Would You Buy Sprint Stock if Softbank is Investing?
Jay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The U.S. wireless market was suddenly sent roiling, at least for Sprint (NYSE: S), when T-Mobile said it was planning to buy MetroPCS (NYSE: TMUS). A combined wireless services of the two companies would post immediate challenges for Sprint, though less so for larger carriers Verizon and AT&T. Likely responding out of reactionary pressures, Sprint quickly declared that it would consider a potential purchase of MetroPCS itself. I mentioned in my last post that a counter bid would be a tough and costly proposition for Sprint. So much so, a couple of days later, Sprint came out again, saying that it was holding off the idea of a counter bid.
If we take a brief look at Sprint's balance sheet, we can see that Sprint really doesn't have the financial resources to carry out a competitive bid against T-Mobile. Sprint currently has about $5 billion in cash and equivalents, while the market capitalization of MetroPCS is over $4 billion. Adding some premium on top of that market tag, a Sprint purchase of MetroPCS would almost empty Sprint’s cash reserve going forward. What about financing the purchase with debt? Well, not feasible either. Sprint already has over $20 billion in long-term debt, nearly twice the amount its total equity of around $11 billion. Taking on more debt would be a big no. Again, it's a tough situation for Sprint. Obviously, the company wishes that it could do something in terms of further expanding its network reach to help it not only defend against a potential alliance between T-Mobile and MetroPCS, but also catch up to its bigger rivals.
So, retreating from its impulsive thought, may we say, of directly bidding against T-Mobile, Sprint now plans to team up with Softbank, the apparently cash-rich Japanese wireless carrier and Internet company, for much needed financial support. But how good would such a deal be for current and potential Sprint investors? Details of a potential deal have yet to emerge, but in all likelihood, a deal with Softbank would have to involve new share issuance by Sprint, with the shares purchased exclusively by Softbank. This way, Softbank would easily gain a desired majority control of Sprint, while Sprint would receive additional capital. Softbank's amassing existing Sprint shares on the open market or through a tender offer probably would give Softbank the same control in the end, but wouldn't result in any capital injection for Sprint as a company. Given Sprint's urgent financing objective, a deal maneuver relying on existing share purchases would be unlikely.
With new share issuance, however, one thing would be certain for existing investors: earnings dilution--both now and in the near term. A lower earnings per share would likely have a negative effect on the stock price. In addition, depending on how much Softbank pays for each of its shares as compared to Sprint's current book value per share, the expected capital injection may not have any immediate benefit to current shareholders. It’ been reported that Softbank might value its majority stake at about $12 billion. Sprint now has almost 3 billion shares outstanding, and to sell a majority stake, Sprint may have to issue at least another 3 billion shares to Softbank. These numbers suggest that Softbank could conceivably purchase its Sprint shares at about $3 per share, the approximate amount of Sprint’s current book value per share. Without any significant purchasing premium from Softbank, the amount of additional paid-in capital would contribute very little to book value for shareholders in a Softbank-controlled Sprint. Furthermore, since Sprint stock is currently trading at well over $5, looking to profit from a Softbank deal, prospective outside investors buying on the open market would have a big price disadvantage when Softbank would be given the right to purchase shares at a negotiated lower equity value.
With Softbank's involvement, Sprint might be better off in the long run and become a legitimate contender to Verizon and AT&T. But there wouldn't be much to gain at the outset of a Softbank deal for current shareholders and potential investors, and the one-day jump in Sprint's stock price following reports on a potential deal really showed the market’s misunderstanding of the nature of the deal. It'd be wise that investors try not to sprint right ahead with the two deal parties at this point.
JJtheArdent has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.