Sprint Reports 1st Net Income in 3 years; CEO Says Merger Decision Coming Soon

As we’ve previously reported, Sprint is exploring various M &A options, including a merger with rival wireless carrier T-Mobile US Inc as well as a tie-up with cableco/ MSO Charter Communications Inc.  Japan’s SoftBank Group Corp owns approximately 80% of the company.

“We’ve had sufficient conversations with several parties and soon we’re going to start making decisions,” Sprint CEO Marcelo Claure said on a conference call Tuesday (see Reference 1. below for the replay) after the company reported results for the three months ending June 30.  The company achieved net income of $206 million, compared to a loss of $302 million one year earlier.  This was the first time in three years Sprint did not have a loss for any quarter.  However, the positive net income was achieved via cost cutting.  Sprint reported almost $370 million of combined year-over-year reductions in cost of services and selling, general and administrative expenses.

Sprint is in the middle of a turnaround plan and has sought to strengthen its balance sheet to compete in a saturated market for wireless service.  Although Sprint has cut costs, analysts have said the company is highly leveraged.  While its customer base has expanded under Mr. Claure, growth has been driven by heavy discounting.  It recently offered free wireless service (including unlimited data) for one year to new subscribers.  Sprint’s CEO had previously hinted that the  #4 U.S. wireless carrier doesn’t have the necessary funds to invest in 5G infrastructure, which gives more impetus to some type of M&A deal if Sprint is to survive.

A person familiar with the matter told Reuters that SoftBank CEO Masayoshi Son is considering making an acquisition offer for the cable company to combine it with Sprint as early as the end of August. The deal would entail SoftBank buying the Sprint shares it does not already own, the Reuters source said.

“The talks with T-Mobile have been encouraging, the talks with other partners have been encouraging,” Mr. Claure said. “Everybody has shown a high level of interest in evaluating Sprint as a potential merger partner,” he added.

The Wall Street Journal reported  (on line subscription required) that the offer being considered by Sprint’s chairman and SoftBank founder, Masayoshi Son, would be to form a new publicly traded entity that would use SoftBank money to buyout shareholders of both Sprint and Charter at a premium. The transaction would be funded with roughly half cash and half stock. The deal would result in SoftBank controlling the combined company.

SoftBank has already lined up financing from at least three banks to fund the deal, according to people familiar with the matter. One of them cautioned that it could still take several weeks or more to reach an agreement with either company.

Mr. Claure said a deal with T-Mobile might be the preferred option, but it would be tougher to get past antitrust regulators in Washington. Sprint and T-Mobile held merger talks in 2014 but backed down in the face of regulator opposition.

“If you were to merge with another wireless carrier, the synergies are enormous. I mean, this is a scale business, and today you need to operate two competing networks to offer the same service, having half the amount of customers that AT&T and Verizon have,” Mr. Claure said.

A Charter deal poses its own hurdles, particularly since the company said Sunday that it isn’t interested in buying Sprint. Mr. Claure said Tuesday that Sprint didn’t offer to sell itself, so he was “surprised to see Charter’s announcement.”

Were Sprint to go it alone, the results it reported on August 1st show it has a rough road ahead. The carrier drew praise from analysts for posting its first quarterly profit in three years—$206 million compared with a loss of $302 million a year ago—but revenue fell 4.5% to $8.2 billion and it added fewer customers than rivals. While Sprint started investing more money in network improvements, its quarterly profit came primarily from cost-cutting.

The company said it had 88,000 postpaid phone additions during the quarter, the eighth consecutive period of expansion. However, the pace of growth has slowed from a year ago when the company reported 173,000 postpaid additions. Overall, it still suffered a net loss of 39,000 postpaid subscribers (a figure that includes things like tablets and smartwatches.)

Mr. Claure said Sprint will be fine without a deal, but “doing a strategic transaction will always be significantly better than having a stand-alone entity.”

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“The obvious risk in so openly courting one potential suitor after another is that Sprint will increasingly be viewed as damaged goods,” said analyst Craig Moffet in a research note to clients.  “Like an unsold house that has sat too long on the market, an asset that has been shopped too often without success takes on an air of taint.”

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References:

1.  Sprint’s earning call webcast- available on demand requires registration at:

https://event.on24.com/eventRegistration/EventLobbyServlet?target=reg20.jsp&referrer=http%3A%2F%2Finvestors.sprint.com%2FHome%2Fdefault.aspx&eventid=1398551&sessionid=1&key=4DF9602D9C5D5AB1FAC1435DC0A533EA&regTag=&sourcepage=register

2.  Sprint Reports Net Income for the First Time in Three Years with 1st Quarter of Fiscal 2017:

http://investors.sprint.com/news-and-events/press-releases/press-release-details/2017/Sprint-Reports-Net-Income-for-the-First-Time-in-Three-Years-with-First-Quarter-of-Fiscal-2017-Results/default.aspx

3. Earnings Results Presentation:

http://s21.q4cdn.com/487940486/files/doc_financials/quarterly/2017/q1/02_Q1FY17-Slides_Final.pdf

 

 

 

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