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Tuesday, May 6, 2008

Nextel better off on its own?

Sprint Nextel (S) has been in the news quite a bit lately. First, there is news that Deutsche Telekom might make a bid for the company. Then we hear that Sprint may be seeking to spin off Nextel. The latest news is that the Sprint Clearwire (CLWR) WiMax combination is on again with backing from a number of big players.

In all the discussion, most writers take pains to point out what a disaster the original Sprint-Nextel merger has been. The finger is usually pointed at Nextel which has established a dismal trend of losing customers and is now embroiled with the FCC in a disagreement over how to handle network interference with radios used by police and firefighters.

Do Nextel's problems indicate something inherently wrong with the franchise or are these problems the result of the merger?

It may be instructive to look at how the Nextel brand is doing in a situation that doesn't include Sprint.

NII Holdings (NIHD) is a company I have written about before (read earlier post). The company essentially provides Nextel service in Latin America using the same Motorola iDEN technology and the Nextel brand.

Where Nextel's U.S. customer base declined by 2.8 million in 2007, NII Holdings saw their customer base grow from 3 million to over 5 million at latest count.

On April 4, NII Holdings announced that its first-quarter net profit rose 35% to $113.6 million, or 65 cents per share, from its year-ago profit of $84 million, or 47 cents per share. Analysts had predicted a profit of 63 cents per share. Operating revenue climbed 39% to $993.2 million as the company added 321,700 subscribers.

Profitability for the Nextel segment of Sprint Nextel? The company is not breaking Nextel out separately; it is lumped into the wireless category. What we see is that in the fourth quarter wireless segment revenues experienced a 2% sequential decline and a 6% decline from the fourth quarter of 2006. Adjusted Operating Income was $168 million in the fourth quarter, compared to $514 million in the third quarter and $652 million in the fourth quarter a year ago. Suffice to say that these numbers are not pretty.

Conclusion --

Nextel's best chance to prosper may indeed be if Sprint spins it off on its own. The success of NII Holdings indicates that Nextel has a viable product and a viable brand. The problem is that here in the U.S. the brand has been eroded. The confusion of trying to combine the Sprint and Nextel networks has served neither company well.

With Nextel's easy to use push-to-talk technology still a product differentiator there could still be a place for the company in the U.S. telecom market. Perhaps it won't be the biggest player but, by concentrating on core markets that value the technology Nextel offers, they could return to profitability and reverse the exodus of customers.

This is not to say that an acquisition by a company that understands and supports the brand might not also result in a positive outcome. It is not clear that Sprint did anything other than try to buy Nextel's customer base. An acquirer with deep pockets could provide the capital needed to get Nextel moving, straighten out the back-end technology issues that will surely result from splitting from Sprint and begin to drive a marketing plan to return Nextel to the public's good graces. There is still potential in the Nextel brand and product.

Disclosure: at time of writing author is long NIHD but has no position in S

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