"debt holders will not go along....."...surely you jest, the debt suffers as well from the same operational risk, or as you put it quagmire, anything which would remove that risk enhances the value, not to mention the possibility of some enticement.....some fool will argue default benefits debt, get real, look, Sprint could drag on for many many years with little chance of that, partly due to the greed of those who continue to want to issue more debt backed by so much actual hard collateral.......so no, don't buy that argument at all, it's ludicrous in fact....anything else?
41 Billion Spectrum
5 Billion cash
18 Billion Network
64 Billion Total
31 Billion debt
33 Billion net value
4 Billion shares
8.25 per share value
Trapped Value proposition. Above does not include even include the value of 50+ million paying customers.
Value Unlock structural argument equates to 20.00 to 22.00 per share value.
This should all suffice to show just how much value is locked in Sprint. It shows what the cash flow scene SHOULD look like with a more efficient structure, you can see how the margins line up nicely with that of VZ, who has that margin advantage due to scale. Sprint can get that same benefit proportionately with an efficient structure. As noted in the last post.
And also, note well, that the 13.00 per share is just the portion associated with core Sprint, not the share compensation for existing holders in the new REIT. Note the Windstream deal structure for instance.
As to the new REIT, a simple look would be to give each share of Sprint one share of the REIT, and note well that in my model here, there has to be at least one if not more major partners in the REIT, starting with DISH, who has a similar locked value problem with their Spectrum, not to mention they must get the spectrum into use on a use it lose it basis per FCC regs.
So Dish becomes a major partner, and considering their contribution which would be about 25 Billion (by some estimates) of Spectrum would have to receive a substantial number of shares, the structure from there out as far as share exchange percentages, is a wild card, as per usual it would be complex.
But basically you have Sprint contributing a hard 60 Billion in assets (conservative number, but per balance sheet) and Dish 25 Billion, so you have 85 Billion in assets less the 30 Billion sprint Debt (which would be refinanced at a lower rate in the REIT), netting out the 30 Billion in debt leaves Sprints contribution at 30 Billion...so one presumes there might be some parity in the Sprint/Dish ownership, more a true JV partnership Sprint/Dish.....
The REIT would then IPO and raise cash, such as for future spectrum needs, income would come via lease back to Sprint and Dish as well as others who need spectrum/access. This includes, everyone. To be continued....
The COOPERMAN Question - post 5
Sprint as it is currently structured:
8.5 Billion in revenue for last quarter
2.3 Billion selling, gen, admin costs
4.8 Billion cost service
898 Million Depreciation
396 Million Amortization
510 Million debt service
Basically, you have revenue of 8.5 billion and it costs about 8.9 Billion including debt service, and including depreciation which isn't cash.
Here's what happens under a restructuring:
8.5 Billion in revenue
2.2 Billion selling, gen, admin (this is taking out the 1.5 Billion a year as per CEO comments, 375 Mil. per Q)
4.3 Billion cost service (this is dropping out the long discussed duplicative costs of multiple networks, the savings due to NV in reduced backhaul, reduced roaming, lower electric, lower cost per GB and per min, this as per info gleaned from cc's and presentations over the years, equated to about 2 Billion a year or 500 Million per quarter, in the REIT model much cost would simply move to the REIT, reflected then in the lease back to Sprint, in other words I take that as a wash, though in the Windstream model the cash flow actually improves, and it might well do so here as well)
0 Debt service (debt exchanged to REIT as more than offset by Spectrum/Network)
0 Depreciation/ Amortization (these likewise shift to the REIT as Sprint no longer owns the network and Spectrum, except note that each shareholder gets 1 for 1 shares in the REIT, so essentially SB still owns a significant part of the new REIT, ie. it works for SB as well)
Now you have 8.5 Billion in revenue and it costs about 6.5 Billion, net is a plus 2.0 Billion. This aligns very nicely with the margins of VZ for example who makes 31 Billion a quarter and nets about 7 Billion.
