Where Sprint Is Going to Get the Cash

October 11th, 2011 by · 15 Comments

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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Categories: Internet Backbones · Mergers and Acquisitions · Wireless

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15 Comments So Far

  • toddforthree says:

    Rob I think its a pretty safe bet Sprint is going to sell this asset. What you pay for it is the big question. They have lost around 33% of their sales in the last 3 years while cutting sg+a and capex to the bone. The internet part of the wireline business was the star until they lost the cable voice business and now its declining quite rapidly. I think 4 billion for this asset is too much UNLESS they give you all of their voice/data data for their cell phones. then it gets interesting.

    • Rob Powell says:

      But as you point out, they have cut capex to the bone. Someone willing to spend the capex wouldn’t face the same level of decline, and the business does have EBITDA margins of above 20%, better than that of other businesses sold recently at multiples of over 5x EBITDA. In the end though it all depends on who needs/wants it the most. But I do think they’ve got to put that mobile voice/data somewhere, and it would be on that same table.

  • Carlk says:

    Damn! Karl Denninger really lays it on heavy against Sprint! He always reminded me of another savvy German investment manager type who started me out in investment advisory too many years ago. I like the guy, but he’s oftentimes very, very bearish even though I know he cares about his country’s ultimate direction.


  • toddforthree says:

    i never viewed ctl as a great metro player (other than in the qwest rboc territory) which is what sprint needs to make their enterprise more competitive. they only have 31% gross margins in that division. maybe they carve up sprints long haul in someway to both of these companies. i agree with you its going to be sold and sprint was stupid for waiting this long.

    How would a jt. venture be viewed at the fcc or would you even announce it if its viewed as an outsource?

  • Anony says:

    CTL and Sprint may seem logical some. However, the CTL execs remaining from the Embarq days have a deep distaste for how Sprint treated them. Would not suprise me if CTL would rather watch them burn, then rummage through their ashes when its over.

  • Anon says:

    um, sorry for being the slow kid but how are you going to combine Level3, Global Crossing and Sprint and get money from the combination? Each are/were cash strapped and trading with stock prices in the low single digits? While we are dreaming, we may want to merge in a tech company with cash? apple could buy them all for cash and them would only have $70B left for other needs…

  • Anonymous says:

    can you spell synergies?

  • Anon says:

    Right, like the airline roll ups… I’ll let branniff, people’s, us air, twa, pan am, norwest and the others know that merging a few under-performers together creates synergy magic…. Also, someone should tell xo, wcom and the telco roll ups how easy this is

  • Brian Scully says:

    What is the route mile and avg strand count for this system?

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