* Sees minimum $15.5 bln iPhone cost in next four years
* Sees cash shortfall from iPhone, network upgrade
* Will refinance debt and turn to vendor financing
* Q3 share loss $0.10 vs Wall Street view loss $0.22
* Shares fall as much as 12 pct; Clearwire rises 22 pct
Oct 26 (Reuters) - Sprint finally owned up to the massive bet it is making on iPhone, sending its shares down as much as 12 percent on Wednesday.
The No. 3 U.S. operator said it could need $7 billion in new financing over the next few years to cover a cash shortfall caused by heavy investments in the Apple Inc iPhone introduction and a big network upgrade.
Sprint said it does not expect the benefits from iPhone to exceed its costs until 2015. It also said it was negotiating a new deal with majority owned Clearwire Corp , its biggest client. Clearwire shares closed up 19.5 percent.
Sprint was sharply criticized for refusing to disclose iPhone costs and its intentions for Clearwire at an Oct. 7 conference.
Besides the $7 billion network upgrade plan, Sprint has committed to pay at least $15.5 billion to Apple in the next four years for iPhone, but it expects that amount to be even bigger because it is based on the number of phones it sells.
Sprint, whose market capitalization is $7 billion, estimated the "net present value," or present value of anticipated profits from the contract, at $7 billion to $8 billion over the next four years.
Analysts were skeptical the bet would work.
"To meet their target, they'd effectively have to turn their entire company into an Apple shop," said Bernstein analyst Craig Moffett.
Another analyst said investors should stay away until they see clear signs Sprint will succeed.
"They're betting the house on two things at the same time," said Mizuho analyst Michael Nelson. "If they pull it off, great. If they don't, their financial performance would get materially worse, and they could have significant liquidity risks."
Nelson said it would be at least a year before investors could assess whether both plans are working because of the timing of the network upgrade.
Sprint warned it would need to refinance $4 billion of debt and raise up to $3 billion from vendor financing deals in the next few years to cover iPhone and network costs and keep its cash balance at a minimum of $2 billion.
Rating Agency Fitch said the company would need to go to the market to improve it's liquidity as soon as possible or face another review of its credit rating.
"We need to see it's a priority for the company," said Fitch analyst Bill Densmore, who added that his current B+ rating of the company has "limited flexibility" for any missteps by Sprint in executing its strategy.
IPHONE WORTH EVERY PENNY?
Sprint, which started taking iPhone orders on Oct. 7, said it would pay Apple a subsidy that is 40 percent higher, or $200 more per device, than what it pays for other phones.
Chief Executive Officer Dan Hesse told analysts on a conference call the iPhone would be worth the extra cost as it has already lured record numbers of new customers to Sprint.
"IPhone has an expensive contract, but is worth every penny," Hesse said, but he added it was too early to estimate exactly how many iPhones he expects to sell.
Sprint promised that, over time, the iPhone would bring 50 percent more value to the company than any other handset.
In the meantime, the upfront costs from iPhone will cut fourth quarter operating income by between $500 million and $700 million to about $600 million to $800 million. Nelson had earlier estimated that profit at $1.1 billion.
Sprint gave a 2011 free cash flow forecast ranging from a loss of $200 million to a gain of $100 million. It had previously promised positive 2011 free cash flow, which generally refers to earnings including capital spending, but excluding interest, taxes, depreciation and amortization.
The outlook overshadowed Sprint's smaller-than-expected third-quarter loss.
The company, which has struggled for years to stem customer defections, said the loss narrowed to $301 million, or 10 cents per share, from $911 million, or 30 cents per share, a year earlier. Analysts on average expected a loss of 22 cents per share, according to Thomson Reuters I/B/E/S.
But Sprint said it lost 44,000 customers in the quarter, compared with the average expectation of a loss of about 11,000 from nine analysts contacted by Reuters.
Net operating revenue rose to $8.33 billion from $8.15 billion a year earlier, but missed Wall Street expectations of $8.38 billion.
Sprint Credit Default Swaps, or the cost of insuring its debt, rose after the report. It now costs $1.475 million paid upfront to insure $10 million of Sprint debt, on top of $500,000 in annual payments. That is up from $1.25 million upfront plus $500,000 annually the day before.
Sprint shares closed down 7 percent at $2.51 on the New York Stock Exchange after falling as low as $2.38 earlier in the session.
Clearwire finished up 19.5 percent at $1.96 on Nasdaq. It lost a third of its value after Sprint comments at its Oct. 7 meeting led investors to believe it was a bankruptcy risk and to worry that the parent might abandon it after the end of next year.
But Fitch's Densmore said it was unclear if the liquidity risks of Clearwire, which is currently seeking about $900 million in funding, have abated just because of Sprint's announcement it is looking for a potential deal.
"The only way we get more comfortable is if Sprint reaches and agreement and Clearwire is able to go out and get more funding. There's some hurdles to that," he said.