Sprint Nextel Corporation
(NYSE: S) shares rose sharply today after the rumor mill shifted into
over-drive and suggested that the company may be interested in spinning
off Nextel. The speculation stems from the fact that the telecom
company will likely have to write-off most of the remaining $30.7
billion in non-cash goodwill value from its $35 billion ill-fated
acquisition of Nextel and its affiliates. Indeed, the acquisition has
proven to be nothing but problems as Sprint stock lost more than 60
percent of its value trying to integrate the two companies. So, does
this rumor have any merit and what would it mean for shareholders?
The idea of a Nextel spin off should come as that much of a
surprise. Activist investor Ralph Whitworth was appointed to the board
in February and there has been much talk that he would push for drastic
changes. Whitworth’s Relational Investors owns a 2% stake in the firm
and has been critical of Sprint’s poor performance. In particular, he
was very concerned about the company’s plan to spend $5 billion or more
on its WiMax initiatives. Instead, the investor hinted that the company
pursue other initiatives aimed at unlocking value instead of building
expenses.
The Nextel acquisition itself was ill-fated from the very beginning.
Sprint experienced a massive customer migration to competitors Verizon Wireless (NYSE: VZ) and AT&T Inc.
(NYSE: T) shortly after the merger thanks to technical problems,
unfocused marketing and difficulty in combining the two very different
company cultures. Shareholders who are already stinging from a $29.7
billion write-down in the fourth quarter are surely ready to get rid of
this dog before it attracts more fleas.The idea of a spin off is
appealing because it could end up solving all of these problems.
The other big reason to spin off Nextel is to make Sprint a cheaper
stock. Merrill Lynch analysts are suggesting that Deutsche Telekon,
which owns T-Mobile, may be interested in acquiring Sprint in order to
block a price war in the mobile phone industry. A spin off of Nextel
would make Sprint a much cheaper purchase with far less of a burden and
may increase the likelihood of such a deal. The only downside is that
Sprint would be getting a bad price for the Nextel business given the
poor market. In the end, this is definitely an interesting situation
that is worth following!
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