What Is Sprint Seeking Other Than FCC Approval?
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The US telecom industry has been full of interesting news from both big and small carriers and the changing dynamics of the telecom space is attracting investor attention. Early in October, T-Mobile announced its intention of acquiring regional telecom operator MetroPCS. Sprint (NYSE: S) came in with even bigger news with its proposed $20.1 billion deal with the Japanese carrier Softbank, wherein the latter agreed to acquire a 70% stake in third largest US carrier.
The Kansas carrier has now filed an application with the Federal Communications Commission (FCC) that requests the regulator give the go-ahead to the proposed transaction. The carrier has asked FCC to grant it permission to transfer wireless spectrum license to Softbank as it prepares to sell controlling interest to the Japanese giant. The FCC’s approval is essential as Softbank intends to acquire a 70% stake in Sprint which is more that 25%, the normal permissible limit for foreign corporations.
As part of the deal, Sprint would receive $7.30 for 55% of its shares and an amount of $8 billion for the remaining stake in two different transactions. The carrier has already received $3.1 billion and the remaining cash would come after all the approvals are received. Other than the FCC approval, the deal also needs to pass through the Committee on Foreign Investment in the U.S. (CFIUS), the U.S. Department of Justice, and the Federal Trade Commission.
However, other than the regulatory approval, there is something else that interests both Sprint and Softbank.
An eye on Clearwire
Sprint recently increased its stake in spectrum rich Clearwire (NASDAQ: CLWR) by 5% to 50.8% and regained majority interest. The carrier has plans of using Clearwire’s massive spectrum resource for its Network Vision. Even Softbank wants to ensure that Sprint’s spectrum position is sound for its network program. The regional carrier has a considerable spectrum position in the 2.5 GHz band that it proposes to use for building the 4G TDD LTE network in 2013. Interestingly, Softbank also holds a similar mass of spectrum in Japan where the carrier has already built its 4G TD LTE network. So Clearwire’s spectrum would be a huge attraction for Softbank as the network compatibility would help it win big contracts from network component makers and handset producers.
At the moment Sprint is behind its bigger peers, Verizon (NYSE: VZ) and AT&T (NYSE: T), in terms of the 4G LTE coverage. Verizon’ LTE covers over 250 million people in 420 markets, while AT&T provides LTE in around 77 markets covering 80 million Americans and expects to double that number by year end. Although Sprint is the third largest US carrier, it is way behind its larger rivals where LTE deployment is concerned, so the carrier is aggressively working on its Network Vision program to improve its competitive position.
To improve its competitive standing, the carrier not only increased its stake in Clearwire, but it has also used the infused cash from Softbank in a $480 million strategic deal with U.S. Cellular to gain spectrum in the prime markets of Chicago and St. Louis, central Illinois and Midwest markets. However, Clearwire’s spectrum position is much more attractive to Softbank that any other as it has a similar spectrum band with same 4G network build out. Chances are very high that Clearwire would be Sprint’s acquisition target in the near future.
Some analysts are doubtful about Softbank’s intentions and the impact of the deal on the US wireless market.
My takeaway - No harm is intended
The deal is in public interest and the prime intention is to build a carrier strong enough to break the feared virtual duopoly of Verizon and AT&T. The deal wouldn’t crush competition; rather it intends to strengthen the spirit of “wireless competition and innovation.” Sprint’s highly leveraged business would get some relief with the cash infusion from Softbank and this would also accelerate the network building process. A financially more stable Sprint, with the support of Softbank’s deep pockets, would improve wireless competition and make the carrier more capable to fight the telecom biggies.
Other than this, a numbers of analysts are worried about rising foreign interest in the US wireless market. For instance, Verizon Wireless is a joint venture of Verizon and UK based Vodafone that holds 45% stake in the company. The German telecom giant Deutsche Telekom owns T-Mobile. Now, Softbank intends to own 70% interest in Sprint. However, I do not see this as a problem in the era of globalization. It’s true that the amount earned by these foreign carriers will not be retained in the US economy, as they will transfer it in their homeland, but customers would stand gain from better quality network and coverage. I consider that the merger is intended to strengthen the US wireless market. Sprint’s dark days are in the past. It’s time for better days, and with steady progress in its network build-out program, it will catch up with Verizon and AT&T.
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