Sprint: Credit Suisse Ups to Hold, Softbank Could Buy Them Out

By Tiernan Ray

Shares of Sprint (S) are unchanged at $6 despite a boost from Credit Suisse's Joseph Mastrogiovanni, who this morning raised his rating to Neutral from Underperform, based on an expectation customer losses are going to turn a corner, and that backer Softbank may try to buy out the 20% of the stock it doesn't own.

First, Sprint may have reached bottom in losing subscribers and may actually show net additions for Q3 when it reports on Monday, thinks Mastrogiovanni:

We believe Sprint continued to see pressure on subscriber metrics through the first two months of the quarter, but saw an improvement in September owing to pricing changes. As such, we're reducing our fiscal 2Q14 (calendar 3Q14) net add estimate to a loss of 100k from a gain of 100k. We're also reducing F2Q14 EBITDA 2.4% to $1.6B on a 70 bps reduction to our wireless EBITDA margin, partially due to a lower EIP take rate of 25%. Finally, we are reducing our calendar year 2014 EBITDA estimate to $6.745B from $6.817B, largely due to reductions to our EIP take-rates. We now estimate EIP sales in 2014 will be 27% of total postpaid device sales compared to 39% previously.

Second, Softbank, which cashed out of some holdings of Alibaba Group Holding (BABA) in that company's September 19th IPO, has enough cash to buy out the remainder of Sprint, he observes, and there is still the prospect of a merger with T-Mobile US (TMUS):

While there's no reason to believe Softbank will change its strategy in the near-term and look to acquire the remainder of Sprint, we feel the risk that it could take-in the company has increased. The IPO of Alibaba has given Softbank a treasure chest of liquidity (Softbank owns ~32% of Alibaba). It would cost less than $5B to buy the remaining outstanding shares of Sprint at $6/share. Furthermore, we had argued that Softbank wanted the public equity to use in a potential deal with T-Mobile. It was reported that Sprint ended its pursuit of T-Mobile in August 2014, which removes a reason to keep the public equity to consummate a deal. However, we believe Sprint could revisit a merger with T- Mobile if there is a party change in the 2016 elections, which could be reason enough to leave the public stub, but it wouldn't prevent short-term stock price appreciation if additional speculation emerged.

 

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