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Sprint struggles with growth after merger collapse

Fresh from the collapse of what could have been the biggest merger in history, the long-distance company is trying desperately to prove it still has a promising future.

    Fresh from the collapse of what could have been the biggest merger in history, long-distance company Sprint is trying desperately to prove it still has a promising future.

    The company's share price has plummeted from an enviable peak to a two-year low in just a few months, following the demise of its planned merger with WorldCom. Analysts are taking a look at what's left in the formerly high-flying company as an independent stock, and many don't like what they see.

    "What do they really have?" asked S&P Equity Group analyst Philip Wohl, who recently downgraded the company's core stock. "They have a bunch of long-distance, which is hurting, and they have some Internet assets, which see story: WorldCom-Sprint merger disconnected don't generate much revenue. What else?"

    Sprint isn't alone in its Wall Street woes, of course. Many other communications carriers, particularly long-distance providers AT&T and WorldCom, have seen their shares slump. Others including BellSouth, Global Crossing and Verizon Communications also have stumbled this year.

    Sprint executives said the entire industry--not just Sprint--has been hammered by investors. They quickly point to Sprint PCS, the company's wireless unit, as evidence of strong growth.

    Nevertheless, these industry-wide concerns have been exacerbated by Sprint's own recent history.

    The company's on-again, off-again merger history has burned some investors, who see an uncertain future ahead. Few prospective suitors remain now that WorldCom is effectively barred from buying the company and after Deutsche Telekom opted instead to purchase VoiceStream Wireless. Baby Bell local phone company BellSouth, which was outbid by WorldCom for Sprint's hand last year, is another possible suitor, but some analysts have recently dismissed this as a realistic proposition.

    Behind these considerations is the fact that profit margins for consumer long-distance service--still Sprint's main business--are at their lowest point ever for most of the major players. For example, AT&T has struggled to recoup its lower long-distance profits, and WorldCom last quarter said its wholesale and consumer revenues grew just 1 percent.

    Investment bank PaineWebber lowered its earnings per share estimate for Sprint last week based in large part on lower long-distance revenue growth and profit margins. PaineWebber believes the lack of apparent suitors for Sprint also is dragging the stock lower and therefore reduced its price target to $41 per share from $45, while maintaining its "neutral" rating on the stock.

    "While we do see value in shares of (Sprint)...there are no obvious buyers for Sprint in the near term now that Deutsche Telekom has agreed to buy VoiceStream," PaineWebber analyst Eric Strumingher wrote in a report.

    Until Sprint is able to show serious revenues from its high-speed ION network, the company's stock isn't likely to jump back up, Strumingher added.

    Damage control
    Watching the value of their core company plummet, Sprint executives are doing their best to rebuild investors' confidence. Much of the market's fear is temporary, stemming from a sell-off by investors who bought Sprint stock under the assumption it would merge with WorldCom, they said.

    Executives said Sprint PCS, the company's coveted wireless unit that trades under the "PCS" ticker symbol, in many ways has offset any declines in the core long-distance business, which trades as "FON," for investors. That unit today has a market valuation almost twice that of the parent company.

    "You've got to remember that Sprint is not just FON," said Kurt Fawkes, vice president of investor relations. "PCS has been one of the better growth stories for a long time."

    Fawkes also noted that Sprint is free to reinvest its capital in high-growth areas that may have been neglected so as not to duplicate areas of coverage with WorldCom.

    "We need to get the FON group growing again to get over investor sentiment about long-distance," he said. "We may have delayed (digital subscriber line) deployment. There were areas where we under-invested or deferred investment, which will see more attention now.

    "I think you'll see Sprint invest its capital to get more top-line growth," Fawkes said.

    Silver linings?
    Despite the recent downturn, some analysts note that the company still stacks up well against the competition, even if its perception in the financial markets has suffered over its series of failed deals and merger rumors.

    see story: Telecom shakeout brings merger frenzy For example, Sprint today filed applications with federal regulators to deliver local voice and Internet services in 45 U.S. markets via fixed wireless technology. Fixed wireless systems carry data at high speeds through radio waves, rather than through fiber-optic or copper wires. The approach is similar to that of AT&T, which has invested heavily in cable TV systems to deliver local voice and high-speed Net access as a means for offsetting falling long-distance profits.

    "It may not have the glimmer that a lot of start-ups have, but you know that the company will deliver what it says it will deliver," said Jilami Zeribi, an analyst at research firm Current Analysis. "At the end of the day, I think it could make a credible run against any competitor in this country."

    Analysts say that Sprint's wireless unit, Sprint PCS, and the company's strong overall brand name are among its biggest assets. But the demise of Sprint's Global One joint venture has left a gaping hole in its international reach.

    "Everyone's biggest see story: Telecom belle: VoiceStreamgrowth drivers right now are wireless, the Internet and international. With Sprint, wireless is a separate unit. They have a little Internet and virtually no international," S&P Equity's Wohl noted. "So you have one out of three."

    Still, some say Sprint has more resources than many competitors and that its problems aren't so significant that the company won't bounce back.

    "None of these are life-ending problems," Zeribi said. "(Sprint is) far from badly positioned to catch up."'s John Borland contributed to this report.