Sprint’s Acquisition Triangle: A Stronger Future Together?
Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In today’s time when competition turns fiercer day by day, one way that big companies are trying to deal with this situation is by buying other smaller players to strengthen their market positions and to take advantage of their competitive edges. Recently, after being partially acquired by SoftBank, Sprint Nextel (NYSE: S) took one step further by acquiring Clearwire (NASDAQ: CLWR).
Sprint – its core business
Sprint offers a range of wireless and wire line communications products and services to individual consumers, businesses, government subscribers in the United States. The company is currently implementing a multi-year plan, Network Vision, to improve its existing wireless communication network, incorporating the decommissioning of Nextel platform.
Sprint closed down its Nextel iDEN network on June 30, 2013. The existing users were transferred to Sprint's Direct Connect service, which is claimed to provide three times faster push-to-talk coverage of iDEN.
SoftBank’s acquisition of 70% stake in Sprint
SoftBank, a Japanese wireless communication company, is now a controlling shareholder of Sprint. Operating in the same business, the two companies' together are forecasted to benefit from potential synergies resulting from this combination. As a result, their subscriber base will now be one of the highest among the worldwide operators, and the third highest mobile service revenue generating company worldwide. Sprint’s market position is also quite strong in terms of highest average revenue per customer (ARPU) growth.
The acquisition may prove revolutionary for Sprint as the company can now leverage on the successful deployment of LTE in Japan in order to develop an advanced LTE network, improve the customer experience and continue to increase the efficiency of its operations.
Sprint benefited from the $8 billion equity financing, which can be used to develop its 4G LTE network and improve the balance sheet, which is heavily loaded with debt. The deal was a major push for Sprint as the company was facing financial constraints to upgrade its networks. Additionally, the equity financing decreased the company’s debt-to-equity ratio which is now in line with the major players in the wireless market, AT&T (NYSE: T) and Verizon Communications (NYSE: VZ). This will result in Sprint reporting a more solid balance sheet.
Acquisition of Clearwire was the second move affecting Sprint’s shareholders. This acquisition was part of the requirements laid out by SoftBank at the time of the Sprint acquisition. Clearwire, the pioneer of the 4G network, has been one of the fastest growing companies in the wireless. Its mobile broadband network serves 11 million 4G customers.
Earlier this year, Clearwire established a platform to base its global LTE roaming. Developing this framework along with the TD-LTE and Band 41 configuration increased the development cycle which will provide operators substantial benefits as the shift towards LTE escalates. Clearwire had a leading role in the development of a unified global LTE market.
According to projections, the global mobile data traffic is expected to increase exponentially in the next 3-4 years. Clearwire is expected to experience a speedy growth in its profits as the LTE market is currently in its high growth phase. The acquisition is likely to provide major benefits to Sprint as Clearwire is working on employing the first wide-channel TDD-LTE 4G network in the U.S. – a network which is anticipated to provide the speed and capacity to outperform all else available in the market. This will provide Clearwire with the first mover advantage which is the highest in the IT industry.
This deal is expected to benefit the public at large, with the customers ending up with a faster and richer 4G LTE service. It would also increase the usage of mobile broadband services and further boost competition. However, SoftBank faced a debt rating downgrade by Standard & Poor's by two notches to junk grade, due to the associated financial risks from the purchase of Sprint, and Sprint's projected takeover of Clearwire.
AT&T & Verizon expanding LTE networks: plenty more to come
In late June, AT&T declared that the company will start off selling customers’ smart phone data to the highest bidder, coming at par with Verizon, Facebook and others that utilize consumer records for their marketing needs. The online customer response has been tremendously negative, with many customers searching for ways to evade these new conditions.
On 2nd July, AT&T launched its 4G LTE service in New Iberia, Silverthorne, Grand Junction, Palatka, Homosassa Springs and Corinth-New Albany, bringing customers the latest generation technology of wireless network. Yesterday, it also launched its 4G LTE services in Wichita Falls. LTE technology is capable of delivering speeds faster than many other mobile Internet technologies. The geographical expansion was also aimed at increasing AT&T’s market presence.
Recently, Verizon conducted network improvements on the islands of Hawaii and Kauai. This has enabled customers to make more calls, download more applications and surf the internet at a faster pace. Verizon Wireless also provided new 4G LTE coverage on 17 sites in the Albany and Glens Falls, NY areas, including a newly built site in Bethlehem, increasing its coverage on high speed data network. Overall, the company has started off more than 350 4G LTE sites in New York during FY13.
The recent acquisitions and the future planned launches provide Sprint's investors an attractive opportunity to participate in the future growth of a stronger, better equipped Sprint, in the years to come. With the recent acquisitions, Sprint is now in a position to better serve its consumers, challenge the market share leaders and steer innovation in the U.S. economy. I would recommend buying the stock of Sprint and holding it for the next few years to earn a high return. The company is currently restricted from paying dividends by the covenants of the revolving bank credit facility.
With the speedy geographical expansion that AT&T is currently undertaking, the revenues and profits of the company are likely to rise in the forthcoming years. I recommend it for investors looking for regular income along with price return. AT&T is expected to increase its dividends by 2.3% in 2013.
More investing ideas from the Motley Fool
It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.
Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!