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What Will Sprint’s Next Move Be?

What Will Sprint’s Next Move Be?
By: Sam Quest
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Softbank Corp. (Japan) (SFTBY) CEO Masayoshi Son stated that: “I am lucky to be free to steer in any direction I choose,” after the merger between Softbank’s subsidiary, Sprint Corporation (S), and T-Mobile US Inc. (TMUS) fell through.

Softbank acquired Sprint last year for $21.6 billion to establish a strong foothold in the US telecom market. However, what Softbank got was a company struggling to retain subscribers and upgrade incompatible technology that it had inherited from a disastrous merger with Nextel in 2005.

With new pricing plans and appointment of Marcelo Claure as the new CEO, Sprint hopes to give tougher competition to rivals AT&T (T) and Verizon (VZ). Back home in Japan, Softbank gave telecom operators a run for their money with extremely low prices, and turned around the feeble unit that it had inherited from Vodafone Japan. Son plans to follow the same strategy for Sprint in the US market.

The competition in the US telecom industry is intense. Companies try to please subscribers with economic plans and give them greater freedom to upgrade their phones, even before the completion of their standard two-year contract. The vast spectrum holdings of Verizon and AT&T allow them to cover larger parts of the US market. They are able to dominate in rural areas, where smaller carriers do not have a presence.

Sprint’s wireless-subscriber base has been declining, and the company has lost around 3.92 million subscribers since the start of 2012. However, its postpaid average revenue per user (ARPU) of $61.65 - which declined 3% year-over year (YoY) in the last quarter - is still higher than AT&T’s $43.4 and Verizon’s $55.4. The cash flow from operations also improved 30% sequentially, and stood at $679 million in the first quarter of fiscal year 2015 (1QFY15).

Sprint has outstanding debt of $32.49 billion, which is rated BB- by Morningstar. The company is highly leveraged, with a debt-to-equity ratio of 1.281 in its most recent quarter. However, Softbank’s stake in Alibaba gives Sprint greater freedom to increase its debt.

Sprint has recently announced that it will start adding subscribers to its ‘Framily’ plan by the end of the year. However, T-Mobile CEO John Legere has commented that he will soon overtake Sprint in terms of subscriber base, grabbing its ‘number 3’ title in the process.

Son’s attempts at acquiring T-Mobile, the fourth ranked wireless carrier, have recently ended due to regulatory pressures. The merger would have allowed both companies to combine resources, and would have given them them the much-needed scale to compete with Verizon and AT&T in the race for subscribers and spectrum. The two companies had wanted to jointly bid $10 billion for the upcoming spectrum auction, but the FCC’s rejection nipped that plan in the bud. However, with T-Mobile’s $32 billion deal out of the picture, Softbank is free to invest in upgrading the telecommunication giant.

Softbank recently took a hit and its operating profits declined 15.6% YoY in 1QFY15. Nevertheless, the company is optimistic about the future and has maintained operating profit guidance of ¥1 trillion for 2QFY15.

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