Sprint Uses Creative Financial Engineering and Alchemy to Raise Cash
When investors hear the terms “financial engineering” or “financial alchemy,” the first thing that might come to mind is borrowing money to buy back stock to drive up earnings per share. But another form of financial alchemy, which is of course perfectly legal and ethical, is the so-called sale-leaseback plan. Generally a company will sell its buildings or land and lease it back. In the case of Sprint Corp. (NYSE: S), it is doing a sale-leaseback — but on phones and mobile devices rather than real estate.
Sprint announced Friday morning that it has signed a $1.2 billion deal for the sale and leaseback of certain leased devices to a newly formed entity named Mobile Leasing Solutions. The company said that the effort will create a repeatable structure to sell future leased devices with a strong combination of financial and strategic parties supporting the transaction. Sprint even said that it has amended its existing receivables facility to include lease receivables and expands total capacity to $4.3 billion.
Sprint also decided to issue some guidance for 2015 in the release. The previous expectation for adjusted EBITDA was $7.2 billion to $7.6 billion, but the new structure here in this deal takes the 2015 adjusted EBITDA guidance to be between $6.8 billion to $7.1 billion.
So, what does Sprint get from this? Friday’s announcement was said to provide Sprint with roughly $1.1 billion in cash at the closing, and it is expected to close in the first week of December. The company said that the cash proceeds are part of approximately $1.2 billion in total consideration that are expected to be exchanged for approximately $1.3 billion of leased device assets.
The transaction is said to immediately improve the company’s liquidity position, and Sprint noted that the funding comes at an attractive cost of capital, well below Sprint’s alternatives in the high-yield debt market.
What investors need to consider here is that Softbank is the majority owner of Sprint. That ownership almost makes Sprint a tracking stock — almost. Now think about the new entity, Mobile Leasing Solutions. The press release confirms that it was formed by a group of equity investors that includes SoftBank.
The news release said that Mobile Leasing Solutions has secured debt financing from several lenders, including international banks and leasing companies. It said:
Brightstar Corp. through its Financial Services Business provided support in structuring the transaction, including assisting in the formation of Mobile Leasing Solutions, LLC which is utilizing Brightstar’s Lease Management and Tracking System. Brightstar has also been contracted to provide reverse logistics and device remarketing services, which will include a forward purchase agreement that is being finalized with Foxconn, thus minimizing the downside risk of future changes in device residual values.
Sprint Chief Financial Officer Tarek Robbiati said of the transaction:
Sprint and SoftBank have worked together to create a unique structure that advances a very high percentage of the total value of certain devices leased to our customers, including the device residual values. Providing mobile devices to customers is the biggest use of cash in the carrier model and with this new structure we have more closely aligned Sprint’s cash flows with those associated with leasing devices to our customers.
As far as how this $1.2 billion or so compares to the big picture here, Sprint’s September 30, 2015, balance sheet had almost $2.1 billion in cash and short-term investments, over $2 billion in receivables and almost $900 million in inventory. The big issue for the balance sheet is the more than $32.5 billion in long-term debt plus additional liabilities.
Apparently the investor community is not giving Sprint much credit for this transaction either. Sprint shares were indicated up one cent to $4.06 shortly after the open. The stock has a 52-week range of $3.10 to $5.45.