10-Minute Investment Autopsy No. 18: Sprint (S)
A telecom giant that illustrated the perils of a messy mega-merger
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here.
The Original Thesis
Who: Bill Miller and me
When: June 2005 and June 2006
What: Sprint Nextel (ticker: S)
The Thesis:
Economics of telecom are undergoing rapid change
The market is underestimating the benefits of wireless consolidation to a structure where 3 players are controlling 75% market share
Sprint Nextel is the 3rd largest wireless company and overall telecom provider in the U.S.
The company has a differentiated product offering with a clear technology path
Cost cutting synergies from the merger should be north of $500M per year
Bill bought more shares after Sprint Nextel shares declined post-merger in 2006
He did not believe that things had changed and therefore perceived the lower price increased his future IRR
He believed that the market was too focused on short-term operating metrics and that progress at the company would be non-linear
The shares, at 5.5x EV/EBITDA are trading at a big discount to other subscription-based companies whose stocks trade in the 8-9x range
In June 2006 Bill believed that Sprint’s private market value, conservatively estimated, was 50%+ above the then-current price
These are the highlights of Sprint Nextel’s then-recent financials up to the point when Bill was presenting his thesis:
This is the stock chart up to the time when Bill presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Over the 5 years following Bill’s 2006 interview, Sprint’s stock was down 74% vs. +14% for the market
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread