Sprint, LightSquared Deal in Doubt

The 11-year deal between Sprint Nextel Corp. (S - Analyst Report) and the privately held LTE provider LightSquared seems to be fading, as GPS spectrum interference issues for the latter are not yet resolved.

Last July, Sprint collaborated with LightSquared to host the latter’s spectrum, providing network services and giving LightSquared roaming access to Sprint’s 3G network. The deal could lessen the load on Sprint’s network as the demand for wireless data is growing rapidly. However, LightSquared has been under the scrutiny of several government agencies due to possible network interference. As a result, Sprint cannot use LightSquared network until it is resolved. While the initial deadline was December 2011, Sprint extended it twice to March 15, 2012.

Now, LightSquared is again expected to fail the deadline for obtaining the approvals. As a result, Sprint will terminate its agreement for building a LTE network with LightSquared.

Facing neck-to-neck competition from AT&T Inc. (T - Analyst Report), Verizon Communications (VZ - Analyst Report) and Clearwire Corp. (CLWR - Snapshot Report), the loss of Sprint’s contract would raise concerns on the viability of LightSquared.

Coming to Sprint, the failure of the deal will not affect the company as it extended its network-sharing deal with Clearwire. The company would use the unlimited WiMax network of Clearwire to support its 4G services over the next two years (i.e. 2012 and 2013).

The third-largest U.S. wireless carrier plans to launch its own LTE networks in the 1.9 GHz band in mid 2012 and expects to complete the deployment by year-end 2013. Initially, LTE services will be deployed in six markets including Atlanta, Baltimore, Dallas, Houston, Kansas City and San Antonio. The LTE coverage is expected to extend to more than 250 million customers by 2013.

Nevertheless, the Clearwire deal raises Sprint’s payment commitments that would dilute it free cash flow over the next two years. Sprint, which owns a hefty 54% stake in Clearwire, would pay $926 million over the next two years. In addition, Sprint would also make prepayments of $350 million for LTE capacity, provided Clearwire meets certain build-out targets by June 2013.

We currently maintain our long-term Neutral recommendation on Sprint. For the short term (1–3 months), the stock retains a Zacks #3 (Hold) Rank.