Behind Sprint's sharp fall

Olga Kharif
04 Dec 2008

December got off to a rough start for equities in general, with the Standard & Poor's 500-stock index down nearly 9%, to 816, on the first day of the month. But wireless carrier Sprint Nextel (S) saw its stock hammered much more than any of the major averages, with shares down 24%, to 2.11.

Why the drubbing‾ The only news Sprint announced for the day appeared to be relatively benign. The company said it had finalized a previously announced deal to combine its next-generation wireless broadband business with Clearwire (CLWRD), a Kirkland (Wash.) company that's building its own wireless broadband business. By combining the two operations, the companies figure they'll be able to roll out service faster and save on expenses in the process. In addition to Sprint's contribution of assets, Clearwire received $3.2 billion in funding from a number of backers, including Intel (INTC), Google (GOOG), Comcast (CMCSA), and Time Warner Cable (TWC).

Trouble is, that may not be enough money. When the Sprint-Clearwire transaction was originally announced back in May, Clearwire expected to be able to offer its service to 120 million to 140 million people by the end of 2010. But the buildout plans assumed that, in late 2009 or in early 2010, Clearwire would be able to raise an additional $2 billion to $2.3 billion. With the capital markets virtually closed, Clearwire may not be able to raise that money and its rollout schedule may have to be modified. 'My preference would be that we continue moving along at the same pace, but that we look at the capital markets on a quarter-by-quarter basis,' says Benjamin Wolff, chief executive of Clearwire. Wolff says Clearwire's board could decide to change its buildout schedule when it convenes in early 2009.

Network access denied‾

Any slowdown by Clearwire could cause Sprint problems. As a Clearwire investor and customer, Sprint plans to buy access to Clearwire's network at wholesale prices and then resell the broadband Internet service to its own customers. If Clearwire's board decides to scale back its ambitions, Sprint may have to wait longer than anticipated to gain access to a high-speed network. (Sprint has two of the 13 seats on Clearwire's board.) That could slow down Sprint's ability to attract new broadband subscribers. Meanwhile, rivals like Verizon Wireless could launch their high-speed networks around 2010.

A Sprint spokesman says the company would 'not discuss movements in our stock.' He referred questions about the pace of Clearwire's buildout to the Kirkland company.

It's just one of the many challenges Sprint is facing. The company, once renowned for high-quality service, has suffered setbacks in customer service and other quality issues since its merger with Nextel in 2005 (BusinessWeek, 2/21/08). Customers have defected and losses have piled up. The company's stock has fallen from nearly 16 a share last year, a drop of 85%. And Standard & Poor's (which like BusinessWeek is owned by The McGraw-Hill Companies (MHP)) cut the credit rating for Sprint to below investment grade back in May.

There may be further problems ahead. During the company's third-quarter conference call, Sprint executives said they expected to stabilize subscriber losses despite ongoing competitive pressures. But that could be difficult. One reason: While AT&T (T) has the exclusive right to offer Apple's (AAPL) iPhone and Verizon Wireless has Research In Motion's (RIM) new Blackberry Storm, Sprint has no comparable must-have device.

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