IHS Global Insight Perspective | |
Significance | Sprint has finally made an offer to acquire litigious affiliate iPCS for US$831 million. |
Implications | This will help to consolidate network operations and put an end to the litigation based on non-compete agreements that iPCS has entered into when Sprint has merged with other businesses. |
Outlook | Sprint would have hoped to pay less of a premium for the affiliate, but this will resolve a number of issues, although doing no favours to Sprint's balance sheet. |
In a move long expected—and likely hoped and aimed for by iPCS—Sprint Nextel has made an offer to buy out the troublesome affiliate. The deal will transfer iPCS' 710,000 direct subscribers and 270,000 wholesale subscribers to Sprint's direct channel, as well as a network covering some 12.6 million people with 1,941 cell sites and a licensed area covering 15.1 million. Sprint will pay around US$831 million, including the assumption of US$405 million in net debt—US$24 per share, a 34% premium on the closing price at 16 October 2009. Sprint expects the deal to create synergies of US$30 million and be accretive to free cash-flow in 2010. The deal is expected to close in the fourth quarter of 2009 or early 2010.
All litigation between the two parties will be suspended with a final resolution on the close of the deal. This will include rescinding the court-mandated sales process for the Nextel network in iPCS territories (see United States: 15 July 2009: Sprint to Sell Off Nextel Markets in iPCS Territories).
Outlook and Implications
Sprint built its network using a string of local affiliates, particularly in rural areas. Later in the development of its network, it began consolidating and buying out these affiliates (see United States: 14 June 2007: Sprint Buys Affiliate Northern PCS for US$312.5 mil.; 19 December 2005: Sprint Nextel Acquires Another Affiliate; and 21 April 2006: Sprint Nextel Agrees to Acquire Wireless Affiliate UbiquiTel for US$1.3 bil.). As an affiliate selling Sprint-branded services with a strongly linked marketing and sales relationship, the disruption caused by the iPCS merger should be minimal.
Wholesale and affiliates have also been the stronger side of Sprint's business in recent years, though latterly this was more heavily predicated on the MVNO wholesale business partners than the remaining facilities owning network affiliates. Sprint bid to acquire MVNO partner Virgin Mobile earlier this year, which will move some 5.25 million subscribers from the wholesale and affiliate segment to the core Sprint business as the process of consolidation continues (see United States: 29 July 2009: Sprint to Buy Out Virgin Mobile USA for US$483 mil. and 30 July 2009: Prepay Provides Ray of Light for Sprint as Subscriber Losses Continue). However, despite the attention-grabbing litigation, iPCS seemed to remain on the shelf.
Sprint Results | ||||||
Q2 2006 | Q2 2007 | Q2 2008 | Q2 2009 | Q2 2007-08 | Q2 2008-09 | |
iDEN Post-Paid | 18,624 | 15,472 | 11,330 | 8,292 | -26.77% | -26.81% |
Net Adds/Losses | 2,008 | -1,063 | -849 | -598 | -4,142 | -3,038 |
CDMA Post-Paid* | 22,781 | 26,129 | 27,575 | 26,145 | 5.53% | -5.19% |
Net Adds/Losses | 294 | 1,080 | 73 | -393 | 1,446 | -1,430 |
Boost Mobile (iDEN) | 3,625 | 4,354 | 3,302 | 4,435 | -24.16% | 34.31% |
Net Adds/Losses | 498 | 70 | -250 | 938 | -1,052 | 1,133 |
Boost Mobile (CDMA) | NA | 102 | 938 | 613 | 819.61% | -34.65% |
Net Adds/Losses |
| 99 | 112 | -161 | 836 | -325 |
Wholesale and Affiliate | 6,700 | 7,958 | 8,714 | 9,341 | 9.50% | 7.20% |
Net Adds/Losses | 100 | 188 | 13 | -43 | 756 | 627 |
Total | 51,730 | 54,015 | 51,859 | 48,826 | -3.99% | -5.85% |
Net Adds/Losses | 2,900 | 374 | -901 | -257 | -2,156 | -3,033 |
Given Sprint's long history of acquiring affiliates, there has been speculation that the continuous litigation emanating from iPCS has at least been partly an attempt to pressure Sprint into making an offer for iPCS. The litigation has mainly been over non-compete agreements that were infringed upon by the various mergers conducted by Sprint, but the litigation history dates back to before the Sprint-Nextel merger when the then-bankrupt iPCS sued Sprint over roaming fees (see United States: 7 April 2004: Sprint PCS Resolves Litigation with Affiliate iPCS).
The merger between Sprint and Nextel itself in 2006 appeared to break non-compete agreements between Sprint and iPCS (see United States: 21 June 2006: FCC Approves Sprint Takeover of Nextel Partners in U.S.). iPCS had the sole right to operate the network under the Sprint brand in the disputed territories, which the Nextel network also covered, albeit with a different network technology and brand name. iPCS has since pursued its case through the courts to assert that the non-compete agreement was valid, while Sprint maintains that a Nextel/iDEN operation did not break the Sprint PCS non-compete agreement (see United States: 22 September 2006: Sprint to Maintain iDEN Network, Appeal iPCS Order and 15 July 2009: Sprint to Sell Off Nextel Markets in iPCS Territories). iPCS also attempted to use the non-compete provisions to hinder the Clearwire WiMAX joint-venture deal and latterly the Virgin buyout (see United States: 18 November 2008: iPCS Drops Clearwire Injunction Attempt and 15 September 2009: iPCS Sues to Block Sprint-Virgin Deal).
This will resolve all litigation between the two entities and allow Sprint to continue with the multitude of plans that iPCS had attempted to stymie. Sprint had likely been hoping that it would be able to hold out until financial pressures pushed iPCS back into bankruptcy. However, iPCS has begun reporting positive free cash-flow and net incomes in 2009, which will have eased the financial imperative on iPCS to sell up. Conversely, with the order to sell off the Nextel Network in iPCS territories reaching maturity on 25 January 2010, time was getting tight for Sprint and buyers for the Nextel/iDEN assets were likely to have been thin on the ground. Sprint has therefore been somewhat forced to offer a significant premium to iPCS shareholders.