Friday, February 29, 2008

look very hard at S if it gets a 6 handle

i realize s is in big trouble; but the market i think has punished s almost to the point of interest. i'd be a buyer of 2 year leap calls with a strike at 5 if the stock gets into the 6s. that, i think, would more than discount sprint's troubles, which are many.

sprint's 2005 merger with nextel looks more disastrous by the day. the mobile-phone operator conceded the obvious yesterday by writing down $29.7 billion in goodwill from the deal. its customer dissatisfaction and potential liquidity problems, while serious, may be overstated by the market at this point.

sprint's customer losses have entered dangerous territory - its postpaid subscribers -- who are far more profitable than those who pay up front -- are declining fast. (i'm one of them) in the third quarter, they fell by 337,000 on a net basis. in the fourth quarter, 683,000 bailed out. now the company predicts it will lose 1.2 million in the first quarter, or more than all of last year's decline.

rivals vz, t and t-mobile aren't letting up either. management appears to worry that customer flight may lead to a liquidity crisis. s suspended its dividend and let its share-buyback program lapse. these are sensible measures for a company conserving cash. it also drew down $2.5 billion of its revolving loan facility this week; sprint says it has no need for the liquidity, but it wants to mitigate any refinancing risk on its $400 million of commercial paper and $1.85 billion of bonds that mature in the next 15 months.

the drawdown, dividend cut and $2.2 billion in cash on its balance sheet give it time to staunch its losses. but even ceo daniel hess admits a turnaround will take several quarters and that customer losses won't slow soon. however, i just don't think s will go into bankruptcy. i envision goog taking a big ownership interest in s or maybe even a certain german telecom coming in and buying the whole thing at firesale prices. i think at these prices s presents a very tempting target for a number of european buyers. and i think they'd pay 10 or more a share for it.

disclosure: do your own DD! i'm a buyer in the 6s

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