Another Blow to Sprint Nextel

The loss of 800,000 Qwest customers to Verizon Wireless comes as spin-off and takeover talk heats up

by Bruce Meyerson and Cliff Edwards

You can still hear a pin drop.

Before long that may be all you can hear around Sprint Nextel (S)—what with regular tidings of customer losses and the prospect that large chunks of its business are up for sale.

On May 5 came news that Sprint's subscriber exodus will accelerate as phone company Qwest Communications (Q) switches to Verizon Wireless to provide mobile-phone calling to more than 800,000 of its subscribers. The decision to drop Sprint is just the latest blow for a cellular company that has stumbled almost continuously since its $35 billion acquisition of Nextel in 2005.

The list of woes is long, starting with millions of lost subscribers due to chronic customer-service complaints. Then there's the share price decline that has shaved two-thirds of the company's market value in less than a year, fueling speculation that the nation's third-largest wireless-service provider might become a takeover target itself. Indeed, on the same day as the Qwest announcement, there were unconfirmed news reports suggesting the German owner of T-Mobile USA is mulling a takeover bid and that Sprint itself is considering plans to sell or spin off the troubled Nextel business.

Against this darkening backdrop, Sprint is putting the final touches on a plan it hopes will lure back customers and shore up investor confidence. Sprint is building a next-generation wireless network called Xohm, based on the so-called WiMAX technology designed to provide speedier mobile Internet connections than those available through archrivals AT&T (T) and Verizon Wireless. An announcement on Xohm is imminent, say people familiar with the matter.

Combining Forces, Like It or Not

Sprint is expected to combine forces with Clearwire (CLWR) on the multibillion-dollar endeavor, with $2.5 billion in financial backing coming from Comcast (CMCSA) and other cable TV companies eager to provide wireless calling among services to their TV subscribers. Intel (INTC) and Google (GOOG) are also expected to be part of the deal.

For a time, Sprint had hoped to go it alone on the new network initiative, but unending setbacks have left the company in financial straits while impatient investors agitate for change. The situation has grown so dire that new Sprint Chief Executive Officer Dan Hesse conceded in February that "this turnaround will not happen for many quarters." Speaking with analysts after the company reported its fourth-quarter results, Hesse said "the issues we face are more difficult" than what he expected to find when he joined the company two months earlier.

It was during that February update that Sprint confirmed a staggering $29.7 billion writedown in the book value of its assets, wiping out nearly all of the value of its $35 billion merger with Nextel. It also suspended dividend payments "for the foreseeable future." Topping it off, Sprint said it had borrowed $2.5 billion from its revolving credit facility to help pay off $2.25 billion in bonds that will mature through 2009. On May 1, credit ratings company Standard & Poor's, which like BusinessWeek.com is owned by The McGraw-Hill Cos. (MHP), reduced its rating on Sprint's debt to junk status.