This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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Sprint Nextel (NYSE: S), the Overland Park, Kansas-based wireless telecommunications carrier, has attracted private equity interest to its iDEN network, two industry sources and two analysts told mergermarket. However, continued the analysts, iDEN, the wireless network Sprint acquired when it purchased Nextel for USD 35bn three years ago, has a number of issues impeding its attractiveness.
In a brief interview, Sprint CEO Dan Hesse said the company has “tested” buyer interest in its iDEN network but has not begun a formal auction.
One industry source who is following the situation said the interested private equity firms could have included Alltel’s owners TPG Capital and GS Capital Partners, and an analyst claiming knowledge of the situation said former Nextel CEO Tim Donahue had paired with one of the firms. However, continued the industry source and analysts, buyers encountered problems when trying to sort through issues related to separating Sprint’s iDEN from its original code division multiple access (CDMA) network.
Donahue could not be reached for comment. A TPG spokesperson declined comment. GS did not return phone calls by press time.
The industry source and one analyst estimated the price of iDEN between USD 5bn and USD 6bn.
Sprint disclosed it was exploring alternatives for its iDEN network and related operations in August. A Sprint spokesperson said when Dan Hesse came on board as CEO a year ago, he made it plain that “all options were on the table.” The spokesperson said, however, that Sprint considered iDEN “core” and “remained committed” to it.
When Sprint merged with Nextel in 2005, the companies predicted that between cross selling, network operation, IT and marketing synergies, they would save USD 14.5bn per year. However, Sprint discovered that the burden of acquiring a large company with a dissimilar network was onerous and costly. Its stock sank from what was then USD 25 per share to what was yesterday USD 6.64 per share. Last year Sprint ousted CEO Gary Forsee.
Thomas Watts, an analyst at Cowen & Co, said Sprint’s iDEN network post-merger is hard to value. “It’s not clear what a customer is getting. Sprint’s been moving customers from iDEN onto its own network. It’s integrated iDEN’s billing and backhaul functions with its own. A buyer could be getting spectrum and radios, but even if it is, it would be purchasing antiquated technology.”
In a note on 4 September, Christopher King, an analyst at Stifel Nicolaus, wrote, “There are operational challenges now that the iDEN service has been largely integrated with Sprint’s CDMA operations, as cell sites are now mostly collocated and billing systems, customer care and sales and marketing efforts are shared with the company’s CDMA segment.” Moreover, noted King, “Whoever buys Sprint Nextel would inherit the obligation to complete the public safety rebanding of 800 megahertz and 1.9-gigahertz spectrum. This poses risk both as to the final cost the buyer would incur and whether the government would approve a sale until the rebanding is further along.”
Last week at a Goldman Sachs conference in New York, Sprint’s Hesse said that although the company is interested in and ready to pursue a divestment of iDEN, it would only do so if it received a compelling offer. “Plan A is to reinvigorate iDEN, and we’ve recently launched four new handsets that run along it.”
Hesse pointed out that in August Sprint rejected a private placement of convertible preferred stock because it found the terms unattractive. “The sale of iDEN is similar to the convert. iDEN is valuable, and we don’t have to sell it.”
Sprint’s stock closed yesterday at USD 6.64 per share. Its market capitalization is USD 19bn. It recorded a net loss of USD 344m on revenue of USD 9bn for the quarter ended 30 June 2008. It had cash of USD 2bn and long-term debt of USD 20bn for that same quarter. It recorded a net loss of USD 30bn on revenue of USD 40bn for full year 2007.
Sprint’s advisors in the Nextel transaction were Lehman Brothers, Citigroup, Davis Polk, Cravath Swaine, Sullivan & Cromwell and Willkie Farr.
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