Sprint’s Big Bet

by CC October 5, 2011 11:51 am • Commentary

There’s alot of talk about the deal that Sprint signed with AAPL in order to get their hands on the new iPhone. It started with a WSJ article the other day that managed to cause a breakdown in the stock:

As Apple Inc. prepares to release its newest iPhone Tuesday, the terms it has squeezed from Sprint Nextel Corp. reveal the leverage it has over the telecom companies that once ran the show.

Sprint, the No. 3 U.S. wireless carrier, is making a multibillion-dollar gamble that access to the iPhone will be the ticket to a turnaround. Sprint has committed to buy at least 30.5 million iPhones, even though it would likely lose money on the deal until 2014, according to people familiar with the matter.

The story is gaining traction. Here’s Bloomberg.

Sprint Nextel Corp. (S)’s plan to offer Apple Inc. (AAPL)’s iPhone may slash its operating margins almost in half if enough people activate new phones, analysts said.

Sprint, which has lost money for 15 consecutive quarters, could see quarterly operating margins drop to 9 percent from the 16 percent reported because activations of each iPhone might cost the company up to $150 more than a typical smartphone, said James Ratcliffe, an analyst with Barclays Capital in New York. John Hodulik, an analyst with UBS AG, said fourth-quarter margins could be between 9.8 percent and 11.5 percent, depending how much Sprint subsidizes the devices.

“Is it better for Sprint to have the iPhone? Absolutely,” Ratcliffe said in an interview Oct. 3. “But in the short term they’re going to take a hit.” He rates the company “equal weight/neutral.”

Sprint, the third-biggest U.S. wireless operator, will begin selling the iPhone 4S on Oct. 14 along with larger competitors AT&T Corp. and Verizon Wireless. The iPhone 4S uses two antennas to improve call quality and a processor that is seven times faster than the chip in the previous phone, Apple said yesterday at a press conference at its headquarters in Cupertino, California.

The general consensus of analysts is that this will put a squeeze on Sprint’s margins near term  as they’ll be shelling out alot for the right to offer the iPhone and will only see a slight increase in subscribers as existing subscribers upgrade to the iPhone rather than drawing in new customers.

Sprint will be holding an investors day on Friday.

Despite this near term pressure on the stock, we have been placing a bet on the possibility that Sprint becomes and attractive takeover target, either by a Verizon or a Dish network type buyer. nothing has changed on that story. We are long both the common and upside call spreads. At these levels the upside call spreads are  at even better prices. Original trade here.