Could SprintNextel be the next buyout from a private firm?

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Analysts Doubt Sprint Nextel Will Go Private

Will Sprint Nextel be the next phone company to go private?



Wall Street speculation on that possibility has amped up since Alltel AT on Sunday said it would be acquired by two private equity groups for $27.5 billion.

Some investors believe Sprint has a chance to be next. Sprint Nextel's S shares have climbed 15% since May 15, when reports surfaced that Alltel's talks with private equity groups were heating up. TPG Capital and Goldman Sachs' GS private equity arm are the buyers, offering $71.50 a share for the nation's No. 5 wireless carrier. Seven months ago, Alltel was trading at less than 55.

The stock of No. 3 wireless carrier Sprint Nextel has climbed 17% in 2007, despite posting a first-quarter loss and a poor financial outlook as it loses market share.

Many analysts, though, are throwing cold water on any talk of a Sprint leveraged buyout.

"I would be very surprised to see any private equity firm move on Sprint Nextel in 2007," said Ken Leon, an equity analyst at Standard & Poor's. "We would dismiss an LBO takeover in the foreseeable future."

Sprint Nextel shareholders are familiar with takeover rumors. As Sprint Nextel began to struggle in 2006, talk that cable TV firms might launch a bid for Sprint Nextel resurfaced. That didn't happen.

Losing Customers

"It gets down to the comfort level a prospective buyer has on the predictability of future cash flow," Leon said. "That's what drives private equity interest. Sprint Nextel doesn't have control of their business to retain and grow customers."

Sprint and Nextel merged in mid-2005. Leon says that Nextel's customers, mainly small business and government users, have been leaving in droves.

In the first quarter, Sprint Nextel lost 220,000 monthly customers who have long-term contracts and generate the most revenue. It was the third consecutive quarter of "post-paid" customer losses. It also sells prepaid services, in which users by airtime upfront. Such users are less profitable than post-paid customers.

Leon has a sell rating on Sprint's stock and owns no shares. He also says that analysts' consensus earnings estimates for Sprint Nextel in 2007 and next year are too high.

He estimates that Sprint will earn 82 cents per share this year and 95 cents next year, while the consensus is 90 cents and $1.10.

Verizon Wireless, owned by phone company Verizon Communications VZ and U.K.-based Vodafone VOD, has been taking share among highly valued postpaid customers. Verizon added 1.45 million customers under contract in the first quarter, compared with T-Mobile USA's 726,000 and AT&T's T 680,000.

AT&T's expected late June launch of Apple's AAPL music-playing iPhone is expected to make the competitive landscape even tougher for Sprint Nextel, some analysts say. Sprint Nextel will probably be forced to spend more on marketing to counter AT&T's iPhone.

Despite eroding market share, UBS analyst John Hodulik Tuesday upped his target price for Sprint Nextel to $23 from $20, mostly because of ongoing speculation of a buyout.

Hodulik, though, sees Sprint Nextel's size as a possible hurdle to a buyout. The firm has 53.6 million customers, including wholesale and prepaid users. Its market value is near $65 billion.

Would Be A Record LBO

Alltel has about 12 million subscribers. A private equity takeout of Sprint Nextel would be nearly three times the size of Alltel's deal and double the largest-ever private equity offer, Hodulik says. The largest is a proposed $32 billion buyout of energy firm TXU TXU by a private equity group led by Kohlberg Kravis Roberts.

Sprint Nextel operates two wireless networks that use different technologies. Sprint's consumer-focused service provides voice and speedy wireless data services via a CDMA network. Nextel's iDen network provides a "push-to-talk" group conferencing feature popular with business users.

Over the next few years, Sprint Nextel hopes to move most of its business customers over to CDMA phones. It's too late to split up Sprint and Nextel, says Roger Entner, an analyst at IAG Research. "They are now joined at the hip," he said.

Goldman Sachs analyst Jason Armstrong views a Sprint Nextel buyout as a "low probability event."

Private equity firms such as Blackstone, Carlyle Group and TPG have taken advantage of low-cost credit to leverage their investments. Even so, "high yield markets (may not) support a deal of Sprint Nextel's magnitude," Armstrong wrote in a note to clients.

Including Sprint Nextel's debt of about $23 billion, he estimates that a buyout would cost north of $86 billion.

Other analysts, though, say private equity groups could be attracted to Sprint Nextel's assets. It owns valuable radio spectrum that's well suited for next-generation, so-called WiMax, wireless Internet services.

And it owns a landline long-distance phone network.

Goldman Sachs estimates the value of Sprint Nextel's WiMax spectrum at more than $5.1 billion and of its long-distance network at about $6 billion.

Source: Investor's Business Daily

Analysts Doubt Sprint Nextel Will Go Private