Now you will have to start netting out taxes out of that 2 Billion a quarter. It works to earnings of about .33 per share, put a 10 multiple on it and you get a share price of about $13 per share
The general idea is move the network asset off the balance sheet into a REIT, essentially taking with it, DEBT. The debt is thus separated from direct operational risk of the core company, and is backed by a hard asset. Hence the cost of the debt service is lower within the REIT and is removed completely from the original core company.
In the case of Sprint, if such were done, and assuming multiple parties use the Spectrum/Network, such as Sprint itself, Dish, Google, Lightsquared, et. al. The income is assured, and the REIT is attractive to investors because it must pay out 90% of income as dividend payments, the REIT is also backed by the appreciating asset of Spectrum. Even AT&T and VZ could make use of such a vehicle.
This by the way, is the anomaly with Sprint at present. Sprint has 30 Billion in debt, that debt is backed essentially by two things, income from 50 Million paying customers AND 41 Billion dollars worth of spectrum (that's the balance sheet number, it is arguably worth much more given recent auctions and if one considers its value if further built out, ie. a use-based valuation, note my post on how highly VZ and T are valuing their spectrum).
Point is, Sprint is backing their debt by 1) income from 50 million customers and 2) Network Assets/Spectrum, and not getting fair VALUE for EITHER. The operational risk is perceived high in part DUE to the debt service, and the debt service is high DUE in part to the operational risk. It's a catch 22. If you really think about it, the current structure is INCREDIBLY inefficient.
As I have said before, perhaps there is some reason why the above could not be done. I am neither an expert in M & A, nor do I have the requisite team of experts to hand to hash out all it would take to put this together, it's massive. That said, the COOPERMAN question is beyond curious, and the advantages of such a structural change are all-too-obviously incredible to be cast off without consideration.
Other structural change benefits:
1) completely changes the playing field regarding a TMUS/Sprint merger, opening the door to such
2) get the 2.5 spectrum into full use
3) move the burden of additional spectrum purchases over the REIT
4) creates a vehicle that enhances the whole industry
5) unlocks terrific shareholder value
6) frees up core Sprint and SB, to engage in M & A combinations with Sprint in other directions such as content that would at present be too unwieldy
Rural telecommunications company Windstream Holdings Inc. updated its plans for its intended real-estate investment trust spinoff, now expecting to distribute 80% of the shares to stockholders.
Windstream will keep 19.9% of the shares in the REIT and distribute the remaining 80.1% to stockholders, the company said. Retained shares will be sold during a 12-month period following the spinoff and net proceeds will be used to retire debt.
And from Channel Partners:
In July, Windstream announced an agreement to spin off its telecom network assets into an independent, publicly traded REIT under a tax-free transaction that the company said will enable it to lower debt and boost cash flow. The REIT will lease assets to Windstream through a long-term triple-net exclusive lease with an estimated rent payment of $650 million annually.
The COOPERMAN Question also know as "TCQ" is the full walkthrough on the value unlock of Sprint Spectrum, Network, and 50+ Million subscribers.......resulting in a 20.00 per share valuation....I have not seen one argument effectively refuting the numbers, or the premise......
Well, as I said, the current price is a total disconnect from value. The 9.00 value figure for Spectrum plus cash less debt is very REAL. The core Sprint valuation on an unlock of value basis (using a standard P/E multiple) and what the earnings will be is $13 (see The COOPERMAN Question for the full walkthrough) .
The trapped value is 22.00 per share, I would argue more as I'd tack another 10 Billion in spectrum value (consider what AT&T was willing to pay for T-Mobile in the past basically for spectrum, and the recent auction, and the use-based factor, remember Sprint has as much spectrum as AT&T and VZ combined, look it up), that's another 2.50 per share. Each 10 Billion in spectrum valuation increase adds 2.50 to the share price.
And note, Spectrum isn't getting cheaper.
I also think you have to add a premium for SB, given that an unlocked Sprint, will not be standing still, and I would anticipate additional M&A at that point, (a TMUS/S merger would ABSOLUTELY be allowed under a Republican administration, and the structure would be totally different if something such as "TCQ" Dish deal were done, AND one suspects Son would move Sprint in directions such as content) That premium however is hard to quantify as it is 2 steps ahead.
