Why You Should Cash Out On Sprint Now

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the last six years the cash reserves of Sprint Nextel (NYSE: S) have reached an all-time high and its stock price has doubled. With these cash reserves and appreciated equity as collateral, it was thought that Sprint could attempt to make game-changing acquisitions. Analysts speculated that such deals would allow Sprint to compete more effectively with AT&T (T) and Verizon (NYSE: VZ).

Instead, it appears that Japan's third-largest mobile-phone company, Softbank, may acquire a 70% interest in Sprint. This is terrible news for Softbank shareholders, because acquisitions (for example, Sprint's experience with Nextel) can cause serious problems for the acquiring firm and these deals often cost a hefty premium.

What should Sprint's current shareholders do now that Sprint shares appreciated 14% after the news of Softbank's intentions? Sprint's current shareholders should take the money and run. The combined company does not offer attractive operations, and Sprint's debt burden was too high for it to sensibly make acquisitions on its own. If Softbank does not go through with this acquisition, Sprint's prospects are not attractive.

Analyst Inklings

Sprint has been burned by rough takeovers before. Sprint's Nextel acquisition left Sprint with a marriage of irreconcilable networks, fleeing subscribers, and a five-year string of losses. With the company making a turnaround, Gabelli & Company analysts have speculated that the company can widen its customer base by acquiring Leap Wireless (NASDAQ: LEAP) or Metro PCS (NYSE: TMUS). Apparently Softbank came out of nowhere.

Analysts were right in that some kind of scale-enhancing merger would attract attention in M&A activity. In a telephone interview Zack Shafran of Waddell & Reed said, "You have two very large players in the form of AT&T and Verizon and now it's argued that a strong No. 3 would be a welcome player. Looks like Sprint are on the verge of perhaps being that strong third player."

In an interview at Sprint's Overland Park headquarters, CEO Dan Hesse said that consolidation "would be constructive" for the industry. Hesse also added that "Sprint will play a role in that some way."

The company is projecting a return to profitability in 2014. Sprint has made an obligation to buy $15.5 billion worth of iPhones, and invest $7 billion to take apart the Nextel network, and simultaneously build a new LTE network called the Network Vision program.

Sprint's Options without Softbank

Here are financial metrics for some of the stocks in the wireless industry:

Ticker

Company

Market Cap

P/E

P/S

P/Free Cash Flow

Debt/Equity

LEAP

Leap Wireless International

466.66

 

0.15

 

6.75

NIHD

NII Holdings

1318.12

 

0.2

 

1.56

S

Sprint Nextel

14851.88

 

0.43

83.91

2.3

TDS

Telephone & Data Systems

2725.53

17.18

0.52

82.47

0.38

MERU

Meru Networks

56

 

0.62

 

0.7

USM

United States Cellular

3148.57

17.53

0.71

101.37

0.24

NTLS

NTELOS Holdings

357.51

14.64

0.82

26.6

8.97

IQNT

Neutral Tandem

241.92

11.19

0.88

6.3

0

PCS

MetroPCS Communications

4546.38

13.9

0.91

24.14

1.53

CLWR

Clearwire

1904.46

 

1.43

 

4.5

RCI

Rogers Communications

21372.57

14.01

1.69

26.27

3.11

GSAT

Globalstar

131.62

 

1.82

 

1.42

ANEN

Anaren

269.7

33.22

1.83

21.07

0

WRLS

Telular

157.79

27.03

2.27

31.37

0.42

UBNT

Ubiquiti Networks

1078.44

 

3.05

13.74

0.23

IDCC

InterDigital

1524.02

23.52

5.17

 

0.48

Notice that Sprint is among the cheapest stocks on this list on a price-to-sales basis. This means that its valuation would increase if it bought all but two of these stocks at their market prices. (This ignores a takeover premium). Notice also that Sprint has a high debt-to-equity ratio, and that an acquisition of Leap Wireless and its debt burden would create a heavily indebted joined firm.

On the basis of historical sales growth, there are seven possible acquisition targets that are as promising as Leap Wireless:

Company

EPS Growth Past 5 Years

EPS Growth Next 5 Years

Sales Growth past 5 years

Ubiquiti Networks

 

25.0%

106.4%

Meru Networks

 

20.0%

83.2%

Clearwire

 

-13.4%

65.8%

Neutral Tandem

38.9%

13.3%

38.4%

MetroPCS Communications

35.2%

13.6%

25.7%

NII Holdings

-4.7%

15.5%

23.2%

Leap Wireless International

0.0%

3.3%

21.4%

Rogers Communications

18.7%

8.5%

7.1%

United States Cellular

0.1%

7.0%

4.6%

TELUS

2.7%

8.9%

3.7%

Telephone & Data Systems

5.9%

2.1%

3.5%

Anaren

-7.5%

15.0%

2.7%

NTELOS Holdings

-3.9%

3.0%

-0.8%

Sprint Nextel

-73.5%

0.9%

-3.9%

InterDigital

24.7%

17.5%

-8.9%

Globalstar

 

15.0%

-11.8%

There is no shortage of acquisition targets which Softbank/Sprint could court and try to acquire. But investors should be very fearful of such corporate marriages, since they will undoubtedly be consummated at premiums since T-Mobile and Softbank/Sprint are both known to be in desperate need of a partner. 

Summary

If you are currently a Sprint shareholder, consider yourself lucky and sell your shares. If you are a Leap Wireless shareholder, wait for an offer to be proposed and for the share price to appreciate, then sell your shares. If you are a Metro PCS shareholder, wait for higher deal terms from either company and then sell your shares.

Do not buy into these companies at this point. Most of the money that is to be made is already priced into these shares, and there is substantial risk of any deal falling through. Expect any combination of firms to find a host of problems from incompatible networks, billing databases, and elusive synergies.

 


StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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