According to the Wall Street Journal, Sprint Nextel (NYSE:S, news, filings) and Level 3 Communications (NYSE:LVLT, news, filings) are in early stage talks about a joint venture. The WSJ has been rather noisy in the telecom merger area lately, most of the main ‘Qwest is selling its longhaul network’ stories originated there as well. The Sprint/Level3 talks are supposedly at a very early stage, but Sprint’s idea here is obviously to pull a Clearwire. They want to take a division they are not willing to keep investing in, and fold it into part ownership of a new company that can and will invest in it.
Why is Sprint considering this? To put it simply, Sprint’s longhaul infrastructure at the fiber level is old (some of it is even direct-buried, no conduit) and they would have to spend huge amounts of cash to upgrade it. They haven’t done so and given their other troubles these days they probably can’t. Instead they have run the division for cash, capex as a percentage of revenues has been around the 5% level and revenues have stagnated. But Sprint Wireline still has almost $6B in revenue and an impressive customer list, a top IP backbone by any measure, and remains financially pretty healthy. So rather than do it alone, they are thinking of throwing it into a joint venture with Level 3 who has the most modern infrastructure at the fiber level. This would allow the combined entity consolidate nearly $10B worth of revenue onto it.
Sounds great yes? The devil, of course, is in the details. According to the article, Sprint’s main conditions would be 51% ownership and Level 3 would need to pay off some of its high debt load. Both are probably non-starters. First off, Level 3 believes its assets are worth more than that and would also demand control of the JV. And Level 3 has been managing its debt load for a long time, but in these market conditions they aren’t likely to be able to do anything substantial without a great deal of dilution. The idea that Level 3 would dilute its shareholders to make the deal happen, and then still only come up with 49% of the JV would not be reasonable unless a deal was forced – and it’s not.
However, there are economics behind a Sprint/Level 3 alliance, and therefore it is actually quite possible that the backup plan of some sort of network sharing would actually happen. What that would mean in practical terms would be an outsourcing of the Sprint transport network to the Level 3 infrastructure in exchange for some large volume discounts. That would leave Sprint serving their high end business customers and continuing to run one of the top 2 IP backbones, but moving up the food chain to do it. That would save them many costs in the long run.
This whole thing is not entirely a new idea, I’ve even posited it on this blog a few times. Frankly, these sort of discussions happen pretty often without the media catching on and they just sputter out, and Sprint/Level3 has happened before too. Nothing came of it then, and chances are nothing will this time. But it makes more sense to me than the Qwest longhaul for $2-3B ever did, mostly because there are options that don’t include raising cash from the credit markets – which neither Level 3 nor Sprint can do cheaply right now.
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