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Sprint's Clearwire Offer Raises New Spending Questions


After AT&T (NYSE:T) unveiled an ambitious $22 billion-a-year capital spending plan earlier in December, it took less than a week for industry also-ran Sprint (NYSE:S) to jump on the bandwagon, according Craig Moffett, a telecoms analyst at Bernstein Research and a noted industry bear.

Early on Thursday, Sprint offered to buy a remaining 49% stake in 4G wireless broadband service Clearwire (NASDAQ:CLWR) for $2.90 a share, or roughly $2.1 billion in cash. While the proposed deal would cement a long-expected takeover drama and turn Clearwire into one of the top arbitrage trades of 2012, the bigger implication may be on Sprint.

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The deal may signal Sprint is poised to dramatically boost its capital spending in coming years, after being the thriftiest of players in a telecom sector marked by the big ticket wireless spending plans of AT&T and Verizon (NYSE:VZ). For Sprint investors and, most notably, Softbank (TYO:9984) - the Japanese investing conglomerate that just announced a deal to buy the company - a bump-up in spending may come as a surprise and hit bottom line earnings metrics.

"Perhaps the biggest take-away from the announcement this morning that Sprint's Board of Directors has authorized a take-over of the remaining 49% of Clearwire is this: Sprint's capital intensity will rise," wrote Moffett, in a Thursday note to clients.

Now that Sprint is unequivocally placing its network bets on Clearwire, the issue is the corresponding spending needed to convert the service into a national 4G option. Notably, Clearwire's 2.5-GHz spectrum will require significant cell tower spending - roughly double the lower band spectrum of MetroPCS (NYSE:PCS) - T-Mobile - to reach a nationwide audience, according to Moffett's calculations.

"Reachingthe next 133 million POPs - if they intend to do so - would mean covering far more land mass, and therefore would take even more capital to build out. In total, it will take a dizzying amount of new capital investment to turn Clearwire's spectrum trove into a usable Asset," writes Moffett.

In a separate Thursday note, Moffett gave MetroPCS shares an outperform rating and $16 price target on expectations that its proposed merger with T-Mobile will drive margin growth and cost synergies.

A full takeover of Clearwire and the prospect that Sprint foots the bill on a cell-tower heavy nationwide 4G rollout may have a big impact on the company's margins. Notably, Sprint may see itself fall from generating some free cash flow in 2012 to none. In coming years, the proposed full takeover is forecast to cut Sprint's free cash flow profile by 15%, according to Moffett's calculations.

The bigger issue is whether Clearwire represents just one area where Sprint will have to dramatically increase its spending in coming years, depressing free cash flow.

Sprint continues to see unlimited Apple (NASDAQ:AAPL) iPhone data plans as its value proposition to consumers over competitiveness on wireless coverage and service, in the interim.

From a pocketbook perspective, Sprint's unlimited data plans compare favorably to the tiered data plans of AT&T and Verizon; however, consumers need to take a leap of faith on coverage, data speeds and the company's improving financial picture.

Sprint also is in the process of completing Network Vision , a rollout of a nationwide 4G network, but its reported spending plan pales in comparison to AT&T even after the company was effectively recapitalized in a merger with Softbank of Japan.

Earlier in December Moffett highlighted the tension of Sprint's relatively light spending plans in comparison to the likes of industry leaders AT&T and Verizon. The question he raised was whether Sprint would have to reverse course.

In the face of AT&T's options and its comparative financial and network position, Moffett wrote, "Starting a spending war is AT&T's best option," of the company's recently announced wireless capex budget through 2015.

The numbers are striking, according to Moffett's calculations.

In 2013, AT&T is expected to spend over $12 billion on its wireless network, roughly 30% more than competitor Verizon and 176% more than Sprint, which is already playing catch up when it comes to network strength.

Meanwhile, between 2009 and 2013, AT&T is projected to spend $57 billion cumulatively, compared with $54 billion at Verizon, $17 billion at T-Mobile and just $14 billion at Sprint.

In spite of what appear to be diverging strategies and earnings profiles heading into 2013, Moffett increasingly sees reason to believe AT&T is simply being forthcoming about the true capital costs telecoms face as they prepare for growing smartphone and data usage. The analysis also raises the question of whether the numbers behind Sprint's unlimited data plans and smaller-than-peer wireless network spending reflect reality.

"[Once] again, Sprint's chronic under-spending over the past four years is striking, particularly in light of its open courtship of super heavy users as a consequence of its heavy promotion of its 'unlimited' data plans," wrote Moffett of the differences between AT&T and Sprint. "This raises obvious questions about the widely held expectation that capital spending can return to below-industry levels after just two years ofSprint'sNetwork Vision," the analyst added in the Dec 6 note.

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