Sprint Adding More Spectrum to Gain Softbank’s Confidence

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

The third largest US wireless provider Sprint (NYSE: S), on Wednesday expressed its intention of buying U.S. Cellular's (NYSE: USM) service areas in the Midwest. The Kansas carrier agreed to purchase U.S. Cellular’s subscribers and spectrum license in the Midwest for $480 million. As wireless data speed is gaining more and more importance, smaller carriers such MetroPCS, Leap Wireless and U.S. Cellular, are finding it hard to survive in this extremely competitive market. The two giant players Verizon and AT&T are having all the fun as these smaller players are losing their premium customers to the two biggies who have better network strength and coverage.

This is the first deal Sprint made after the $3.1 billion cash infusion from Softbank. Other than this the wireless provider also increased its stake in Clearwire (NASDAQ: CLWR) by 5% to 50.8% for regaining a majority ownership of the company. The carrier’s main purpose is to make available sufficient airwaves to build the 4G LTE network and achieve the Network Vision.

A step towards U.S Cellular

The telecom player finalized the $480 million cash agreement with the sixth largest carrier of the country to expand its overall spectrum coverage and subscriber base. As per the deal, Sprint would get access to 20 MHz of PCS spectrum in the 1900 MHz band in U.S. Cellular’s Midwest markets. This would strengthen Sprint’s coverage in Chicago, South Bend, Indiana, Michigan and Ohio. The deal would also give Sprint an additional 10 MHz of PCS spectrum in its St. Louis market. The telecom player would gain about 585,000 U.S. Cellular customers in these markets.

However 980 jobs will be lost as a consequence of the deal, which is expected to close by mid 2013, since Sprint does not propose to take over the target’s workforce. Also, U.S. Cellular should keep in mind that it is parting off with its prime territory of Chicago and St. Louis. The rest of the company’s network coverage that spans over Wisconsin, Iowa, Oregon, Maine and North Carolina isn’t as attractive. Though Sprint has made a decent offer, it proposes to take the best of U.S. Cellular’s market. The company’s investors expect more from its most valued assets. The remaining markets aren’t that good and so getting a buyer for these markets would be a tough job.

Sprint to gain from the deal

In such a spectrum tight environment, when players are hunting for more airwaves to satisfy the rising data demand of users due to their bandwidth-hogging mobile applications, this deal would be really valuable for Sprint’s LTE build-out program. The company’s Chief Executive Dan Hesse considers the agreement to be extremely essential as it would ‘strengthen’ the company’s business and make it a much stronger competitor to fight its larger rivals. It would enhance the company’s network capacity together with boosting several important markets such as Chicago and St. Louis.

The deal makes a lot of sense for Sprint. Adding spectrum under its umbrella is extremely critical for the carrier so that Softbank has confidence on Sprint’s access to adequate spectrum to carry out the Network Vision. The only doubt the Japanese giant has is with regards to Sprint’s spectrum position and the latter doesn’t want to take any chance with its deal with the Japanese telecom player. The Softbank deal, which will infuse about $20.1 billion into the debt heavy company, is very critical for Sprint’s network build-out program and its overall growth. The company has suffered quite a bit since the time it acquired Nextel, and the Softbank deal would give the company a chance to comeback and combat the virtual duopoly of Verizon and AT&T. So Sprint not only plans to purchase U.S. Cellular’s spectrum license, but it paid $100 million to Clearwire founder Craig McCaw for an additional 5% stake in the company. There are chances that Sprint would attempt a Clearwire takeover and take advantage of its depressed price. In return it would get access to Clearwire’s huge spectrum holding.

The Bottom-line

It is pretty clear that Sprint is desperate to come back in form. It doesn’t want to leave a stone unturned to make sure that the Softbank deal happens. This is why it increased its stake in Clearwire and now entered in a spectrum purchase deal with U.S Cellular. The U.S. Cellular deal would enhance the company’s spectrum position, strengthen its coverage in prime markets and remove Softbank’s doubt about Sprint’s spectrum holding. 

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