The DOJ Needs More Time To Assess This Telecom Deal

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The Sprint (NYSE: S) Softbank merger is witnessing another road bump. The consolidation program is being reviewed by the US Department of Justice (DOJ), Department of Homeland Security (DHS), and the Federal Bureau of Investigation (FBI). They are assessing the impact of the deal on national security and other safety concerns with regards to too much exposure of domestic network to a foreign entity. The DOJ has written to the FCC to hold off its review process and defer its action until they are through with their examination. The DOJ and the DHS said that they require more time to complete their investigation of the deal.

This may be another impediment in the way of the $20 billion deal. However, the Kansas carrier has already received a capital infusion of $3.1 billion in the form of convertible debt. The cash infusion led Sprint to make a $2.97 a share takeover offer to partner Clearwire (NASDAQ: CLWR) and get complete access to the carrier’s spectrum. Dish Network (NASDAQ: DISH), which was recently in talks with Sprint regarding a possible partnership, withdrew its proposal once Sprint made an offer to the Houston-based carrier. In fact the satellite provider made a counter bid of $3.30 a share for Clearwire in comparison to Sprint’s $2.97 per share offer. Dish is against both Sprint-Softbank and Sprint-Clearwire deals. However, Dish is not the only one opposing such a transaction, there are others who are concerned as well.

The opposition
While the DOJ has written to the FCC to postpone the decision on the deal, Dish has requested the FCC to block the deal in the interest of national security. The satellite provider pointed out that control on such a huge swathe of spectrum by a foreign entity would put public interest at stake.

Other than this, Clearwire investor Crest Financial has also expressed its concern and has therefore requested the FCC to block the Sprint-Softbank and Sprint-Clearwire deals. Crest argues that Sprint is grossly undervaluing Clearwire’s true worth by offering $2.97 per share. He makes a comparison between Sprint’s offer to Clearwire and AT&T’s recent proposal for Verizon’s spectrum. Sprint is valuing Cleawire’s airwaves between 13 to 21 cents per “MHz POP” while AT&T is offering $3.77 per MHz POP to Verizon.

Is Clearwire’s spectrum attractive?
Clearwire’s spectrum may not be as good or attractive at the moment since it has issues in penetrating walls and other huge structure. In addition there are barely devices that run on this spectrum band. But things are set to change for this spectrum band in times to come. Qualcomm said that it would add 2.5 Ghz in its chipset while China Mobile has plans to build 20,000 cell towers for the 2.5 Ghz spectrum. Moreover, telecom players are shifting to small towers that give stronger coverage and reduced traffic overcrowding on huge cell towers. Clearwire’s 2.5 GHz spectrum works well with these mini towers and is suited to carry huge data with least interference. Considering all these facts Clearwire’s spectrum asset has been underrated by Sprint.

Other shareholders have also voiced their concern about the Sprint takeover and have requested the regulatory authorities to act in the best interest and block the deal. The DOJ and other bodies are scrutinizing both the deals closely to weigh security considerations. Softbank closely works with two of China’s largest phone-equipment makers Huawei Technologies and ZTE Corporation. In the event of Softbank’s acquisition of Sprint, these two equipment makers might get an entry into the US market by dint of their association with the Japanese carrier. These issues need to be addressed as part of the investigation.

The bottom-line
Despite the opposition both Softbank and Sprint are confident about the deal and expect to close it as scheduled in the middle of this year. If things go in favor of the third largest US carrier, Softbank’s cash infusion backed by Clearwire’s spectrum would increase Sprint’s strengthen by great folds in the long run. It would give Sprint the required muscle to challenge Verizon and AT&T. However, Sprint’s future outlook still remains a question unless the regulatory body passes its decision.

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