Sprint has long been the red-headed step child of the telecom industry in the U.S. The company has been ridiculed and ignored as a bit player among the major cell phone service providers. In fact, given so many years of poor brand perception, Sprint’s continued existence is a surprise.
Sprint’s story of misfortune might be taking a turn, however. Softbank is a Japanese holding company led by Masayoshi Son, the second richest man in Japan (largely from Japanese telecom companies as well as an early investment in Alibaba), with a net worth over $10 billion. In July 2013, Softbank invested $21.6 billion to buy 72% of Sprint’s equity. Since then, the Japanese holding company and Mr. Son himself have become more and more involved in managing and improving Sprint as Chairman of the Board.
Granted, Softbank’s involvement so far has not been of much benefit to Sprint’s shareholders. Softbank has lost a substantial amount on its initial July 2013 investment (Sprint’s total equity value is now only $18.7 billion, vs. around $30 billion in July 2013). And that’s after the stock has rallied significantly in the past month.
In fact, S rallied more than 50% from its bottom near $3 in July, and closed above its 200 day moving average last week for the first time in the last year. (it got hit hard like everything on the open but has worked its way back towards the 200 day on the bounce):
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2 yr S from LiveVol Pro[/caption]
The major catalyst for the rally was news that Softbank bought an additional $87 million of stock two weeks ago, as reported by the WSJ in this article. Softbank’s stake is now over 80%, and can increase to up to 85%, based on the terms of the company’s initial investment. The article goes on to cite Mr. Son’s excitement about the turnaround plan for the carrier, partly due to extensive work on improving Sprint’s network:
Mr. Son hunkered down with his top 100 engineers from SoftBank in addition to many at Sprint over a four-month stretch to come up with a plan to overhaul the carrier’s network without pouring in much more money.
Mr. Son says his plan will work, although he has declined to specify what it entails. Sprint has said it would install tens of thousands of small cells using much cheaper and more efficient technology to increase data speeds and capacity.
Meantime, Sprint has shown signs of a recovery. The carrier added 310,000 mainstream customers in the three months ended June 30, compared with 181,000 losses in the year ago period. It also had its lowest cancellation rate in company history. It only lost 12,000 phone customers, a significant improvement over past quarters.
It is network has also improved greatly on call quality, according to independent network analysts at RootMetrics, though it still lags behind on data speeds in many places.
The carrier is still losing money. It burned through $2.2 billion in the latest quarter. Sprint says cash flow should significantly improve in the coming years.
Mr. Son is one of the richest men in the world for good reason. He is a very smart, very hard working, experienced businessman. On the most recent conference call, he discussed his optimism about Sprint’s efforts to improve the network without much incremental capital expenditure:
Okay, this is Masa. As you may know, Japan has the best network in the world. To me, every time I come to the States, I say this network in this country is not something that you should be proud of. It is actually very bad. It’s not just Sprint, even Verizon, AT&T and T-Mo, all network is pretty bad. I’m going to say U.S. invented Internet, U.S. invented telephony but network is not something that you should be proud of.
So I would say the network that we created in Japan is much, much more superior. That’s a fact: coverage, the speed and all the integration. However, within Japan, SoftBank spent almost half in CapEx compared to our competitor, but the result of our network coverage, the speed is number one. So what we’re good at is spending less in CapEx and create a number one network. Of course, it’s easy to spend money and get the result, but if you have less money and then still want to achieve the number one network, you have to use brain instead of money and muscle.
The main point is, Masayoshi Son is now the largest owner of Sprint, and he knows what he’s doing. The big negative for Sprint all along (and the reason the stock nearly reached $3 last month) is the company’s heavy debt load and poor brand perception. The company has around $33 billion of long-term debt, vs. tangible assets of only $30 billion. Moreover, free cash flow as negative $2.2 billion in the most recent quarter alone, a concern when your debt load is so high to start.
On the flip side, Sprint’s management expressed confidence that free cash flow was going to turn positive at some point in the next 18-24 months. If momentum in the business continues (and the network improvements stick as Mr. Son expects) and that financial forecast turns out to be true, the $18.7 billion current equity value could be a real steal. EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) is expected to be $7.5 billion. If negative free cash flow and debt load concerns were not an issue, Sprint could easily be worth $35-$50 billion given that EBITDA level.
Of course, these are all big Ifs. However, Softbank has put their money where their mouth is, and Mr. Son is no slouch. If you believe in his chops, Sprint could be an interesting name for the longer term. The recent move higher has been so large that it might not be the best entry point for a new long position. But if stocks revisit this morning’s lows and if Sprint pulls back to near $4, the Jan17 5 / 10 call spread might be a good purchase for the turnaround story. It currently costs around $1, but could be purchased for $0.80 or less if the stock traded down to $4-ish again. That would be one way to play for a long-term move higher in Sprint over the next 18 months.