I come back to a 20.00 valuation with a structural change as wholly reasonable.
I also think it is foolish to try to load up here on margin despite the low price, bottom picking is tricky business, and as noted there is a total disconnect right now between Stock price and value, total disconnect, so buying now, one would have to ask themselves will I stay in or rabbit out if it goes lower......
Only the investor himself evaluating his own risk tolerance and circumstances can answer that....I can tell you this...bottom fishing is in part what keeps a stock going lower......and why bottom fishing is a bad strategy.
ie the bottom fisher buys at 5.00, he is happy he got a "low price", the stock goes to 4.50, he freaks and sells, it goes to 4.75, he is ticked off, he should have held, he resolves to buy if it goes down. It goes to 4.00, he buys, he is happy, he got a "low price", it goes to 3.75, he freaks and sells. He can't believe it, it happened again. Then it goes to 3.50, he can't bring himself to buy again, just can't do it. Not again he says. It rockets to 8.00 over several days, he quits trading figuring it's all rigged. No, HE and other bottom fishers were the ones "selling".....meanwhile value investors who plan to hold, are grabbing what cheap shares they can.....
so what do I think, I think the current price is highly unstable, that as soon as the so called long entrenched longs are shaken out, as soon as margin clerks take out the overly aggressive margin buyers, as soon as the rolling lower phenomena of bottom fishers runs its course, AND most importantly as soon as the value investors are ready, this is going up like a shot....
the news THEN, don't need "news" at all....the NEWS could be "investors realize the sprint spectrum is more valuable than realized", or simply "sprint is doing better".....remember the blog writers and half the analysts are FOOLS, they only SEEM to have any credibility at all, because THEY keep telling each other in blogs and other soft news sites that they are credible, they are not
I have posted two rather detailed series of posts in the last couple days, "The Cooperman Question" and "Sleeping GIANTS - simple valuation" which detail valuations and one possible way to unlock the substantial value in Sprint.
But let me make a couple comments. EXTREME undervaluation situations such as what we have now with Sprint are impossible to maintain, they look "stable" because the long looks at the share price each day, and sees a "real" number..........meanwhile value investors look at the same share price, and start to ask questions about the value......wait, 41 Billion or much more in spectrum, 5 Billion cash.......almost the whole share price in spectrum and cash (after netting out debt)...that assigns NO value at all, a negative value to a whole new nationwide network and 50 Million paying customers.....
You may wonder why I called this post Sleeping GIANTS, the reason is with so many bashers and media picking up on odd/weird/incorrect valuations of Sprint as worth essentially nothing, AND the stock price being at an utterly ridiculous level, the Sleeping giants of value investors, who do NOT get their information on value from half baked analysts, blog writers and message board bashers.......are awakened...they too know how to use a calculator....
Now the fact of the matter is this points up THE problem with Sprint right now, it is a classic VALUE UNLOCK problem.....the value of the cash and spectrum and network are being dragged down by the debt.....
in other words the debt creates 2 Billion dollars per year in debt service, THAT harms margis unless one cuts costs elsewhere and gets more customers (ie economies of scale).
As I noted in "The COOPERMAN Question" series of 7 posts, it's a catch 22, the debt service cost is high due to operational concerns, and operational concerns are high due to the debt.....
Also as I noted in "TCQ".......there are other costs to be removed, the 2 Billion in debt service, the 1.5 Billion in cost cuts per the CEO on selling/gen/admin and another 2 Billion per year as per the oft discussed NV upgrade savings (that's "cost of service" Balance sheet item going from 4.8 per quarter to 4.3).
What is then left is a VERY profitable Sprint. See The COOPERMAN Question for the full walk through on this, and how I reasonably arrive to a total valuation of 20.00 per share......
But just here in this tread, just the hard assets, I have made a simple and strong case for 9.00 per share value (again, just on Spectrum and cash less debt)......Add the value of a debt free "core" Sprint...and you have a higher figure still.....
What is the network worth? and the 50 Million paying customers, well, the network is on the balance sheet as plant/prop/equip, that figure is 21 Billion dollars.
THAT's 5.25 per share in value........
