I know that Sprint Nextel Corporation (NYSE:S) investors likely feel mixed emotions about what is going on with their company. On the one hand, the stock price is up recently on news about Softbank and Dish Network each looking to buy the company. However, what seems to be lost in the shuffle of all of this is, what does Sprint bring to the table in a merger? It seems investors should be more concerned with whether Sprint can be competitive, rather than who will ultimately buy the company.
Don’t Pretend I know that some Sprint Nextel Corporation (NYSE:S) fans believe that they are with the best carrier out there. However, it’s one thing to believe that you are with the best carrier, and another thing to have the data to back it up. The truth of the matter is, Sprint is near the end of a massive transition from Sprint Nextel, to just Sprint. This change was inevitable, and according to the company, should be completed by the end of the second quarter.
This transition has been difficult because it has been painfully obvious that customers didn’t like the change, and Sprint Nextel Corporation (NYSE:S) has been losing thousands of subscribers from the Nextel base. Just for point of reference, the Sprint platform gained 356,000 subscribers, and on the surface, this would have been better than AT&T Inc. (NYSE:T)’s 296,000 wireless postpaid additions. However, Sprint’s performance still would pale in comparison to Verizon Communications Inc. (NYSE:VZ)’s 677,000 postpaid additions. That being said, Sprint’s performance is one thing, but with the company losing 771,000 Nextel subscribers, and 560,000 of these postpaid, the overall subscriber number is down.
The cold hard fact is, until Nextel is no more, Sprint Nextel Corporation (NYSE:S) likely won’t see real subscriber growth. In fact, of the big carriers, only T MOBILE US INC (NYSE:TMUS) had a higher churn rate recently. While the merger of T-Mobile and Metro PCS makes the numbers a little murky, as recently as late last year, T-Mobile’s churn rate was 2.3%. Sprint, on the other hand, reported a postpaid churn rate of 2.09%. Considering that AT&T and Verizon reported postpaid churn rates of just 1.04% and 1.01%, you can clearly see, customers still leave Sprint almost twice as easily as the “big two.”
There is also the unavoidable issue of cash flow and debt management at Sprint Nextel Corporation (NYSE:S). In the current quarter, the company reported negative core free cash flow (net income + depreciation – capital expenditures) of over $500 million. Even T-Mobile outperformed by this measure, with core free cash flow of about $63 million. AT&T and Verizon are once again in a completely different league, with billions of dollars in free cash flow each.
Where debt is concerned, Sprint Nextel Corporation (NYSE:S)’s shareholders need to pray that one of these deals goes through, because their company’s debt load is simply unsustainable. Using a simple debt-to-equity ratio, Sprint sits at 3.72. T-Mobile is doing better, with a debt-to-equity of 1.71. AT&T’s debt-to-equity of 0.80 and Verizon at 0.48, make Sprint look like the red-headed stepchild of the group.
Let’s Imagine For A Minute If you are a Sprint investor and you don’t already know the above numbers, I would suggest you sell immediately. However, if you are an investor and you are willing to accept that Sprint has a future, the obvious question is, what does that future hold?
First, assuming either an investment by Softbank, or an outright buyout by either Softbank or Dish, Sprint Nextel Corporation (NYSE:S)’s debt issues may or may not be cured. An investment by Softbank would seem to make the most sense, as theoretically this investment would directly retire some of Sprint’s gargantuan debt pile. A buyout by Dish offers no such solution, and if you look at the deal it downright stinks.
Second, Sprint’s aforementioned elimination of the Nextel network should lead to real subscriber additions. The Sprint network’s performance has been okay, but the losses at Nextel have been too much to overcome.