Tuesday May 6, 01:27 PM
Sprint Loses a Huge Customer
By
Bruce Meyerson
Qwest Communications is ditching Sprint as the provider of its cellular service and switching its mobile-phone customers over to Verizon Wireless' network, striking another sharp blow to Sprint's distressed business.
The announcement
on May 5 came the same day as unconfirmed reports that the German owner of T-Mobile is mulling a takeover bid for Sprint Nextel (NYSE: S - news) (S) and that Sprint itself is considering plans to sell off the Nextel business it acquired for $35 billion in 2005.
Qwest (NYSE: Q - news) 's five-year deal with Verizon Wireless, a joint venture of Verizon Communications (VZ) and Vodafone (LSE: VOD.L - news) (VOD), would mark the latest in a series of major setbacks for Sprint, including a junk rating on the company's debt issued by Standard & Poor's on May 1. While current customer figures are not available, Qwest (Q) had 824,000 wireless subscribers at the end of 2007, representing more than 1.5% of Sprint's base of 53.8 million customers. Neither Qwest nor Sprint has reported first-quarter results yet.
Declining Stock Price and Book Value
Despite its woes, Sprint has become an increasingly tasty takeover target over the past year with its stock price being marked down nearly two thirds. At present, the company is worth about $25 billion, an amount that T-Mobile parent Deutsche Telekom (Xetra: 555750 - news) (DT) could easily afford. Sprint's shares, which have been trading at their lowest level in nearly two decades, rose 10.5% to 8.74 on May 5, propelled by reports in The Wall Street Journal of a possible Nextel sale or spin-off.
Since taking over Nextel, which was once the toast of the cellular industry with the highest paying customers, the acquired business has shed millions of subscribers who grew frustrated with clogged networks and other service problems.
The situation has grown so dire that new Sprint CEO Dan Hesse conceded in February that, "This turnaround will not happen for many quarters." Speaking with analysts after the company reported its fourth-quarter results, Hesse said, "The issues we face are more difficult than what I had expected to find," when he joined the company two months earlier.
It was during that February update that Sprint confirmed a staggering $29.7 billion writedown in the book value of its assets, wiping out nearly all of the value of its $35 billion merger with Nextel. And dividend payments were suspended "for the foreseeable future." To top it off, Sprint announced it has borrowed $2.5 billion from its revolving credit facility to help pay off $2.25 billion in bonds that will mature in 2008 and 2009.
More Options for Qwest Customers
Verizon Wireless uses the same cellular technology as Sprint, but Qwest's wireless customers will not be able to use their phones on Verizon (NYSE: VZ - news) 's network. Instead of tacking its own name on the phones and service, as it has with Sprint, Qwest plans to begin marketing Verizon-branded service this summer.
In sharp contrast with the Sprint deal, which denied Qwest access to most of the high-end handsets that Sprint users can choose from, Qwest customers will have access to the full line of Verizon Wireless handsets, smartphones, and BlackBerry (RIMM) devices. Qwest's customers will be able to choose to be billed directly by Verizon Wireless or to include those charges on their residential phone and broadband bills.
Qwest's deal with Sprint expires in February, 2009. Though Qwest's customers will not be forced to switch to Verizon Wireless, it appears unlikely that there will be any new arrangement with Sprint that would allow them to continue using their existing Qwest cell phones when the deal expires.
Sprint did not immediately respond to requests for comment on the Qwest deal. Sprint spokeswoman Leigh Horner declined comment on the reports in The Wall Street Journal about the possible Nextel spin-off and the potential Deutsche Telekom bid for all of Sprint Nextel.
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