Sprint seeks to raise capital; investors flee

AppId is over the quota
AppId is over the quota

A woman talks on her phone as she walks past T-mobile and Sprint wireless stores in New York July 30, 2009.

Credit: Reuters/Brendan McDermid

By Sinead Carew and Supantha Mukherjee

NEW YORK | Fri Oct 7, 2011 6:20pm EDT

NEW YORK (Reuters) - Sprint Nextel Corp said it needs to raise more money and signaled it will burn through its cash reserves, raising concerns about the wireless provider's financial stability and business strategy.

Shares fell 20 percent to close at $2.41 on Friday, while its credit default swaps rose, reflecting greater concerns about a default risk. Shares of Sprint affiliate Clearwire Corp tumbled 32 percent to $1.39.

The news that Sprint could spend more cash than it brings in to upgrade its network provoked angry questions at an investor meeting with Chief Executive Dan Hesse.

Analysts complained that Hesse gave few clear answers and instead raised many fresh questions. In particular, they were worried that Sprint said its cash shortfall did not yet factor in the undisclosed sum of money the carrier has to pay Apple Inc for the right to sell the popular iPhone.

"They're going to be spending more money than they're bringing in for the next couple of years... even before iPhone costs," Hudson Square analyst Todd Rethemeier said, adding that this makes Sprint -- already a risky investment prospect -- an even more dangerous bet.

The Wall Street Journal previously reported that Sprint agreed to pay Apple $20 billion over four years as part of their agreement.

Hesse conceded that selling the iPhone would be expensive, but promised it would be "quite accretive" to Sprint's profits over time.

"The part we struggle with here is the fact that Sprint wants us to think about the subscriber benefit from the iPhone, but ignore the financial impact," Jennifer Fritzsche from Wells Fargo wrote in a research note.

LIQUIDITY QUESTIONS

Sprint outlined a plan to spend $7 billion on a network upgrade that it wants to complete by the end of 2013, two years earlier than previously suggested. The company said that upgrade would save it $10 billion to $11 billion.

Chief Financial Officer Joe Euteneur said Sprint would pay for the upgrade with cash from its balance sheet and by raising capital. He said he could not provide details as he wanted the flexibility of being able to tap the market at the best time.

The company also flashed a presentation slide saying it expects its liquidity to improve after 2013, implying a tough two years before that.

Analysts, many of whom have covered Sprint for years, told management that they did not understand the presentation and several asked about liquidity.

"Seeing all these balls in the air is a little scary," said Evercore analyst Jonathan Schildkraut.

Analysts said there was no immediate risk of Sprint defaulting on its debt. But, in a sign of investor nervousness, Sprint credit default swaps rose.

It now costs $1.5 million paid upfront to insure $10 million of Sprint debt for five years, in addition to annual payments of $500,000, according to data provider CMA. That is up from an upfront cost of $1.04 million plus $500,000 a year on Thursday.

CLEARWIRE UNCERTAINTY

Sprint owns 54 percent of Clearwire, and was questioned about how long it plans to support the venture.

Executives for Sprint said it would stop selling phones using Clearwire's high-speed WiMax network by the end of 2012, and refused to speak about plans beyond that.

Sprint also said it hopes to bolster its own network using spectrum from Clearwire's rival, LightSquared, backed by hedge fund manager Phil Falcone, if that becomes available.

Sprint declined to comment on whether it would offer Clearwire more funding. When asked if Sprint would let Clearwire go bankrupt, Hesse's response was that if there was a bankruptcy, he would "expect it to be constructive."

Clearwire Chief Executive Eric Prusch told Reuters that he was optimistic that the company would be able to raise the $1 billion financing it needs to continue to operate and upgrade its network. He added that Sprint was still dependent on Clearwire's network.

At the Sprint meeting, Joan Lappin of Gramercy Capital Management angrily asked why it was spending to upgrade its own network while Clearwire, which has much more spectrum than Sprint, needs funding.

The question was greeted by loud clapping and cheering among analysts and investors.

Sprint said its network upgrade would help boost its margin from operating income before depreciation and amortization by 4 percent to 6 percent by 2014. It also said it would raise its margins by another 4 percent to 6 percent by improving its operations.

But analysts questioned whether investors would see any boost in profit because of the spending plans.

Bernstein Research analyst Craig Moffett also worried that Sprint's service could suffer while it sets aside spectrum for the network upgrade. It is not clear how the company would avoid "creating a capacity gap" when there will be big demands on the network, he said, particularly iPhone users.

Sprint plans to upgrade its network using Long Term Evolution, the same technology used by bigger rivals, AT&T Inc and Verizon Wireless, a venture of Verizon Communications Inc and Vodafone Group Plc.

