In $5B Deal, Sprint Outsources Ops to Ericsson

By Richard Martin

In one of the largest and furthest-reaching managed services telecom contracts in history, Sprint Nextel Corp. (S) today said it would turn over day-to-day operations of its wireless network to wireless giant Ericsson (ERIC), later this year.

Such a partnership has been rumored for some time but the scope of the deal, and its price tag, came as surprises to many analysts. Sprint will pay $4.5 billion to $5 billion over the seven-year life of the contract. In return, Ericsson will manage Sprint’s iDEN, CDMA, and wireline networks while taking on 6,000 employees from Sprint’s operations headquarters in Overland Park, Kansas. The former Sprint technicians will be employed by wholly owned Ericsson Services Inc., also based in Overland Park.

Ericsson has such network management contracts with carriers around the globe including Brasil Telecom (BTM), Saudi Telecom, Hutchison Telecom in Hong Kong, T-Mobile’s U.K. division, and Cable & Wireless (CW.L), which has operations in Europe and Asia. The Sprint deal is its first partnership with a major North American carrier.

Sprint has been plagued with network quality and reliability problems since its $35 billion merger with Nextel in 2005, widely viewed as one of the more poorly executed telecom mergers in recent history. The company also has suffered subscriber losses that have left it in the wake of its two biggest rivals, AT&T (T) and Verizon Wireless (VZ). The company had been the subject of takeover rumors before reports emerged of a deal with Ericsson earlier this year.

Steve Elfman, Sprint’s president of network operations and wholesale, emphasized several times in a phone briefing with journalists and analysts that Sprint will continue to own its networks and will make all strategic and marketing decisions as well as continue to handle customer service and relations for its services.

“Working with Ericsson will allow us to leverage a great deal of tools, best practices, and systems, they have in place,” said Elfman. “So we can avoid that invest to get the productivity and network enhancements we need.”

Sprint said that all savings from the arrangement will be re-invested in upgrading its networks and developing advanced services. Such managed services contracts, popular in much of the rest of the world, typically save operators up to 30 percent in operating costs.

Sprint shares were up almost 4 percent in late-day trading on the New York Stock Exchange.