Proposition Analysis: Japan’s 3rd Largest + US’ 3rd Largest
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Industry experts and analysts have been expecting a lot of consolidation to take place in the US telecom space and the recent development is the Sprint-SoftBank merger talks. Both Sprint (NYSE: S) and Japan’s 3rd largest telecom player SoftBank have confirmed that they are in the middle of a negotiation through which SoftBank will invest heavily in Sprint. Though, the terms and conditions and the compensation hasn’t yet been finalized and the companies haven’t made any formal announcements, informal talks from people with knowledge of the situation suggest a figure of $13 billion to be the price that SoftBank will need to pay and in return SoftBank will get a 70% stake in the 3rd largest US telecom player.
The incident came to public knowledge not long after Sprint decided to make a counter-offer to MetroPCS (NYSE: TMUS) and this pushed up Sprint’s share price by as much as 14%. Recently, T-Mobile and MetroPCS have been locked in talks regarding a merger and this has created a lot of tension among the top 3 US telecom players. With an intention to buy time and analyze the competition in the space, Sprint decided to make the counter-offer.
M&A talks in the space have been around for quite some time now. Previously, AT&T (NYSE: T) made an attempt to acquire T-Mobile for $39 billion. But, after facing objections from the regulators on grounds that such a deal will lead to concentration of power in AT&T’s hands, the US’ 2nd largest telecom firm had to drop the idea. However, the regulators were fine with the idea of T-Mobile and MetroPCS merger and it’s being assumed that the SoftBank-Sprint deal will also get a nod from them. They will be comfortable with the idea of a foreign player entering the space and thus making it more competitive.
Having said all this, now I will shift towards analyzing the proposition from a variety of viewpoints and attempt to establish why this deal is a good idea.
Viewpoint 1: Market competitiveness
When it comes to consolidation attempts, the prime issue that the regulators face is controlling the shift in power and maintaining the competitive equilibrium. This being the case, it was impossible to allow the 2nd largest and the 4th largest US telecom players to merge. But, the present talks between SoftBank and Sprint will not only not disturb the balance, it will also act towards disrupting the ever increasing dominance of Verizon (NYSE: VZ) and AT&T, and thus help in striking an equilibrium.
According to Tero Kuittinen, an analyst at a mobile diagnostics company Alekstra Oy, “This (talks between SoftBank and Sprint) must be causing chills to run down the spines of AT&T and Verizon executives.” I believe Tero is correct in saying this. Data from Goldman Sachs suggests that Verizon and AT&T together enjoy a command over 75% of the US contract customers, while Sprint controls only 15% and the balance 10% lies with T-Mobile. For Verizon and AT&T, the control is high and automatically the stakes are high. Japan’s 3rd largest joining hands with Sprint will definitely have a positive effect on the latter. The merger can do wonders in the space as Sprint will surely benefit hugely from better technology, better service and other SoftBank expertise, giving the company the correct combination of weapons to combat with the bigger boys of the US telecom market.
Viewpoint 2: Sprint’s benefit
Analyzing the competition and ignoring the SoftBank development for a few minutes will help us understand why Sprint needs SoftBank. T-Mobile (US’ 4th largest telecom player) is going to merge with MetroPCS (US’ 5th largest telecom player) and this will affect the competitive environment hugely. After the deal, T-PCS (my abbreviation for T-Mobile + MetroPCS) will be in a much better position to challenge Sprint for the 3rd position and also compete better with Verizon and AT&T. Keeping in mind this possibility, Sprint needs to strengthen itself and SoftBank has the apt solution for Sprint.
Next, investment from SoftBank will help Sprint to strengthen its balance sheet which presently carries debt worth $21 billion. With this huge debt gone, Sprint can think of expanding by acquiring smaller players and thus prepare itself better for the future. Again, Sprint already has a 49% stake in Clearwire (NASDAQ: CLWR) and with help from SoftBank, the company can also think of increasing its stake or acquiring Clearwire entirely. Ever since Sprint acquired Nextel, it has been facing problems. However, after huge efforts, Sprint has been able to do away with most of the problems and has been slowly improving. Help from SoftBank at this point of time is very crucial for Sprint. With better service, better technology and improving fundaments, Sprint will be in a much stronger position to take on T-PCS as well as Verizon and AT&T.
Viewpoint 3: SoftBank’s benefit
A majority stake in Sprint will allow SoftBank to enter the highly competitive US market. Softbank operates in the Japanese markets and has around 38 million subscribers. However, the market is a saturated one and isn’t growing. In such a situation, its entry into the much larger and growing US market will allow SoftBank to grow. From the chart, we can see, while the number of mobile-handsets sold in the US increased from 182 million in 2007 to 191 million in 2011, that in Japan decreased from 52 million in 2007 to 38 million in 2011. The Japanese markets are shrinking, and expanding to a growing market such as the US looks logical on SoftBank’s part.
(Source: data from IDC through Bloomberg Businessweek)
Another note worthy point is the spectrum owned by Sprint. The value of the spectrum that Sprint owns is much greater than the market capitalization of Sprint and thus by acquiring Sprint or by investing heavily in the company, SoftBank will get access to US spectrum at a huge discount. As suggested by Roger Entner, an analyst at Recon Analytics, Softbank will get its hands on valuable US wireless spectrum and “bragging rights” at a relative bargain.
Again, SoftBank is not just aiming at Sprint. Nikkei, a Japanese newspaper reported that through Sprint, the Japanese telecom giant also aims to buy MetroPCS. According to the newspaper, SoftBank aims to strike a two-step deal to buy Sprint and MetroPCS which could cost SoftBank more than $25.6 billion, making it the biggest overseas acquisition by a Japanese firm ever and thus putting Softbank into the top ranks of wireless carriers worldwide. SoftBank is also in talks with three Japanese banks to borrow $23 billion to finance the bid for Sprint as reported by Reuters. So, all this falls into place to make a complete picture which suggests that SoftBank has huge things planned and it will need Sprint to enter the market.
Concluding thoughts
Though the companies have not announced the terms and conditions of the deal, they have confirmed that they are in talks to complete a deal. After the deal, SoftBank will have a 70% stake in Sprint and the remaining 30% will be made available for public trading. Such a high stake has hidden implications for investors. It probably indicated SoftBank is up to something big and expects to benefit hugely from Sprint as it helps Sprint to grow. Again, Sprint expects to perform much better with SoftBank’s strength. Entering Sprint or maintaining a position in Sprint makes sense at the moment. Japan’s 3rd largest and the US’ 3rd largest telecom players joining hands is looking pretty attractive to me. I see a good opportunity to benefit from the deal and the resulting dynamics of the competitive market place. What about you?
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