(Additional reporting by Liana B. Baker. Editing by Gerald E. McCormick and Robert MacMillan)

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Corporate America seeks cover in arms of small business

AppId is over the quota
AppId is over the quota

General Electric Chief Executive Officer Jeffrey Immelt speaks at a news conference in New York, October 21, 2009.

Credit: Reuters/Mike Segar

BOSTON (Reuters) - Facing talk of "class warfare" in Washington and protest marches on Wall Street, some of the biggest players in corporate America are linking arms with small business in what observers see as moves to bolster their images at a time of rising public anger.

Starbucks Corp (SBUX.O) Chief Executive Howard Schultz started the ball rolling on Monday with word that the world's biggest coffee chain was donating $5 million to start a fund dedicated to lending money to small businesses and nonprofit organizations.

General Electric Co (GE.N), the largest U.S. conglomerate, will also tout the virtues of smaller businesses on Thursday when it hosts a meeting in Columbus, Ohio, to discuss how to encourage the growth of mid-sized companies.

Both companies, giants in their own industries, are throwing their weight behind beneficiaries who are generally better regarded in the public eye, in hopes of picking up some of their shine, experts contend.

"Small businesses, entrepreneurs are the corporate equivalent of dolphins. Everybody likes dolphins ... It's a good group to associate with," said Scott Galloway, a marketing professor at New York University's Stern School of Business.

While associating with dolphins may make corporate leviathans seem cuter, it is unlikely to do much to boost the ailing U.S. economy, where unemployment has hovered near or above 9 percent for more than two years, observers said.

"It's mostly a show. The only thing that is going to help the employment situation in the next two years is macroeconomic policy," said Josh Bivens, an economist at the Economic Policy Institute, a Washington think tank.

RISING TENSIONS

The moves come at a time of rising tensions over the heading of the U.S. economy. Last month, U.S. President Barack Obama unveiled a plan to raise taxes on people who make more than $1 million a year -- a move he called the "Buffett rule" in honor of billionaire investor Warren Buffett of Berkshire Hathaway Inc (BRKa.N), who backed the idea.

Republican House Speaker John Boehner was quick to blast the idea, saying it amounted to "class warfare."

Over the weekend, more than 700 anti-Wall Street protesters were arrested in New York after attempting an unauthorized march across the Brooklyn Bridge.

New York City Mayor Michael Bloomberg warned in his weekly radio address that the demonstrations could lead to the sort of unrest seen during the so-called Arab Spring wave of protests in the Middle East.

"You don't want those kinds of riots here," Bloomberg said, according to media reports.

Amid this turmoil, both Starbucks' Schultz, who grew up in public housing, and GE Chief Executive Officer Jeffrey Immelt, a Dartmouth College graduate, have stepped up their involvement on the political stage, though both deny any interest in running for office.

Immelt, a lifelong Republican, in January took the helm of a White House advisory board on the economy and job creation. He has taken flak this year for the company's expected low tax rate, which GE attributes to losses at its finance arm.

GE, which has a hefty finance arm, did benefit from some of the federal programs set up during the credit crisis to back private debt. Starbucks, whose business is not in the financial sector, did not.

Before Schultz, a Democrat, unveiled his fund, to which Starbucks is encouraging customers to make $5 donations, he had already called on wealthy Americans and businesses to stop making campaign contributions to U.S. lawmakers until they found a "fair, bipartisan" deal on the nation's debt, taxes and spending.

NEGLECTED SEGMENT

Small businesses say they are largely neglected by the nation's largest banks, leaving many entrepreneurs to rely on personal borrowing, including credit cards and second mortgages, to fund their ventures. To that extent, they welcome attention from other sources of financing, whether they be Starbucks' "Create Jobs for USA" fund or GE Capital.

"I don't think the banks in the current regulatory environment have the flexibility to experiment, have the understanding of small business. Their focus is elsewhere," said Marilyn Landis, a director and former chair of the National Small Business Association. "I don't see the banks as being significant players any time soon."

But even so, Landis is wary when big companies rush to embrace small businesses.

"We're going to see lots of posturing, lots of grand opportunities," she said. "The question is if any of them will be meaningful."

Starbucks said its only interest in starting the fund is helping the neighborhoods where it sells its products.

"Let there be no mistake: Our concern is about the communities where we do business and where our partners, which is what we call our employees, live and work," said Jim Olson, a spokesman for the Seattle-based chain, adding that Moody's Analytics' top analyst had backed the idea.

For its part, GE Capital said it is just trying to promote the interests of companies to which it lends.

"It's our customer base," said spokesman Russell Wilkerson. "Sure, we have a vested interest here in seeing them do well."

While companies like GE and Starbucks focus on programs that they contend can help with social ills, it is unlikely their overall actions are going to be any different from those of any major publicly traded corporation, one observer said.

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