Sprint Nextel Corporation (NYSE:S) stock suffered yesterday after an analyst downgrade that ended Sprint’s stock rally; the report also noted likely consolidation in the wireless sector. Earlier in February Sprint’s board voted against buying MetroPCS Communications Inc (NYSE:PCS).
Today CapitalCube assesses potential Corporate Actions for Sprint Nextel Corporation (NYSE:S). Our M&A analysis is peer-based and looks at Sprint’s likelihood to merge or acquire within its peer group comprising: AT&T Inc. (NYSE:T), Verizon Communications Inc. (NYSE:VZ), Deutsche Telekom AG (PINK:DTEGY), MetroPCS Communications Inc (NYSE:PCS), United States Cellular Corporation (NYSE:USM), and Clearwire Corporation (NASDAQ:CLWR).
(Yesterday we published our Fundamental Analysis for the Sprint Nextel Corporation (NYSE:S))
While S-US’s size alone will not prevent it from becoming a target in this peer group, its share price could make it a relatively expensive acquisition.
While S-US has the size (by book value) to acquire other firms within this peer group and may need to do so to meet the market’s growth expectations, it may not be able to add more goodwill to the balance sheet.
The company’s current share price is not sufficiently lower than its 52-week high (currently about 4% below) and does not justify a share buyback as the best use of cash at this time.
Dividend Not Present
S-US did not pay a dividend in the last twelve months prior to 2012-06-30. The combination of its relative operating results and cash flow is not strong enough (relative to peers) to justify a dividend initiation as the best use of cash in the near term.
Why merge or acquire?
Companies typically acquire to realize economies of scale, scope, gain customers, bundle complementary products, or gain vertical integration. From an investor’s perspective, these business reasons fall into natural screening categories that include: (a) buying companies to boost growth expectations; (b) buying to realize cost synergies; and (c) buying earnings through acquisitions that increase EPS.
Potential targets would typically be smaller than their peers though sometimes targets can be marginally larger than the acquirer. As a result, when identifying a company as a target, we check for a book value that is up to 80% more than the peer median. In addition, we also filter for a cheap valuation relative to peers (i.e. price to book is less than the peer median) and a share price that is trading sufficiently (i.e. at least 20%) below its 52-week high.
Typically, acquirers are larger than their peers though, as mentioned above, targets can sometimes be marginally larger than the acquirer. To identify a company as an acquirer, we look for a book value that is around or more than the peer median and for growth expectations (measured by its price to earnings or P/E) that are lower than peer median. In addition, we consider whether the company has the capacity to add intangible assets (like goodwill) and whether its valuation (measured by its price to book or P/B) is attractive relative to its peers.
S-US’s share price could make it a relatively expensive acquisition in this peer group.
While S-US’s size (book value of USD9,227 million) alone will not prevent it from becoming a target in this peer group, its share price is not far from its 52-week high, which could make it a relatively expensive acquisition.
S-US appears not to have room for more goodwill on its balance sheet.
At the same time, S-US has the size (by book value) to acquire other firms in this peer group and may need to do so to meet the market’s growth expectations. However, the company has negative net tangible assets, which implies it would have difficulty justifying the added goodwill of further acquisitions and could be a signal of previous goodwill going bad.
Is the company likely to buy back shares?
In this section, we identify whether S-US is likely to buy back its shares. In order to screen for this event, we look for positive free cash flows and good liquidity in addition to a leverage, an earnings multiple and a current share price that are low enough to suggest that there is some pressure on management to buy back shares. If the company pays a dividend, we also confirm that its ending cash balance is more than the cash dividend in order to highlight the greater priority of paying a dividend versus buying back shares.
S-US’s share price performance does not justify a share buyback as the best use of cash.
S-US’s current share price is not sufficiently below its 52-week high (currently 4.2% lower) and does not justify a share buyback as the best use of cash at this time. As a reference, the company’s cash balance is currently 40.8% of its market capitalization.
Dividend cut, increase or initiate?
In this section, we try to identify whether the company is likely to cut, increase or initiate a common stock dividend. In order to screen for these actions, we apply multiple tests to check whether the combination of operating performance, leverage, liquidity, growth expectations and share price performance is sufficient to permit such an action.
To check for a dividend initiation at S-US, we look for outperformance relative to its peers in terms of pre-tax margin and operating cash flow. In addition, we also filter for relatively low leverage and good liquidity, which indicates sufficient support for debt servicing. We also look for a price to book value (P/B) that is positive, relatively low growth expectations (based on P/E) and a share price that has underperformed its peers. Overall, these conditions suggest that there is pressure on management to return money to the shareholders in the form of a dividend in order to increase their total returns. Finally, we overlay the dividend quality (medium or high) and ending cash dividend coverage (moderate or strong) to indicate whether the company is likely to increase its dividend.
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Sprint Nextel Corp. provides a comprehensive range of wireless and wireline communications services that are designed to meet the needs of individual consumers, businesses, government subscribers and resellers. It provides 4G wireless broadband services. The company builds and operates next generation mobile broadband networks, which provide high-speed mobile Internet and residential access services, as well as residential voice services, in communities throughout the country. It operates through two reportable segments: Wireless and Wireline. The Wireless segment offers wireless services on a postpaid and prepaid payment basis to retail subscribers and also on a wholesale and affiliate basis, which includes the sale of wireless services which utilize the Sprint network but are sold under the wholesaler’s brand. The Wireline segment provides a broad suite of wireline voice and data communications services to other communications companies and targeted business and consumer subscribers. It also provides voice, data and IP communication services to Wireless segment and IP and other services to cable Multiple System Operators that resell local and long distance services and use back office systems and network assets in support of their telephone service provided over cable facilities primarily to residential end-user subscribers. Sprint Nextel was founded by Cleyson Brown in 1899 and is headquartered in Overland Park, KS.
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This article was originally written by abha.dawesar, and posted on CapitalCube.