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Sprint (S) Plans to Double $3.5B Spectrum Leaseback Deal

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Sprint Corp. (S - Free Report) plans to increase its spectrum leaseback transaction to $7 billion in order from $3.5 billion to pay off higher interest bearing loans. This October, Sprint announced a spectrum leaseback transaction to ease liquidity pressure on its balance sheet.

The wireless carrier plans to sell 14% of its spectrum assets to a wholly owned entity. Sprint will then lease back the same under a long-term agreement. The proceeds from the sale will help Sprint clear higher interest bearing loans which will improve the financial condition of the company. The airwaves in consideration for the transaction include those in the band of 1.9 Giga-hertz (Ghz) and 2.5 Ghz and are valued at around $16.4 billion. Although the total proceeds of the transaction will stand at $7 billion, Sprint may benefit through lease payments which will be lower than that of the market.

Will It Reduce Liquidity Woes?

Sprint is not new to such complex sale and leaseback transactions. Notably, in 2015, the company entered into a similar arrangement with another Special Purpose Entity (SPE), Mobile Leasing Solutions, LLC, for $1.1 billion in cash. Back then, Sprint had gone for aggressive mobile leasing plans to draw 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 the company lower equipment costs and free up resources to focus on new growth opportunities. However, intense competition in the U.S. telecom market from rivals like Verizon Communication Inc. (VZ - Free Report) , AT&T Inc. (T - Free Report) and T-Mobile U.S Inc. (TMUS - Free Report) has impeded the company’s strategic efforts, severely affecting its liquidity position. The company, as a result, has a debt-laden balance sheet now.

Price Performance of Sprint

Year to date, the Zacks categorized U.S. wireless industry has registered impressive growth of 14.56%. However, the stock price of Sprint has outperformed the industry mark. Notably, Sprint has registered growth of 122.38% in the same time period.

We believe efficient usage of capital, reduction of cell sites, elimination of dual networks, backhaul efficiencies, reduced churn, lower roaming charges and energy cost savings bode well for Sprint’s long-term growth.

The Bottom Line

The sale and leaseback arrangement will help the company generate the cash it needs to expand its business. Although Sprint may incur higher operating expenses in the process, the tradeoff between lower lease payments and higher interest savings is sure to add value to Sprint.

Sprint presently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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