How Much Is Sprint's Spectrum Worth?

  on January 05 2011 1:09 PM

Wireless carrier Sprint Nextel Corp. (S) was reiterated at 'buy' rating by brokerage firm Auriga USA, LLC with a price target of $6. Auriga's previous valuation model had suggested that Sprint’s spectrum was worth $7 billion based on older auction sales of spectrum by the U.S. Government, while the updated model suggests a valuation closer to $9 billion.

We use the recent sale of bandwidth between Qualcomm (QCOM) Inc. and AT&T Inc. (T) to update our valuation table on Sprint, relative to its spectrum holdings. Our valuation model revisions suggest a slightly higher price target ($6.50) on Sprint compared to our current $6 target, said Chandan Sarkar, an analyst at Auriga USA.

However, we are choosing to keep our price target unchanged, as the company’s recent announcement of additional spending on its Network Vision initiative will likely pressure profitability metrics (relative to consensus estimates) for 2011 and 2012, before becoming accretive in 2013 and beyond, Sarkar wrote in a note to clients.

Sarkar plans to revisit his model after Sprint provides more details, likely during the fourth quarter of 2010 report. Given how well understood the costs of this network vision initiative already are, Sarkar believes its profitability ramifications are already built into the current stock price.

Valuation of Sprint's Spectrum

LocationMHz

BandwidthMHz

POPSCovered

Base Case ValueMHz/POP

DiscountPercentage

Discounted ValueMHz/POP

SpectrumValue

800

14

300

$0.87

5%

$0.83

$3486

900

3

300

$0.87

10%

$0.78

$702

1900

36

300

$0.87

50%

$0.44

$4752

2500

90

150

$0.87

50%

$0.44

0 (moved to JV)

 
 
 
 
 

Total

$9000

Source: Company Filings, Auriga USANote: Sprint's 2.5GHz spectrum holdings are not included in the valuation, above, as this spectrum was merged into the Clearwire joint venture.Base case assignment of $0.87 per MHz/POP is based on the recent price paid by AT&T to purchase 700 MHz spectrum from Qualcomm.

Sprint Valuation based on Sum-of-Parts

Assets

Value

Spectrum

$9000

Postpaid + Boost Subscriber Acquisition Costs
 

(@$300/sub) * 49 million

$15,000

JV with Clearwire

$2,000

Infrastructure

$5,000

Brand

$1,000

LD

$4,000

 
 

Liabilities

 

Remaining FCC 800 MHz Reconfig Costs

($800)

Debt

($15,600)

 
 

Total

$19,000

Shares Outstanding

3000

Implied Share Price

$6.53

Source: Company Filings, Auriga USA

 

Sprint recently announced that it will not be participating in the latest round of Clearwire Corp.'s (CLWR) financing. This will effectively bring Sprint’s current 54 percent ownership down to just below 50 percent. Sarkar was somewhat surprised that Sprint did not at least participate at a level to keep above 50 percent ownership.

But Sprint's management felt that much of the advantages of being a majority holder are no longer available given the anti-trust concerns that had been raised earlier. Although this has lifted an overhang in the shares near term, Sarkar believes management still faces a difficult choice between WiMax (aka Clearwire) and a potential switch to LTE (long term evolution, 3GPP 4G technology).

Sarkar said WiMax represents headline risk to Sprint. Furthermore, if WiMax proves ineffective, it is unclear what the company can or will choose to do to combat the LTE networks that will likely be established by Verizon Communications Inc. (VZ) and AT&T by the time Sprint abandons its WiMax efforts.

Of the about $5 billion allotted to Sprint's network vision initiative, approximately half will be for capital expenditure and half for operating expenditure. Sprint does not expect the cost savings from network vision to cancel the incremental spending until 2013. In 2014, Sprint expects the initiative to significantly accretive.

Despite a recent, highprofile report on MarketWatch.com suggesting that Google Inc. (GOOG) might have an interest in becoming a carrier by buying Sprint, Sarkar noted that such a move would significantly undermine Google's Android initiative which is currently multi-carrier. If Google were to buy Sprint, its current carrier customer base would immediately view them as a threat and would no longer promote the Android OS in their phones.

Our industry checks suggest that Sprint and all the other U.S. wireless carriers (except for Leap Wireless (LEAP) which preannounced slightly weaker than expected net adds last night after the close) will likely report strong net addition numbers for fourth quarter of 2010. Christmas tends to be strong seasonally but relative to consensus expectations, this strength is somewhat surprising given the backdrop of a saturated marketplace, said Sarkar.

Sarkar said along with MetroPCS (PCS), Sprint remains his only Buy rated stock in the carrier group. Sarkar believes that Sprint is continuing to make steady (albeit slow) progress in turning its business around.

We value Sprint using sum-of-parts and subscriber-based valuation models. These models suggest that spectrum remains Sprint's most valuable asset. We also ascribe value to its subscriber base. The range of values suggested by these models is $3 to $7 per share. Our $6 price target represents a value slightly above the midpoint of this valuation range, given the company's improving growth prospects, said Sarkar.

Sprint shares closed Tuesday's regular trading down 1.33 percent at $4.45 on the NYSE, while in after-hours the stock rose 0.67 percent to $4.48.

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