There have been times when Dan Hesse, the CEO of Sprint Nextel (NYSE:S), seemed like corporate America’s answer to Harry Houdini. Time and again, both men eluded what appeared to be certain demise. Unfortunately, the legendary magician’s luck eventually ran out when a punch to his stomach caused an aggravated appendix to rupture, leading to a fatal infection. Hesse’s fate as CEO likely will not be quite as grim, but his efforts to keep his faltering telecom company afloat do appear to be doomed.
Shares of the firm tumbled to their lowest levels since 2008 on July 28 (until Tuesday, that is), when the mobile phone carrier reported dismal second-quarter results that missed consensus forecasts. The lowlights included the Nextel network’s loss of 101,000 monthly-contract customers, and an $847 million loss on the balance sheet. As Bloomberg News noted, this represented a reversal from the fourth quarter, when Sprint gained customers for the first time in more than four years. The company’s difficult second-quarter came despite marketing outlays of about $120 million.
To be fair, Hesse inherited a sinking ship when he was named the head of Sprint in 2007. He deserves credit for improving the company’s then-lousy customer service, but his bet on high-speed, 4G coverage has not delivered the bonanza he had hoped for. One reason is that every other company has the same idea. Some 15 4G devices were introduced at this year’s Consumer Electronics Show in Las Vegas.
Sprint’s potential for growth is constrained. The company, which had been left at the iPhone altar, may be allowed to sell the iPhone 5 this fall, according to analyst predictions. That would be nice, of course, but about three years too late. Sprint likely will need to spend a fortune subsidizing the smartphone, as have AT&T (NYSE:T) and Verizon Communications (NYSE:VZ). Moreover, Sprint would probably have to offer steeply discounted plans to entice customers away from its largest rivals.
Sprint’s other huge challenge is AT&T’s proposed acquisition of T-Mobile USA, which is owned by Deutsche Telekom (PINK:DTEGY). That deal, Hesse said, would stifle innovation. The telegenic CEO is going for broke. He has said that if Sprint fails to derail the deal, he would have to find a buyer for his company. Many experts say he is right.
Based in Overland Park, Kansas, Sprint is the nation’s third largest wireless carrier, with 51 million customers. Combined, AT&T and T-Mobile would have about 137 million and Verizon Wireless, a joint venture of Verizon Communications and Vodafone Group (NASDAQ:VOD), has about 104 million. The size difference is too large to make up with an iPhone 5, 4G service, or even 25G service for that matter.
Sprint’s days as an independent company are numbered. According to Bloomberg News, the most likely buyer would be Centurylink, though other buyers, including Comcast (NASDAQ:CMCSA), may emerge. A deal between Verizon and Sprint – which had been discussed – would probably face antitrust scrutiny, experts have said. Perhaps a foreign telecom provider might take a chance on Sprint as well.
Hesse is an affable, telegenic CEO, a master at saying the right thing. And as he told Marketplace radio earlier this year, Sprint’s “goal isn’t to be biggest, it’s to be best, and best isn’t necessarily biggest.”
That sounds great, of course, but it isn’t realistic. Wall Street is not going to back the third-place horse in a three-horse race.
– Jonathan Berr does not own any securities listed here.
