Analysts study Sprint's possible retreat from cellular

Mobile Phone News,  June 26, 1995  

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In the 12 months through the end of March, Sprint Cellular posted operating revenues of more than $762 million, up 48 percent from the comparable period that ended March 31, 1994. Operating income of $104 million increased almost 200 percent, and operating cash flow rose 73 percent to $200 million - the kind of growth that could generate considerable interest in an acquisition.

In consultation with two New York investment banks, Sprint's board will consider selling off or swapping selected cellular properties as well.

But an AirTouch-like spinoff to shareholders could hold the greatest appeal for Sprint because of the favorable tax implications of such a transaction. "I think that's the most likely scenario," said John Barnicle, who follows Sprint as a fixed-income analyst for Duff & Phelps Credit Rating Co. in Chicago.

The board of directors' decision is expected "within the next several weeks," Sprint said on June 15.

Barnicle believes that disposing of Sprint Cellular may be the path of least resistance for Sprint. "I'm not sure there's a real big market" for the four overlap MTAs [major trading areas] in question, he said, but "you start to lose some critical mass" if Sprint decides to unload all 7.7 million "pops" (potential market population).

...Money Is the Big Issue, Analysts Say

A deeper reason for Sprint's move out of cellular, however, may be to allay the fears of both shareholders and stock analysts that the company is strapped financially. Sprint contributed a good portion of WirelessCo's money for the PCS broadband major trading area auction - some insiders say more than $1 billion - and it may have to gain funds for the network build-out.

If money is a big issue to Sprint's decision to scrap its cellular business, then it obtained needed funding last week when it partnered with Deutsche Telekom and France Telecom to provide telecommunications services worldwide.

The deal, which was worth nearly $4.1 billion, allows the European telecoms to purchase 20 percent of Sprint.

"The spin that they put on [divesting the cellular properties] is that because of the incredible growth opportunity presented by wireless, it would maximize shareholder value," said Jon Hulak, a senior industry analyst for Boston-based BIS Strategic Decisions.

He added that a number of companies have taken this route to growth, most notably Pacific Telesis Group, which spun off AirTouch last year.

But "reading between the lines. Wall Street was fairly concerned with the amount of money that Sprint spent in the auctions, and their ability to fund a build-out," Hulak said. "This might also be a defensive move to placate shareholders - in other words to protect the shareholders by putting this new venture [WirelessCo] into a sort of self-sustaining buffered entity. It's a money issue and it's a shareholder value issue."

Some analysts believe that Sprint's possible divestiture of all or part of its cellular properties shows that the company has decided to commit completely to PCS.

"They must feel that their future really lies with WirelessCo," said Harry Young, a consultant with Malarkey Taylor Associates Inc.-Economic Management Consultants International Inc. (MTA-EMCI). "The cellular properties don't add much to that plan."

Another industry analyst at MTA-EMCI, Elliot Hamilton, said, "It's kind of weird for Sprint to get rid of its cellular holdings. Their PCS markets kind of dovetail nicely with their existing cellular markets. It shouldn't really be a cash-flow problem unless they really need to get the cash. I can't believe Sprint has that cash-flow problem."

Hamilton added that Sprint would be taking a risk if it gave up its cellular holdings because "PCS still has a lot of questions surrounding it. It's kind of like throwing out the baby with the bathwater."

...Despite Rumors, Sprint Cellular Still Expanding

Despite industry speculation that it may sell off its cellular holdings, Sprint's subsidiary has positioned itself to be the next controlling-interest owner of Palmetto MobileNet L.P., a rural cellular carrier operating in 34 South Carolina counties.

BellSouth Mobility is completing a deal under which Palmetto MobileNet will purchase its 50 percent interest. Sprint expects the acquisition to add 650,000 pops to its cellular footprint.

Sprint and Palmetto MobileNet signed a letter of intent to prepare the transaction, which will give Sprint management control of the company. The companies declined to reveal financial terms of the agreement, according to MOBILE PHONE NEWS' sister publication COMMUNICATIONS TODAY, but a successful transfer of the BellSouth interest is a prerequisite. Palmetto MobilNet is owned by 18 South Carolina telephone companies.

COPYRIGHT 1995 Access Intelligence, LLC
COPYRIGHT 2008 Gale, Cengage Learning