Sprint Connection

Sprint trims losses, but Hesse remains cautious ahead of merger fight

Updated: 2013-04-25T03:32:40Z

By MARK DAVIS

The Kansas City Star

With control of Sprint Nextel Corp. up in the air, chief executive Dan Hesse on Wednesday mapped out critical turns in the road ahead for America’s No. 3 wireless phone company.

Hesse, in comments following Sprint’s regular quarterly report, called for changes in its marketing strategies this summer and touched on its options for buying network partner Clearwire Corp.

And he allowed that with two rivals battling for control of Sprint, new owners could affect how quickly Sprint presses ahead with its multibillion-dollar network upgrade designed to take on wireless giants Verizon and AT&T.

“Depending on which (Sprint merger) transaction takes place, a new board of directors, new governance, could possibly — we’re not saying they will or they won’t — want to adopt a different plan,” Hesse said in an interview with The Kansas City Star.

The question Hesse couldn’t address was who the owners will be once the dust settles.

Sprint agreed last October to a $20 billion deal that would give Tokyo-based SoftBank Corp. 70 percent ownership. SoftBank already has pumped $3 billion into Sprint’s bank account in anticipation of the deal being wrapped up on July 1.

But Sprint’s directors are weighing a rival bid that came earlier this month from satellite television operator Dish Network Corp. Its $25.5 billion offer is for all of Sprint.

Wednesday’s report from Sprint showed they’re battling over a company that did a better job of controlling its financial losses than its customer losses so far this year.

Sprint said it lost $643 million in the first three months of this year, 25.5 percent less than it lost in the same period a year ago. The setback equaled 21 cents a share, compared with a loss of 29 cents a share a year earlier.

But subscriber counts fell by 415,000, including the loss of 560,000 customers under contract. Sprint added customers who buy service month to month but generate less revenue for the company.

Sprint finished March with 55.2 million subscribers, down from 56.1 million a year earlier.

The average customer pays more for service now, allowing Sprint to post revenue of $8.8 billion, a bit higher than a year ago.

Overall, the results were something of a wash, and shares of Sprint shed 1 cent, closing at $7.09.

Cash matters

Both fronts — money and customers — are important for SoftBank and Dish, though for different reasons.

SoftBank, for example, is bringing lots of cash to America — $4.9 billion on top of the $3 billion once its deal is completed.

Hesse has made Sprint’s cash management one of his three priorities since joining the company in late 2007. Wednesday’s report showed the company had $7.8 billion available but spent $493 million more cash than it took in during the first quarter.

Much of that has been to invest in its new network that has added faster service using Long Term Evolution, or LTE, technology in 88 markets so far.

Industry consultant Berge Ayvazian at HeavyReading.com said Sprint is more interested in an investor that can pour money into the company rather than a buyer. That’s a nod toward SoftBank.

“With the investment (from SoftBank), Sprint will accelerate the Network Vision buildout, complete the Clearwire acquisition and network deployment, and reduce debt,” Ayvazian said in an email.

SoftBank and Sprint also are sharing “best practices” and technical knowledge with each other, Hesse said Wednesday.

SoftBank’s money has already allowed Sprint to launch bids for a piece of U.S. Cellular’s Midwest operations and the roughly 49 percent of Clearwire that Sprint doesn’t already own.

Sprint has said its bid for Clearwire is contingent on completing the SoftBank merger.

Hesse added Wednesday that the Clearwire deal isn’t necessarily dependent on the SoftBank deal going through.

“Sprint does have the option of still proceeding with that (Clearwire) transaction if the SoftBank merger doesn’t complete. But we’re not obligated to acquire Clearwire if the SoftBank/Sprint merger isn’t completed,” Hesse said.

Dish, which made its own bid for Clearwire, has said it would not oppose Sprint’s purchase of Clearwire if Dish and Sprint agreed to a merger.

Clearwire on Wednesday set May 21 for a vote by its shareholders other than Sprint. Some owners, including Crest Financial Ltd., second only to Sprint, have battled against approval.

Hesse said he hopes for and anticipates a yes vote.

Shareholders of MetroPCS Communications Inc. voted Wednesday to accept a merger offer from T-Mobile USA, which is owned by Deutsche Telekom and had increased its bid earlier this month.

Customer count

Sprint’s network upgrade was one reason the company cited for its customer losses in the first quarter. Some of that is service disruptions tied to the work on towers and equipment, what Hesse has called “pardon our dust” issues.

Most of the losses came on its older Nextel network, which came to Sprint with its 2006 merger with Nextel Partners. Customers are leaving it because Sprint will shut down the network at the end of June.

Sprint said 43 percent of the 771,000 Nextel departures in the first quarter switched to the Sprint network that’s being upgraded.

Marketing efforts have been targeting Nextel subscribers, but Sprint expects to hang on to fewer of the 1.3 million customers still on Nextel but who have to leave by June 30.

After that, finding customers for the Sprint network will depend on luring them away from other wireless phone companies.

“We will have to change our (marketing) tactics in the second half of this year,” Hesse told analysts during a conference call about the first-quarter results.

Hesse acknowledged that Sprint lags behind Verizon and AT&T in the number of markets where it offers faster LTE service.

Sprint probably wants to close some of that gap “before being aggressive with its marketing,” analyst Jennifer Fritzsche at Wells Fargo Securities said in a note to clients.

Otherwise, Sprint said that it sold 1.5 million iPhones in the first quarter and that 43 percent went to new customers. Sprint also added to its subscriber base that buys service month to month.

Customer counts are important to Sprint’s future, but especially important to Dish Network’s bid.

Dish has said its interest in a merger is based in large part on offering its satellite television and Internet services to Sprint’s large customer base, and Sprint wireless service to its own customers.

In a statement Tuesday, Dish said its merger would allow Sprint to gain the full benefits of its network upgrade with in-home and outside-the-home video, Internet and voice services. Dish would add to Sprint’s wireless spectrum holdings, which are the licensed airwaves needed to carry customer traffic on smartphones, tablets and other wireless devices.

The companies also could cut costs by $11 billion after a merger, Dish has said. Cost-cutting figured heavily into Sprint’s lower first-quarter loss.

Sprint probably will have more difficulty with its finances and customer counts in the second quarter, which began April 1 and runs through the end of June.

Shutting down the Nextel network will mean more customer losses because most won’t re-sign with Sprint.

And Sprint’s finances will suffer from its introduction of new handsets, such as the Samsung Galaxy 4S and HTC One.

New devices lead more customers to upgrade with an extension of their contract. Each upgrade costs Sprint because it pays a large part of the cost of the new devices, expecting to recover the subsidy over the life of the contract.

To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com.

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