Sprint and Nextel completed their merger on August 12, 2005. Now Sprint Nextel plans to spin-off Sprint's local telephone companies to shareholders. Sprint's local telephone operations serve approximately 7.7 million primarily rural customers in 18 states.
Sprint Nextel filed applications in August 2005 for approval of the local spin-off in 14 states: Florida, Kansas, Minnesota, Missouri, Nebraska, Nevada, New Jersey, Ohio, Pennsylvania, South Carolina, Virginia, Washington, and Wyoming and a notice of separation in North Carolina. (Sprint Nextel has local telephone companies in Indiana, Texas, and Oregon but has not filed applications in these states.)
Sprint Nextel hopes to keep this important transaction off the radar screen of regulators, public officials, and consumers. Yet, as the facts come out, it is clear that this deal as currently structured is bad for consumers, employees, and rural America.
Sprint Nextel plans to dump a large portion of Sprint's debt onto the local telephone companies. As a result, the local telephone companies will not have the resources to invest in their networks and to maintain adequate staffing levels. Consumers will see already deteriorating service levels decline even more and experience further delays in deployment of high-speed Internet networks.
Regulators should not approve the transaction as it is currently structured. Regulators and public officials must ensure
- Sprint's local telephone companies remain viable entities
- Sprint's local customers receive a payback for local rates they have paid over the years to fund Sprint's wireless and long-distance operations
- Sprint make concrete commitments to maintain or increase staffing levels and meet deployment timetables for broadband
- Sprint transfers all the pension fund and any other assets due local telephone employees
Facts About the Spin-Off of Sprint's Local Telephone Companies
Sprint Nextel Plans to Dump Exorbitant Debt onto its Local Telephone Companies. Sprint Nextel announced it will allocate $7.25 billion in debt to the local telephone companies at the time of the spin-off. (8/15/05 Sprint Nextel Press Release) Immediately after this announcement, Standard & Poor's placed Sprint's local telephone division on "CreditWatch with negative implications."
The $7.25 billion in debt represents a full 42 percent of Sprint's $17.4 billion consolidated corporate debt in 2004. Yet, as of 2003, the last time Sprint publicly reported debt separately for Sprint PCS and Sprint FON (which at the time included the local and long-distance subsidiaries), Sprint assigned $1.7 billion in total debt to Sprint FON, representing 9 percent of Sprint's total corporate debt.
Looked at another way, the $7.25 billion debt allocation is four times more than FON's debt in 2003, even though the local telephone companies are smaller than FON. This high debt load will leave Sprint's spun-off local telephone companies financially weaker than they are today.
Sprint Nextel Ignores Commitments to Regulators. In order to get federal approval for their merger, the CEOs of Sprint and Nextel made a commitment to the FCC that the local telephone companies "will receive an equitable debt and asset allocation at the time of its proposed spin-off" (Forsee/Donahue Letter to FCC, Aug. 2, 2005). Immediately after FCC approval, Sprint Nextel ignored this promise with plans to load 43 percent of their combined debt onto their local telephone companies.
Sprint Used Its Local Telephone Companies as Cash Cows to Fund Wireless and Long-Distance. Now It's Time for Local Consumers to Get Their Money Back. In the years 1998-2003, Sprint's local telephone companies earned $8.7 billion in profits for Sprint Corp. – profits that were used to invest in wireless and long-distance networks, not the local telephone companies. Regulators must make sure that this money goes back to the local telephone companies at the time of the spin-off.
This Deal Will Make Sprint's Poor Service Quality Worse. Sprint's service to local telephone customers has gone from bad to worse; since 1997, repair intervals increased 72 percent, trouble reports are up 22 percent, and repeat trouble reports are up 81 percent. (FCC Armis Reports). If the local companies are loaded down with debt and interest payments, there will be even less money available to invest in the network and ensure adequate staffing to provide quality service.
Important Questions Remain. Sprint has said nothing about the impact of the local spin-off on employment. Will there be adequate staffing? How will the pension fund and other assets be divided? Will Sprint Nextel transfer all pension assets earned by and therefore belonging to Sprint's local telephone employees and retirees? Will the local telephone companies be viable entities – providing good service to customers and careers for the employees who have built these companies? These questions must be equitably resolved before any approval of the transfer.
