Sprint Nextel Ready To Spin Off Embarq To Focus On Wireless (Investor's Business Daily)

As Sprint Nextel gets ready next week to spin off its wireline local phone business named Embarq, its faster-growing wireless business has hit a bump in the road.

In the first quarter, Sprint Nextel (NYSE: - )added 1.34 million net new subscribers, but major rivals Cingular and Verizon Wireless each added more than 1.7 million.

More worrisome, say analysts, is that Sprint Nextel's average monthly revenue for customers who are billed monthly fell 4.5% from the year-earlier quarter to $62.

More than a third of Sprint Nextel's new customers last quarter signed up for its prepaid service, called Boost Mobile. Boost customers spend only $36 per month.

Analysts say Sprint Nextel seems to be adding lower-profit prepaid subscribers rather than high-spending business customers, which has been Nextel's strength. Sprint and Nextel merged last year.

"Since the merger, the wheels have fallen off somewhere -- and it's likely that it's on the Nextel side," said Roger Entner, an analyst with research firm Ovum.

Sprint has "lost momentum on the Nextel side," said David Janazzo, a Merrill Lynch analyst.

"Sprint Nextel will continue to struggle with a deteriorating wireless subscriber mix while waiting for (merger) synergies," Michael Bowen, a Friedman, Billings analyst, said in a recent note to clients.

Citigroup late last month downgraded Sprint Nextel to hold from buy. On the other hand, Credit Suisse last week initiated coverage of Sprint Nextel with a rating of outperform, its equivalent of buy.

Sprint Nextel's merger created the No. 3 wireless phone carrier in the U.S. It trails Cingular, owned by AT&T (NYSE: - ) and BellSouth (NYSE: - ), and Verizon Wireless, owned by Verizon Communications (NYSE: - ) and the U.K.'s Vodafone Group (NYSE: - ).

Sprint and Nextel planned to focus on wireless from the get-go.

By focusing on business customers, Nextel had garnered the wireless industry's highest average revenue per user.

Nextel attracted business customers, thanks largely to its walkie-talkielike feature, Direct Connect, which sets up group calls at the push of a button.

Nextel had this feature to itself for years, but Verizon, Cingular and others have since come up with their own push-to-talk features.

In addition, Cingular and Verizon have focused much more on the business market. And that's a big problem for Sprint Nextel, says Entner, as growth in the consumer market starts to level off.

Still, in the first quarter, Sprint Nextel's wireless revenue rose 3.5% from the previous quarter to $8.5 billion. That beat Cingular, up 1.5%, and Verizon Wireless, up 1%.

But Sprint Nextel faces added costs because the two firms must merge their two networks, which used different technical standards. Nextel uses iDEN, while Sprint uses .

Sprint Nextel hopes to gain a lot of business through an alliance with four cable TV firms, which plan to offer wireless services as wholesale customers of Sprint Nextel. Late last year, Sprint Nextel formed a joint venture with Comcast (NasdaqNM: - ), Time Warner (NYSE: - ), Cox Communications and Advance/Newhouse Communications. The last two firms are privately held.

Analysts don't expect the joint venture to contribute significant revenue for Sprint Nextel until 2007.

After merging, Sprint Nextel revealed plans to spin off the local wireline unit, now called Embarq. The unit has 7.3 million residential lines in 19 states.

Sprint's local revenue last quarter fell 1% from the previous quarter, to $1.46 billion. That's down 2% from the year-earlier quarter.

Sprint Nextel last week said the Embarq spinoff will occur on May 17. Sprint Nextel shareholders will get one share of Embarq for every 20 shares of Sprint Nextel owned.

In a regulatory filing Thursday, Sprint Nextel said Embarq's revenue and profit probably will decline in its first year because of fierce competition. Sprint Nextel says Embarq could lose 5% to 7% of its residential lines in 2006 as cable TV companies ramp up phone services.

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