Affiliate’s lawsuit delivers another blow to Sprint

Margaret Stafford

Friday, Feb. 28, 2003 | 11:52 a.m.

KANSAS CITY, Mo. -- Telecommunications giant Sprint Corp. already was getting tossed like a dinghy in a hurricane before one of its business partners dumped another bucket of water into the hold.

Earlier this week one of the companies that owns and operates part of Sprint's wireless network charged in a lawsuit that Sprint's financial practices were forcing the partner into bankruptcy.

The company, iPCS Inc. of Barrington Hills, Ill., is demanding that Sprint PCS either be ordered to buy it -- at an estimated cost of hundreds of millions of dollars -- or negotiate a new contract.

By itself, that problem wouldn't be huge, but several other Sprint PCS affiliates also are facing similar financial problems. And for Sprint, it's been a rough winter.

The Overland Park, Kan.-based company's top two executives are being forced out, reportedly over the use of questionable tax shelters they used for stock options. The company's choice for its next CEO is bogged down in a court fight with his current employer, rival BellSouth Corp.

On top of that, overall revenue is flat and Sprint's wireless division continues to lose piles of cash. Last quarter it was $255 million in the red, though earnings from the long-distance and other divisions offset the loss.

Shares in the wireless division have fallen 9 percent this year; stock in the rest of the company is down 10 percent.

Shareholders have sued and more than 15,000 employees have been laid off since October 2001.

"This is just the last thing Sprint needs right now," Jeff Kagan, an independent telecom analyst in Atlanta, said of the iPCS suit. "They are distracted, with a lot of very big issues on their plate. You have to wonder which straw is going to break the camel's back, because they are all big straws."

Sprint PCS's 10 wireless affiliates manage nearly 2 million of the 17 million customers in Sprint's national network.

Sprint set up the affiliate arrangement in the 1990s to cut costs and build its network quickly during the telecom boom. The affiliates pay Sprint a management fee and then receive most of the revenue from subscribers.

Executives at iPCS, which has 235,000 subscribers in Nebraska, Iowa, Illinois and Michigan, said that unilateral changes Sprint PCS made in its contract cost the affiliate tens of millions of dollars and contributed to its bankruptcy filing Sunday.

In a separate lawsuit against Sprint, iPCS claims that the telecom giant arbitrarily added new fees, reduced the rates it paid and forced affiliates to participate in money-losing programs.

Sprint contends iPCS's complaint is without merit, saying iPCS's financial problems are due to its debt load and "have nothing to do with Sprint's actions."

"As a separate and independent business, iPCS is alone responsible for its financial condition," spokesman Dan Wilinsky said. "To blame Sprint for economic conditions and the competitive nature of the wireless industry is ludicrous."

Even so, if other affiliates take similar actions, "it could be a nightmare for Sprint PCS," Kagan said.

"The problem for Sprint was the general strategy in the first place, stringing all these companies together and acting like they are all one company with one name," Kagan said. "The flaw is that if the companies start to struggle, it has a bad impact on Sprint."

iPCS claims its contract requires Sprint PCS to buy the company for 88 percent of its entire business value, which could amount to "hundreds of millions of dollars," said Tim Yager, iPCS's chief restructuring officer.

Yager said Sprint eventually will have two choices -- buy iPCS or "get in a conference room and negotiate, so we can emerge as a restructured company with a better contract."

To stem all the bleeding, Sprint needs to get its management problems solved and then quickly determine a strategic direction, said Tim Horan, an analyst with CIBC World Markets.

"They are going to have to consider getting smaller and more focused, maybe consolidating Sprint and its PCS division, and definitely shoring up their balance sheet," he said.

It also would make sense for Sprint to consider becoming more competitive in the local phone service market, he said.

Sprint offers local service in 18 states, including Nevada, but has generally resisted expanding that service in areas where it would have to rent or buy the necessary infrastructure.

But now Sprint is running tests in 35 states and Washington, D.C., to see if bundling its long-distance, wireless and local service would be financially viable, spokesman James Fisher said.

Now that the Federal Communications Commission recently preserved the ability of companies like Sprint to lease network space in order to provide competitive local phone service, Sprint hopes the tests will help it determine the market and economic viability of doing so. A decision is expected this spring, Fisher said.