So wait, that's 5.25 value in the network, plus 3.75 value in spectrum and cash after netting out the debt, that's 9.00 in value...and you STILL haven't even included the fact there are 50 Million customers...yes, that is correct....
And if you use the higher valuation on spectrum you have 5.25 for the network plus 6.25 on a total value per share of 11.50......
Some experts and based on the recent auction feel that the spectrum is worth more. It is arguably also worth more in a "use-based" valuation, note real estate analogies, and cases such as LEAP, who was bought by AT&T for its spectrum. ie. it's Spectrum was more valuable in the hands of AT&T than LEAP, the more Spectrum is put to use, the more valuable it is considered
Call the sprint Spectrum worth 51 Billion (some feel it's even worth MUCH more)
Now you have 51Billion Spectrum less 31Billion debt plus 5Billion cash equals 25Billion
That's 6.25 per share value in hard assets. NOT including the network and 50 Million + paying customers
41 Billion dollars - value of Sprint's Spectrum (balance sheet figure, arguably worth much more)
31 Billion - Debt
5 Billion - Cash
41Billion Spectrum less 31Billion Debt plus 5Billion cash = 15 Billion dollars value
That's 3.75 per share in value in hard assets (just the spectrum and cash)
That's not including the value of the network itself AND 50 Million subscribers.
This brings me back to the unlock of value that IS "The COOPERMAN Question" series of 7 posts plus comments. That is ONE way to unlock value.
When you manage billions of dollars, have a serious decades long rep as a preeminent value investor, and you have opportunity to ask Charlie Ergen a question in the Dish CC, you're going to ask a question that MATTERS.
Look at this exchange as reported in the WSJ:
Analysts, investors and journalists could ask questions on the call and hedge-fund billionaire Leon Cooperman, founder of Omega Advisors Inc., asked Mr. Ergen if Dish has “thought about putting spectrum into a separate vehicle where, if a transaction occurred, that it would be much more tax efficient.”
Mr. Ergen said he has indeed thought about it—and noted that his lawyers were signaling to him during the call not to say too much.
Wow, what a GREAT question. And not sure if Ergen saying that his Lawyers are buzzing in warnings.....does anything but add jet fuel to the curiosity-fire. One HAS to assume THAT question was not idly asked.
What does this have to do with SPRINT. Sprint and Dish have had three ongoing trials of wireless broadband, Ergen has commented that Sprint 2.5 spectrum is tailor made for OTT video, that he is concluding there is a real business there. Dish has long said it wants into mobile. Meanwhile Dish has accumulated much Spectrum, needs to put it into use per FCC regs or risk losing it. Meanwhile Sprint's new NV network is made to accommodate varied spectrum, network sharing deals.
What IF Sprint were to contribute its network/spectrum and Dish its Spectrum into a new separate corporation, a REIT similar to what was done by Windstream . Let's have a look at the Windstream deal, there was news out today on it in fact.
you can also gauge how bad this is for AT&T and VZ by how upset they are about it.....this roaming business is a cash cow for them....
again, I will go on record that while this decision is great for Sprint, but cuts against my basic philosophy on what the gov't should be doing....in other words AT&T and VZ have built their networks, if they can get whatever fees the market dictates, fine, this is incentive to spend money building a network.........but this administration is so far down the road of over-regulation and overreach, it will require a new administration with a whole different philosophy.......I felt they should have allowed the TMUS/S merger...having done so, this new handling wouldn't be necessary......
that's the playing field we have, so OK, this may save Sprint hundreds of millions a quarter
I won't complain too much since this has the potential to be HUGE for Sprint, remember all the times Hesse used to comment on the input costs from Verizon and AT&T.......they've been trying for years to get this changed since it is basically VZ and AT&T goughing....
...the other side of the argument is to let the free market settle it.....and of course that's also what was not allowed when TMUS/S wanted to merge.....why not let the free market handle that decision......it was a close call, so let them do it....
same thing in both circumstances, it's a overriding policy to control the market, pick policy to even it all out.....or suit whatever the gov't thinks should happen..........
like I said they givith and taketh away, this one is givith to sprint and TMUS