Sprint's announcement on Friday of its decision to build out an LTE network of its own on an aggressive schedule has the market completely perplexed. One of the key sticking points is that little matter of cash. With their big, new iPhone subsidy needs, a multi-billion dollar infrastructure buildout, and a few billion dollars in debt that needs to be refinanced soon - one can see why that might give people pause. But I think Sprint has an ace up its sleeve that will make its way onto the table shortly. They're finally going to sell the wireline business.
Sprint Wireline has been managed for cash for years, but it is still sitting on $4B+ in annual revenues and $800M+ in EBITDA. It is still one of the top 5 IP backbones, and has a substantial large enterprise presence. I have no idea how much Sprint might sell it for, but at an EV/EBITDA multiple of 6, we're talking about something in the range of $5B. That would pretty much clear up the cash difficulties and get Sprint to the next stage of its existence.
And now is actually a very good time for Sprint to put the wireline biz up for auction, because there are actual viable bidders out there:
CenturyLink: Now that they have both Qwest and Savvis under their wing, CenturyLink is one of the top backbones - but not as strong as they might be. They have some of the better developed cloud assets, yet not as many pre-existing relationships with large enterprises as they might wish to help jump start their growth. Sprint wireline would fit both bills. The older Sprint fiber network could be shut off and all the traffic moved onto the newer Qwest build. Those Savvis cloud services could be upsold into the Sprint enterprise customer base. And Sprint wouldn't be arming the enemy, as CenturyLink has no wireless business of its own and might be able to use its ILEC last mile to help Sprint's LTE buildout as part of the deal. Where's the downside here?
Level 3: With the Global Crossing integration underway, attention will inevitably turn to the other big Level 3 acquisition rumor that seems to resurface annually - some sort of joint venture with Sprint. Here, the idea of losing control of the combined entity was something of a deal breaker for both sides in the past. But now, with Sprint needing cash and obviously in the midst of a major transition, the idea would surely be a cash deal. The intent here for Level 3 would be obvious. Buy the revenues for cash, migrate the traffic and turn off the network to save what would probably be $400M in annual expenses. Sprint's international presence would give Level 3 a bit more bulk to add to Global Crossing in Asia, as well as add beef both in Europe and South America. If they made a deal over the winter and closed next summer, the GLBC integration would be well along already. Level 3 would also would be able to throw in help on the buildout of Sprint's LTE backhaul network to sweeten the deal.
The numbers for either are compelling enough that I think the markets would be willing to finance it. Honestly, the CenturyLink angle seems the more likely, as I believe Level 3 might hit regulatory hurdles a bit higher this time if the #1 transit backbone tried to buy #3 (or #4 - whatever it is now) right after buying #2. But for Sprint, it's all about taking pans off the back burners and refocusing on the future - and selling the wireline business does just that.
Of course, right now the street is paying more attention to the idea that Level 3 might make an extremely uncharacteristic 11th hour bid for PAETEC. There are so many more possibilities out there right now that seem more likely...
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