Sprint Posts $29.5 Billion Loss on Nextel Writedown (Update9)

Feb. 28 (Bloomberg) -- Sprint Nextel Corp., the third- biggest U.S. wireless carrier, posted a $29.5 billion loss and scrapped its dividend after writing down most of the Nextel Communications Inc. acquisition from two years ago.

Sprint sank as much as 13 percent in New York trading and its credit-default swaps reached a record. The company reported a fourth-quarter net loss of $10.36 a share. Sales fell 5.7 percent to $9.85 billion, missing analysts' estimates, and the carrier borrowed $2.5 billion under a credit line.

The writedown put Nextel's value at 80 percent less than when it was acquired and the loss is the fifth-largest among Standard & Poor's 500 Index companies since 1990. Sprint expects 1.2 million subscribers to leave this quarter, as many as it lost in all of 2007. Chief Executive Officer Dan Hesse, who took over in December, said business is deteriorating.

``We need an articulated strategy of how he's going to turn around the business,'' said Michael Nelson, an analyst at Stanford Group Co. in New York who had predicted subscriber losses of 400,000 this quarter. He advises holding the shares. ``I don't expect it to be a pretty picture.''

Sprint, based in Overland Park, Kansas, fell to its lowest level since October 2002. The stock dropped 86 cents to $8.09 at 4 p.m. on the New York Stock Exchange and earlier reached $7.75, its steepest percentage decline since Jan. 18. The shares had fallen 32 percent this year before today.

Price War

``We will have a difficult 2008 as we turn this ship around,'' Hesse, the 54-year-old who came in when Sprint ousted Gary Forsee, said on a conference call. ``This turnaround will not happen for many quarters.''

Subscriber losses, triggered by complaints of dropped calls and poor service, ballooned to the most since the Nextel purchase and probably won't ease in the second quarter, Sprint said. If it loses an additional 1.2 million users, the carrier will have shed 5.9 percent of its contract subscribers by the end of June.

To win back customers, Hesse today announced an unlimited calling plan for $89.99 a month, including text messaging and walkie-talkie calling in addition to regular phone calls. That escalates a price war that started last week, when bigger rivals AT&T Inc. and Verizon Wireless unveiled $99.99 offerings. Sprint will sell a $99.99 version with Web access, television and music.

``It's a smart, conservative move,'' said James Moorman, an equity analyst at Standard & Poor's in New York who advises holding Sprint shares. ``It's a differentiator.''

Writedown

Sprint wrote down $29.7 billion of the $36 billion purchase of Nextel and related companies. The expenses reduce its goodwill, the premium paid in an acquisition for reputation, customers and other intangible assets.

Leaving out items such as the writedown, profit was 21 cents a share, topping the 18-cent average of estimates compiled by Bloomberg. A year ago, net income was $261 million, or 9 cents.

Big mergers often haven't provided the gains companies were seeking, and telecommunications and media purchases have provided some of the most stark examples.

The $124 billion combination of Time Warner Inc. and America Online Inc. in 2001 caused $100 billion in writedowns. Time Warner recorded a $54.2 billion loss in the first quarter of 2002, the largest among S&P 500 companies since 1990.

Deutsche Telekom AG, Europe's biggest phone company, took 21.4 billion euros ($32.5 billion) of writedowns in 2002 to cut the value of mobile-phone assets. Vivendi SA wrote down the value of entertainment, TV and music units by 18.4 billion euros for 2002.

`Prudent Step'

Sprint borrowed $2.5 billion under a revolving credit line, in part to mitigate financing risk related to $1.25 billion in bonds that mature in November, $400 million in commercial paper and $600 million of bonds that mature in May 2009. Sprint has about $500 million left under the revolving credit line.

``Not knowing what the future holds, we just thought it was a good, prudent step to take this action now,'' Hesse said in an interview.

The carrier, which had paid a 2.5-cent quarterly dividend, had $22.1 billion in total debt at year-end. After the report, Standard & Poor's and Moody's Investors Service said they may cut Sprint's credit ratings to junk levels. Sprint has a Baa3 rating from Moody's and a BBB- from Standard & Poor's.

The forecast for more subscriber losses prompted Fitch Ratings Ltd. to downgrade the company's debt one level to junk status.

Sprint's Bonds

Sprint's $2 billion of 8.75 percent bonds due in 2032 fell about 13 cents to 80.5 cents on the dollar at 5:06 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 11 percent, or 658 basis points more than similar-maturity Treasuries, up from a yield of 9.4 percent and a spread of 475 basis points yesterday, Trace data show. A basis point is 0.01 percentage point.

Credit-default swaps tied to Sprint's bonds soared to the highest on record, a signal that debt-market investors are growing concerned about the company's ability to repay its debt. The contracts climbed 254 basis points to 628 basis points, according to London-based CMA Datavision.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A drop shows improvement in the perception of credit quality; an increase, the opposite.

Acquisition Unlikely

While Sprint shares have declined, the company probably isn't a good target for an acquisition, said William Power, an analyst at Robert W. Baird & Co. in Dallas. U.S. rivals would have to contend with antitrust laws, and private-equity companies couldn't stomach such a large purchase, he said.

Comcast Corp., which offers digital home-phone service, isn't interested in buying Sprint, Chief Executive Officer Brian Roberts said Feb. 14.

``Could you have an overseas buyer? Maybe, but that's pretty speculative,'' said Power, who is neutral on Sprint shares. ``Unless there's something particularly compelling, you're going to want to give that management team a chance to turn around the business.''

Sprint said first-quarter operating income, a measure of profit that leaves out expenses such as interest, will be $1.8 billion to $1.9 billion.

Subscribers on long-term contracts spent $58 a month on their bills last quarter, down from $60 a month last year, as prices fell for voice calls. Churn, the percentage of users who scrapped the service, remained unchanged at 2.3 percent.

San Antonio-based AT&T lured 1.2 million contract customers last quarter with handsets such as Cupertino, California-based Apple Inc.'s iPhone. Verizon Wireless took 1.6 million.

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net.

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net.