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Can Another Sale and Leaseback Arrangement Save Sprint?

Cash-strapped U.S. wireless carrier Sprint Corp. S has announced its plans to raise $2.2 billion through a sale and leaseback transaction. Reportedly, the company will sell its networking gear worth $3 billion to a Special Purpose Entity (SPE) named as Network Leasing Co., which will lease the same back to Sprint immediately. SoftBank Group Corp., Sprint’s majority shareholder, is expected to provide the necessary funding to the SPE to execute the transaction. The deal is expected to close next week.

No Stranger to Such Deals, But Can It Reduce Liquidity Woes?

Sprint is no stranger to such complex sale and leaseback transactions. Notably, in 2015, the company had entered into a similar arrangement with another SPE, Mobile Leasing Solutions, LLC, for a $1.1 billion cash infusion. Back then, Sprint had gone for aggressive mobile leasing plans to attract customers and the lease-back deal was intended to reduce one of Sprint’s biggest expenses – the cost of buying millions of new devices. The idea was to help Sprint lower equipment costs and free up much-needed resources to focus on new growth opportunities. However, intense competition in the U.S. telecom market from rivals like Verizon Communication Inc. VZ, AT&T Inc. T and T-Mobile U.S Inc. TMUS has fallen hard on the company’s strategic efforts, severely affecting its liquidity position. The company, as a result, now has a debt-laden balance sheet and negative cash flow. It has been witnessing losses annually since 2007. Currently, the major rating agencies hold a negative outlook on the company and have rated its bonds as junk.

Our Take

Sprint has recently adopted multiple cost-cutting measures, including employee layoffs and certain operational overhauls, in order to free up cash to repay debt. Moreover, the company decided to sit out of the 600 MHZ low-band airwaves auction, only to preserve cash. This measure can limit Sprint’s scope for network upgrades and expansion in the future, disrupting opportunities to spring back to growth.

The sale and leaseback arrangement, on the other hand, will help the company to infuse the much-needed cash into its business. In the event of the company crafting a favorable leasing agreement, it will reduce its operating expenses apart from helping it repay debts. Additionally, Sprint is planning to use microwave technology instead of the traditional backhaul system to save operating costs. Collectively, we perceive a lower debt-equity ratio going ahead, increasing chances for an upward revision of its credit rating. Nevertheless, we choose to remain on the sidelines with regard to the carrier’s growth strategies for now.

Sprint presently carries a Zacks Rank #3 (Hold).

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AT&T INC (T): Free Stock Analysis Report
SPRINT CORP (S): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
T-MOBILE US INC (TMUS): Free Stock Analysis Report
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