The Takeover of Sprint is Confirmed
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On Monday, Japan’s SoftBank Corporation announced the completed takeover talks with Sprint Nextel (NYSE: S), one of America’s largest telecom providers. This deal should provide a new lease on life for the ailing mobile phone carrier, which has been having a bad time over the last few years. Aside from shoring up Sprint’s balance sheet, the deal should also provide immediate value for shareholders who have seen the stock more than double in value this past year. In this article, I will examine some of the consequences this deal may have for the stock’s future.
Under this deal, SoftBank is set to invest some $20.1 billion into Sprint Nextel, of which $12.1 billion will be distributed to shareholders and $8 billion will be used to fortify Sprint’s balance sheet. The $7.30 per share that SoftBank is paying for about 55% of Sprint's outstanding shares represents roughly a 25% premium to the current stock price, which inspires confidence in the deal and the company’s future. As part of the deal, a new publicly traded entity called New Sprint will be created, in which SoftBank will have a 70% stake.
Luckily for Sprint shareholders, SoftBank has quite a bit of expertise in the mobile phone market. Since 2006, in which the company entered the mobile phone arena by acquiring Vodafone Japan from Vodafone (NASDAQ: VOD), SoftBank has set an excellent track record in turning around lagging carriers. In the words of SoftBank CEO Masayoshi Son, “As we have proven in Japan, we have achieved a V-shaped earnings recovery in the acquired mobile business and grown dramatically by introducing differentiated products and innovative services to an incumbent-led market.”
Relevance for Shareholders
According to Sprint CEO Dan Hesse, the deal should provide a number of short- and long-term advantages for the company and its shareholders. As a better capitalized company, Sprint will be able to spend more money on improving its network, and should be able to achieve a higher credit rating, thus lowering its borrowing costs. Also, it will allow Sprint to benefit from SoftBank’s extensive expertise in the mobile carrier arena, as well as its global leadership status.
Moreover, it will improve Sprint’s ability to compete with Verizon (NYSE: VZ) and AT&T (NYSE: T), who together hold a near duopoly in the US cellphone carrier market. Since acquiring the iPhone at the end of 2011, Sprint has begun to turn around its dwindling business, and is starting to regain some market share from the previously mentioned US telecom giants.
Valuations and Metrics
Sprint Nextel's P/E ratio stands at a worrying -4.5x earnings, which is largely a reflection of the company losing money in recent years. Verizon and AT&T have P/E ratios of 44.2x and 47.5x, respectively. Sprint trades at 1.87 to book, which is lower than the 2.25 industry average. The firm has quite a lot of debt, with a LT Debt to Equity ratio of about 177. Return on equity is -22.1 and the company's operating margin is 0.6%. I think it suffices to say that these metrics are pretty awful whichever way you slice them. It is thus imperative that SoftBank will manage to create some added value for shareholders in the near future.
The recently announced deal between SoftBank and Sprint seems like good tidings for Sprint, an embattled US telecom provider. By investing over $20 billion in the company, SoftBank hopes to turn around this marginalized carrier, something the company has proven it's able to do after acquiring Vodafone Japan. The deal creates immediate value for shareholders through the premium paid on the stock, as well as strengthening Sprint’s balance sheet. However, it remains to be seen whether or not Sprint’s valuation can be saved, as at the moment it's worryingly poor.
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