Poor outlook hits Sprint Nextel

Shares in Sprint Nextel, the third-largest US mobile phone operator, fell more than 11 per cent Tuesday on the back of a weaker than expected outlook for this year.

The fall in Sprint Nextel’s stock valuations led to speculation among some analysts that private equity investors might start to find the company an attractive target as they look to invest billions of dollars in equity raised from investors.

The announcement late on Monday by Gary Forsee, chairman and chief executive, of a 5,000 cut in Sprint Nextel’s workforce, and projections that profits would fall owing to the need to spend $1.1bn more than anticipated on improving its networks, is the latest blow to the phone group.

Jason Armstrong, Goldman Sachs analyst, said “2007 guidance seems to indicate that Sprint’s approach is to haemorrhage in 2007 rather than endure a steady bleed over the next several years through network, handset, and branding transitions”. The company was formed when Sprint bought Nextel two years ago.

Sprint Nextel has lost ground to its two largest rivals, Cingular and Verizon Wireless, since the merger owing to difficulties of absorbing 18m new customers as well as millions of other subscribers from affiliates of both companies.

Shares in the group have fallen repeatedly as its earnings performance has been weaker than expected. A number of top executives have departed, including Len Lauer, its chief operating officer, last August after a near 40 per cent share price decline.

The company has suffered from a higher turnover of its customers owing to the poorer creditworthiness of many of its phone users relative to its rivals, and has also struggled to integrate networks based on different technologies.

David Janazzo, analyst at Merrill Lynch, said Sprint Nextel’s new outlook for earnings before interest, tax, depreciation and amortisation was about 12 per cent below his estimate and 15 per cent below the market’s consensus.

Mr Armstrong at Goldman Sachs said private equity investors could be interested in Sprint Nextel at the lower stock valuations.

Sprint Nextel shares closed down 11.15 per cent to $17.45 in New York.

Analysts at Credit Suisse said Sprint Nextel would continue to struggle to add subscribers and improve operations in 2007. Sprint Nextel’s cost of doing business is materially higher than in the past and its revenue mix was becoming less profitable, they added.