Sprint Nextel (NYSE:S, news, filings) is in the news all the time these days, but almost entirely for its wireless business and the company's rather public indecisiveness over Clearwire, WiMAX, TMobile, LTE, LightSquared, etc. But there's also that pesky wireline business that nobody ever talks about much even though it contributed $5.04B in revenue and $1.09B in EBITDA in 2010. In all the speculation about Sprint's future in the soap opera of wireless networks, the fate of one of the largest international fiber and IP backbones seems to get far less than its share of attention. For instance, just what would happen to that asset if Sprint merged with T-Mobile USA and DT came on board with a big stake in the combined company and no interest in an aging fiber asset?
A year and a half ago the answer was rumored to be a merger of Sprint Wireline with another carrier in the form of some unspecified kind of joint venture, with Level 3 and Qwest being the most frequently mentioned. But Qwest will soon be part of CenturyLink, and the combined company will surely be rather busy for a while integrating what they have. Level 3 has been, like Sprint, seeking to recover a bit of lost ground over the past year. Are they now in a position to deal?
A Sprint/Level3 joint venture has never been one of my favorite combinations, however I think it is more likely now than ever in the past. Both companies have stabilized and are looking ahead now, but they have both absorbed some pretty humbling blows in the past three or four years that may have given each a rather more practical view of their own relative value. And both have very straightforward motives to make a deal:
- Sprint would gain a future in wireline even while turning all its attention to wireless as it so clearly wants to. Sprint has been running the wireline business for cash while spending less capex than any other network as a percentage of revenue. They've been very successful at it thus far, but you can't do it forever. Eventually that declining revenue will hit a wall of fixed expenses, and they'll need to do something else long before they reach that point.
- Level 3 would gain the scale to finally justify its debt load. Combined the two would have over $8B in revenue and nearly $2B in EBITDA. They have been trying to grow into their debt for a decade now, but the going has been rather rough over the past few years to say the least and they have made little progress organically.
A Sprint/Level3 joint venture would probably have more flexibility when it comes to financing than the possibility I have dwelt on more often over the years - Level 3 and Global Crossing. On the other hand, Sprint might not want to involve itself with Level 3's debt load even with the refinancing work that has been done, while Level 3 might not want to take on a huge new pile of declining legacy revenue when it has just recently reached the point where the vast majority of its current revenues are core.
Of course, Level 3 is not the only fish in the pond other than Qwest. AT&T and Verizon would obviously hit regulatory issues and care more about wireless nowadays anyway, so they seem unlikely. One could posit Global Crossing or TW Telecom or even (shudder) XO as a possible place for Sprint to leverage its wireline assets in a joint venture. But TW Telecom lacks motive and also a national intercity fiber backbone (Sprint's is too old now), Global Crossing lacks US metro coverage (and hence fewer available synergies), and XO has Icahn ('nuff said). But they could always wait a year for CenturyLink/Qwest too.
In the end, it all comes down to price though, and in the past they Sprint and Level 3 not been able to agree on one. I still doubt they could hammer out a deal now, but I'll bet they're closer now than a few years ago. And I think it's more likely to benefit shareholders on both sides than the rumored deal for T-Mobile USA.
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