Sprint, which has been consistently losing money for some 10 years, is about to get a $2.2 billion cash infusion by selling about $3 billion worth of existing cell tower gear, which will then be bought back in 2018 when the company projects its financial standing will be improved.
The deal, announced April 6, enables Sprint to temporarily sell the network gear to “special purpose entities” that are made up of investors who provide cash to the company to improve its liquidity today as it works toward profitability, Dave Tovar, a Sprint spokesman, told eWEEK.
Under the deal, Network Lease Co. will acquire the cell tower assets and then lease them back to Sprint, according to the company’s announcement. Those assets “will be used as collateral to raise approximately $2.2 billion in borrowings from external investors, including SoftBank,” which will then be used by Sprint to improve its financial position as it gains new customers.
The $2.2 billion cash infusion will later be repaid “in staggered, unequal payments” through January 2018, the announcement stated. The equipment at stake is worth about $3 billion. At the end of the deal, during which Sprint will lease the gear and continue to use it, the company will be able to buy it back for $1.
“Sprint and Softbank have worked together again to create a unique structure that provides Sprint with an attractive source of capital,” Sprint Chief Financial Office Tarek Robbiati, said in a statement. “This transaction is an important first step in addressing upcoming debt maturities and allows us to stay focused on our corporate transformation, which involves growing topline revenues and aggressively taking costs out of the business to improve operating cash flows.”
Essentially, the deal will allow Sprint to raise $2.2 billion in cash at a time when it sees an opportunity for a turnaround, buoyed by growth in the number of its mobile phone subscribers, said Tovar.
“Sprint is not buying companies,” Tovar told eWEEK. “It is improving its liquidity position, to rid itself of debt on its balance sheet in the midst of its turnaround.” The company is at the same time reducing operating expenses to help put the business in a stronger position, he said.
“Sprint is doing all of this because it has been losing money for the last decade,” said Tovar. “Losing money over that period of time is not a sustainable business model for anybody, so it is getting cash now to fund operations and turnaround efforts.”
The idea, he said, is that Sprint “will be in a stronger financial position in the future when they pay it back. If we didn’t do this then there’s, I suppose, a possibility that we wouldn’t be able to fund our turnaround. This strengthens our liquidity position today and if the current trajectory continues … we will be in a much better position to repay our debt.”
In January, Sprint reported revenue of $8.1 billion for the third quarter of 2015, while sharply narrowing its operating loss for the period to $197 million from $2.54 billion a year earlier and adding 501,000 new wireless postpaid customers. The wireless carrier’s third-quarter results portrayed a company that is still in transition as it fights competitors like Verizon, AT&T and T-Mobile in a very volatile consumer market.
IT analysts, however, have mixed views of the company’s move to raise cash by selling assets.
Chris Antlitz, an analyst with Technology Business Research Inc. (TBRI), called it “a desperation move” in which Sprint is “turning over every stone possible to uncover new funding.”
Antlitz said the process amounts to “a shell game going around” where the company is just moving money around as it tries to stay afloat in its present form.
Sprint’s key problem is that it has been blowing through the money it has been getting from investors at about $2 billion per quarter recently, he said. “That’s money that’s gone.”
The company did gain customers, but it is “chronically losing money,” said Antlitz. “Sprint is in a state of having to raise money to continue. Honestly, I think they have about a year left of capital. In my personal opinion, I don’t think they can survive in their current configuration.”
Also facing Sprint is a massive amount of debt that is coming due and the company will have “some serious challenges with managing that debt load,” he said. “They are playing a very precarious balancing game here to make sure they are adequately capitalized.”
Sprint Selling Assets to Raise Cash as a Way to Manage Debt
Bill Menezes, an analyst with Gartner, told eWEEK in an email reply to an inquiry about the situation that such lease-back arrangements are not unusual but that he wonders if Sprint will be able to “successfully execute its strategy in the consumer market to regain enough share profitably to stop its ongoing losses and cash burn.”
At some point, Sprint “will run out of things to mortgage and Softbank either will have to decide to pump more money into the company or walk away,” wrote Menezes. “They’re betting they won’t get to that point. If they do, it’s Sprint’s shareholders, not its creditors, who will suffer.”
The lease-back arrangemet, meanwhile, makes sense because the network assets have value and can be used to help “meet both the looming debt payments and cover their continuing cash burn,” he wrote. Other carriers, including AT&T, T-Mobile and Verizon, have done similar deals, he added.
“Sprint’s going all-in on its success, literally mortgaging the farm in hope that it’s turnaround is real and sustainable,” wrote Menezes. “We’ll need to see a few more quarters of improvement to gauge whether they are right.”
Another analyst, Jan Dawson of Jackdaw Research, wrote in an email reply to eWEEK that Sprint has in the past “done some unconventional things to try to protect and improve its cash position, and this seems to be another example of that strategy.”
The company’s “inability to generate profits in the short term, combined with their high level of debt, means it has to get creative to stay in good financial shape while management is trying to turn around the business,” he wrote. “Obviously, long-term, Sprint still needs to turn around its business and get out from under the losses it’s been generating and return to profit. In the meantime, though, it may continue to require these financial gymnastics to keep financially healthy.”
Jeff Kagan, an independent wireless analyst, told eWEEK via email: “as Sprint begins their recovery process, it looks like we will see them take these kind of creative steps on the financial side to help free up more cash for growth. In this case, Sprint is using the hidden value of the company to continue updating and expanding the network.”