Cash crunch for wireless players?

Sprint PCS is viewed as a bellwether for the wireless industry, given its huge growth in recent years. Like other aspiring wireless companies, Sprint PCS could be caught between its ambition to continue to build its large network to attract more customers and its need to fill its coffers--a position it shares with other emerging nationwide wireless players such as Verizon Wireless and Cingular Wireless, among others.

All of Sprint PCS' designs on supremacy in a fiercely competitive market might come to nothing for one reason: cash. Parent corporation Sprint, which includes Sprint's wireless and long-distance divisions, estimates its total cash requirement for 2001 is about $5 billion, which it intends to raise by a $3 billion offering of PCS stock and $2 billion in debt from both companies.

"If they raise more debt, their credit rating will probably be downgraded. If they make an equity offering, they are going to dilute the hell out of their shares," said Frank Marsala, an analyst at ING Barings.

Jim Veneau, a senior analyst at Moody's Investor Service, agreed that there could be a dilution problem with a Sprint PCS equity offering, adding that a separate debt offering from PCS could merit a downgrade.

A Sprint PCS representative said the company declined to comment on the company's cash needs, citing the quiet period in advance of earnings scheduled for Feb. 1.

Since being set free from long-distance stalwart Sprint and using a separately traded stock, Sprint PCS has vigorously gained clout as a leading wireless provider in a rapidly evolving market by aggressively tapping new markets outside of the voice arena. The company recently announced a deal with Palm that will enable customers of older Palm devices to access the wireless Internet and award Sprint PCS more wireless data users in a prized market.

The company also recently reported that it has built its wireless Web service to about 1 million customers, or 500,000 paying subscribers, with the remainder regarded as free trial or casual users.

But the downturn in the markets has caused a capital crunch, whereby investment dollars have dried up for many companies and gravely affected many communications carriers, ranging from long-distance giants to high-speed Internet start-ups.

The infrastructure costs for wireless carriers such as Sprint PCS, Verizon Wireless, Cingular and others are as high as for any communications company. Wireless carriers are furiously expanding their networks to patch holes in their coverage and to attract customers as quickly as possible.

The capital markets recently have brutalized Sprint PCS shares. Sprint now trades around $28, much closer to the stock's 52-week low of $17.62 than to its high of $66.93.

"PCS (stock) has recovered from its low point, but because it's significantly off its high point, I would think there needs to be some more recovery" before an equity offering, said Moody's Veneau.

Analysts predict an intensifying capital crunch as Verizon Wireless and Cingular plan IPOs for 2001, along with AT&T, which plans to spin off the majority stake it owns in AT&T Wireless. Japan's NTT DoCoMo might also visit the U.S. capital markets this year.

Many Wall Street watchers wonder how much wireless the markets can stomach after such a tough year for tech stocks. "There's plenty of paper coming, so there's a supply issue," said Bill Benton, an analyst at William Blair.

This puts Sprint PCS in a bind. The company must acquire customers to stay in the good graces of Wall Street, but that requires cash, which investors will not fork over.

Technology advantage?
Yet industry analysts say Sprint has some strong advantages over its competition. Sprint has invested much time and resources over the past two years to build a nationwide digital CDMA (Code Division Multiple Access) network.

Analysts generally believe CDMA is more efficient in some ways than the other major types of wireless technology, GSM (Global System for Mobile Communications) and TDMA (Time Division Multiple Access). CDMA allows more voice information to be packed into a given amount of spectrum than the other types of technology.

Another advantage is that Sprint built its entire network on 1900MHz frequency, compared with Verizon, which maintains a combination of 1900MHz and 800MHz digital networks as well as analog connections.

This makes Sprint's network cheaper to manage because the company requires less equipment on each of its wireless towers and less personnel to maintain it. The lower operating costs translate into greater pricing flexibility.

Analysts also believe the uniform 1900MHz network makes it easier for Sprint to upgrade to next-generation technology, often called "3G."

Explanation necessary
But the central issue remains Sprint's cash dilemma. Sprint does have some options in this arena. "They have a valuable portfolio of towers they could sell to help meet their cash requirements going forward," said Mark DeRussey, an analyst at Raymond James.

Analysts say Sprint could sell the tower structures and the land surrounding them to tower maintenance companies and pay rent for the right to keep their equipment on those towers.

At the end of the third quarter of fiscal year 2000, Sprint owned approximately 4,600 towers, and DeRussey has seen deals that value a tower at between $300,000 and $400,000.

The company would be selling part of its assets, but the wireless industry is beginning to regard towers as nonstrategic assets it can trade to concentrate on more vital technology-oriented battles. "Operators are focusing on the core competencies of acquiring and retaining customers," DeRussey said.

This is a game that Sprint is well-positioned to win because it is making great efforts to break into new markets. The company's distribution pipeline is sizable. At the end of the third quarter, consumers could purchase Sprint phones at about 13,000 retail locations in addition to the 260 company-owned stores.

But it will mean little if the success does not translate into profit. Sprint is "getting bigger and still doesn't have any meaningful cash flow," said Fred Moran, an analyst at Jefferies. "They will have to answer to Wall Street about that."

News.com's Corey Grice contributed to this report.