Sprint to Pay Ericsson Billions to Manage Network
Page 1 of 1
Sprint Nextel (NYSE: S) said it would pay Ericsson $4.5 billion to $5 billion to manage its network under a 7-year deal in which 6,000 Sprint workers will move to Ericsson. Sprint shares rose 4 percent.
Sprint said it would keep full control of its network after the deal, which is the first of its kind for a major U.S. operator. Sweden's Ericsson said the deal would initially hurt margins but provide "satisfactory" profits over seven years.
The No. 3 U.S. mobile service provider said Ericsson would help improve its network performance more efficiently than it could on its own. It also plans to plow any savings from the agreement into improving its network coverage.
Investors will closely watch for any impact on Sprint's network performance as the service provider has been struggling to stem customer losses partly related to a poor reputation for network quality that it has been working to shake off.
However, analysts said they did not expect the quality of Sprint's wired or wireless network to suffer from the management handover.
"If anything, I think the reverse is true," said Soleil analyst Michael Nelson. "It actually appears that by making this move they're attempting to strengthen the quality of the network. There's always the potential for increased risk when you have a deal of this magnitude but I think its minimal."
Savings to boost network
Pacific Crest analyst analyst Steve Clement agreed that the move would not affect Sprint customers but said it was too early for shareholders to celebrate. "For investors, it will depend on the savings they get from the deal," he said.
Elfman declined to estimate savings except to say they would come from the use of Ericsson's technology and its massive scale as a network services company rather than the transfer of Sprint workers to Ericsson.
Piper Jaffray analyst Chris Larsen estimated that the deal could create savings of 10 percent to 20 percent or $100 million a year based on the mid-point of that range.
But the fact that this is Ericsson's first U.S. network management deal, may mean less savings for Sprint than some investors would have hoped, Clement said.
"I don't think this type of deal will even approach [20 percent]," he said.
To assuage any investor worries about a loss of control, Sprint said it will keep full network ownership and continue to make network investment and strategy decisions itself.
To do this it is retaining about 2,000 employees to work on network-related issues, according to Elfman who told reporters that it took about a year to put the deal together.
Sprint and Ericsson said the agreement would not result in any workforce reductions because the transferred employees would become part of an Ericsson subsidiary based in Overland Park, Kansas, where Sprint's headquarters is located.
Ericsson profit "satisfactory"
The job transfers to Ericsson Services Inc are expected to occur late this quarter, the companies said.
While Ericsson has a lot of experience as a network manager and already runs networks supporting about 275 million customers, this will be its first time running a network based on CDMA, the mobile technology used by Sprint.
"Strategically it's an important deal" for Ericsson, said Credit Suisse analyst Kulbinder Garcha. "It's the first services deal in the U.S. and the first with a CDMA carrier."
He said it wasn't clear how the deal would affect Ericsson's margins in the short term as it was obviously competitively priced and involves 6,000 new employees.
"The question we all have is what impact this has on Ericsson's profitability in the second half of this year and next year," Garcha said.
Jan Frykhammar, the head of Ericsson's global services business, said he expected the deal to help Ericsson expand in North America and that the margin impact would be short-lived.
"We only enter these projects that are profitable to us. A partnership like this has an impact on margins initially but over the life cycle the profitability of a deal like this is satisfactory," Frykhammar said on an analyst conference call.
Sprint closed up 17 cents, or almost 4 percent, at $4.46 on the New York Stock Exchange. Ericsson's U.S. shares rose 2 cents on Nasdaq at $9.43.