Credit Suisse expects Sprint Nextel Corp. (NYSE: S) will sign network sharing deals both LightSquared and Clearwire Corp. (NASDAQ: CLWR) between now and mid-year.
The brokerage said the LightSquared deal could be announced within the next month, while the Clearwire deal will likely follow the announcement of new wholesale pricing.
We have assumed the same basic deal terms for both LightSquared and Clearwire in the analysis that follows: We assume partners pay Sprint $2,400 per base station per month. We assume both LightSquared and Clearwire will pay 50 percent in cash and 50 percent in capacity. We assume $700 per site per month per partner in incremental operating expenditure, said Jonathan Chaplin, an analyst at Credit Suisse.
Chaplin assumes Sprint incurs additional upfront capital expenditure of $2.2 billion in total ($1.4 billion for LightSquared; $0.8 billion for Clearwire), with the bulk of the spend occurring in 2012 and 2013.
The upfront investment will be offset by an upfront payment from LightSquared to fund a portion of capital expenditure that Chaplin estimates at $500 million, and revenue from both partners starting in early 2012.
The deals could consume $1.2 billion in cash before becoming cash flow accretive in 2013. Sprint should be able to fund this, in addition to Network Vision, with cash on hand and internally generated cash. Chaplin estimates additional maintenance capital expenditure for Sprint of $300 million annually.
Chaplin assumes Sprint owns 100 percent of the radio access network, while the partners own 100 percent of their spectrum and elements of their own core network. This avoids the complexities of joint ownership that has been an issue in network sharing deals in other markets.
We assume LightSquared leases access to all 45,000 Sprint base stations, giving them a nationwide network. We assume they lease base stations at the pace that Sprint installs them, with lease payments starting at the beginning of 2012 and covering all 45,000 base stations by the end of 2013, said Chaplin.
We assume Clearwire leases 28,000 base stations to expand coverage to another 70 million POPs and replace some of their existing base stations. Clearwire will need an estimated 12,000 base stations in addition to the base stations they lease from Sprint, because they have higher frequency spectrum than Sprint (we assume Sprint's network will be configured for 1.9GHz spectrum, which has greater reach than Clearwire's 2.5GHz spectrum), said Chaplin.
Chaplin estimates that these two deals could add $1.8 billion in revenue and $1.2 billion in EBITDA over the course of the next few years, with benefits showing up from early 2012. Chaplin doesn't think the impact of network sharing is reflected in consensus expectations at all.
Based on Chaplin's preliminary estimates, the two deals could add $1.30 a share in value to Sprint shares. This would be in addition to his $8 price target. Again, he doesn't think any of the upside from these deals is currently reflected in consensus expectations or in Sprint's valuation. Each deal should be a positive catalyst for Sprint's equity, given that the upside is not reflected in consensus estimates.
We believe other companies with Spectrum could enter into similar network sharing deals with Sprint. Potential network sharing tenants could include SpectrumCo LLC, Public Safety, S-Band Holders, Leap Wireless International, Inc. (NASDAQ: LEAP)/ MetroPCS Communications, Inc. (NYSE: PCS), US Cellular, and Cox, said Chaplin.