Sprint Set For a Comeback with Softbank

Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There has been plenty of talk about the T-Mobile and MetroPCS (NYSE: TMUS) deal in the past few weeks. While Sprint (NYSE: S) kept eying the regional carrier, T-Mobile took a step forward in making a deal with MetroPCS. But before Spring can make a couter-bid, something more interesting has developed that has drawn Sprint’s attention from its would-be acquisition. Softbank, Japan’s third largest telecom operator, has shown an interest in putting its money into the carrier to gain control of its operations.

The Japanese giant is in discussion with Sprint to invest as much as $20.1 billion in the company, in exchange for a 70% stake in its operation. Softbank shall pay $12.1 billion to the shareholders of Sprint and buy $8 billion worth freshly issued capital from the carrier. Dan Hesse, Sprint’s Chief Executive is expected to continue to lead the company. This must come as a big relief to the third largest US carrier, which is presently focusing itself on its "Network Vision."

How important is the deal for Sprint?
The Kansas carrier is in great need of cash to work on its Network Vision, a wide-scale network upgrade program. Sprint’s Nextel merger proved a complete disaster for the company, which witnessed years of falling subscriber base that kept crushing both its top-line and bottom-line. Now that the company is working towards upgrading its complicated network, a fresh infusion of cash would facilitate the process. Also, since the company is burdened with debt, the inflow of cash would be of great help to pay it down. Sprint could use the cash to reduce its debt burden and invest the rest of it to build its network infrastructure.

In addition, we know that Sprint's present scale isn’t enough to compete with Verizon (NYSE: VZ) and AT&T (NYSE: T). Consolidating with a big entity like Softbank would improve its competitive position to take on these bigger industry players, and it would put pricing pressure on the Verizon and AT&T duopoly. As per IHS data, in 2006 the top three US carriers (Verizon, AT&T and Sprint), more or less had the same market share of 23%, 24%, and 21%, respectively. But that is not the case now. In 2011, the market share for Verizon and AT&T increased to 30% and 29% respectively, while Sprint’s share slipped to 15%.

The deal is of great importance to Sprint, as it could help the carrier recover from its losses, begin making a profit once more, and become more competitive. But it poses some risks to Softbank.

The concern
The Japanese carrier has a debt heavy balance sheet, and investing such a big amount in Sprint, which has been suffering from losses in the past few years, would increase the burden further. Also, the market already has two very strong players that dominate the industry. And now the fourth largest carrier, T-Mobile, is planning to get more competitive by acquiring MetroPCS. By joining hands with PCS, T-Mobile’s ability to compete with Sprint would improve given the former’s envied network and subscriber base. As a reaction to this, Softbank’s stock price fell 17% on Friday as investors doubted the deal’s success.

But there is probably something else that Softbank may be thinking of. Following an investment in Sprint, Softbank could aim to sort out complications involving Clearwire and eventually bring it under its umbrella. In fact, Sprint has already taken a step forward to gain more control on Clearwire. The company is talking with Clearwire investors, including Craig McCaw and Comcast, to pay them for their stake. This would give Sprint the right to appoint the majority of Clearwire’s directors, which means it wouldn't need to acquire the company.

However, AT&T feels that the regulator should scrutinize the deal closely and pay extra attention to Sprint’s attempt at getting more control over Clearwire. AT&T is afraid that Softbank’s control over Sprint and Clearwire would give the Japanese operator access to ‘more U.S. wireless spectrum than any other company.’ Also, the combined entity of Sprint and Softbank could even target T-Mobile in the future and start operating at a much bigger scale, which could shake up the wireless industry even further.

Concluding thoughts
There is no doubt that Sprint needs a lot more to aggressively compete with Verizon and AT&T. However, the Softbank deal would give Sprint a partner with deep pockets and the much needed boost it needs to carry on with its network overhaul. Eventually, when the company gets stronger, it could look into further acquisitions to add scale and revenue. The deal has received the go-ahead signal from the boards of the two companies, but Sprint’s shareholders and the FCC have yet to give the go-ahead. If all goes well, Softbank plans to conclude the deal by the middle of next year. It would be really interesting to see how things take a turn for the US wireless industry with such consolidation talks. Will Verizon and AT&T continue to threaten competition, or will Sprint manage to find a way to make its presence felt?

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