Sprint to Buy iPCS Affiliate

Sprint Nextel (S - Analyst Report), the third-largest U.S. wireless carrier, announced the acquisition of its wireless affiliate iPCS Inc. (IPCS - Snapshot Report), which is expected to end the long legal battle between the two entities. Based in Schaumburg, Illinois, iPCS exclusively markets wireless services under the Sprint brand across 81 markets in several Midwestern states
 
The deal represents the latest in a series of acquisitions of its affiliates by Sprint. Acquisition of iPCS leaves just two remaining affiliates (out of the original ten), Swiftel and Shentel. Both of them are small privately-held operators with limited subscriber base.
 
Under the agreement terms, Sprint will commence a cash tender offer to acquire all outstanding shares of iPCS Inc for $24 per share, representing a 34% premium to iPCS’s closing price on Oct 16. Sprint will make a cash payment of approximately $426 million for the acquisition, and will assume $405 million in iPCS net debt. The acquisition is subject to regulatory approvals and other closing conditions and is expected to complete in fourth quarter this year or early 2010.     
 
Since 2005, iPCS has been in litigations as it continued to sue Sprint on the carrier’s acquisition activities including the purchase of Nextel’s business, 51% stakeholding in Clearwire Corp. (CLWR - Snapshot Report) and the impending acquisition of Virgin Mobile USA (VM - Snapshot Report).
 
iPCS Inc has argued that these investments have violated its affiliate agreements with Sprint. The company has also demanded the divestiture of Nextel’s iDEN wireless networks in specific iPCS markets. The acquisition, if successfully consummated, is likely to end all the pending litigations between the two entities and Sprint will no longer be required to divest any of its network assets.
 
Sprint remains significantly challenged by the dismal economic environment which has contributed to the precipitous decline in the subscriber base and associated revenues. In contrast, its larger peers Verizon (VZ - Analyst Report) and AT&T (T - Analyst Report) continue to expand their respective customer bases.
 
Acquisition of iPCS will expand Sprint’s service territories by providing access to a potential subscriber population of 12.6 million, which falls under the affiliate’s netwok coverage. Moreover, Sprint will expand its direct customer base with iPCS’s more than 700,000 wireless subscribers and 270,000 wholesale customers. The transaction is also expected to offer Sprint approximately $30 million in annual synergies and will be accretive to free cash flow in 2010.  
 
While Sprint’s cash resources (approximately $4.6 billion) are adequate to fund the acquisition, assumption of iPCS related debt will further stretch the company’s balance sheet considering its current high debt level.