vows to keep improving on the network and churn even amid cost cuts
SoftBank's Son confirms Sprint to cut 'thousands' of jobs in new restructuring plan

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