Sprint and Softbank Reject Chinese Equipment to Seek FCC Approval

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The third largest carrier in the U.S., Sprint (NYSE: S), and Japan based SoftBank are putting in all the effort required to win the confidence of the regulators regarding security concerns. The deal has been assessed by the FCC, the U.S. Department of Justice (DOJ), and the Committee on Foreign Investment (CFIUS) that looks into national security threats and public safety concerns arising from foreign business transactions.

In fact, one of the government’s major worries is Sprint’s transfer of majority control to a foreign entity in the form of SoftBank, which purchases network equipment from two big Chinese suppliers Huawei Technologies and ZTE. For its 4G network in Japan, SoftBank gets the antenna system and base band units from Huawei and ZTE.

Assurance given

The Kansas-based carrier and its Japanese suitor have assured the House Intelligence Committee that they would not purchase and use equipment from these Chinese telecom equipment manufacturers. The U.S. intelligence team has always been suspicious of these equipment makers having connections with the Chinese government.

In fact, last October, the agency said that the U.S. government should obstruct any merger and acquisition deal that involves Huawei and ZTE, since that could lead to a way which could help the Chinese intelligence to spy using U.S. telecom network. So, the regulators want to ensure that some of these specific companies do not get an entry as vendors to the domestic players.

SoftBank is aware of this sensitivity. The company’s Chief Executive, Masayoshi Son, also acknowledges the fact that Sprint is a major government supplier, and using ‘equipment that would raise any security concerns’ would be inappropriate. An individual close to the matter said that Sprint is working on a ‘network security agreement’, that would put stipulations on the company’s vendor list.

Even though trade rules do not restrict these Chinese gear makers from supplying, both Sprint and SoftBank have willingly agreed to strike them off from their supplier list to get the deal approved.

The U.S. agency has previously dealt with security issues and made security agreements related to mergers, the most recent one being that of T-Mobile and MetroPCS, which recently received the green signal. According to the FCC, Deutsche Telekom, parent of T-Mobile, had to disclose the equipment its uses and also if it has added any new suppliers.

The path is getting Clearer

Meanwhile, Sprint’s talk with Clearwire (NASDAQ: CLWR), in which it holds majority stake, is advancing. The good news is that Clearwire, for the second time, is tapping the $80 million additional finance from its biggest wholesale partner, flouting Dish Network’s (NASDAQ: DISH) condition that the satellite provider would withdraw its bid if Clearwire accepts Sprint’s capital infusion.

The Bellevue-based carrier says that talks with Dish are on, though it continues its recommendation of Sprint’s proposal. But this doesn’t seem to be the case. The additional financing offered by Sprint is part of its merger deal with Clearwire. Every time the regional carrier accepts $80 million, it would increase Sprint’s ownership stake in the company; and this makes it pretty clear that the carrier wishes to inch closer to Sprint player rather than assess Dish’s offer. Though Dish made a superior offer of $3.30 a share against Sprint’s $2.97 a share proposal, the latter can remain care free.

However, one thing that has drawn Sprint’s attention in all this is that Clearwire, too, uses Huawei-made equipment for its network. The regional carrier uses supplies from home vendors, including Cisco Systems and Ciena, for its core network, but it purchases gear from Huawei for network edges. Though the agency officials have not yet conducted serious talks about Clearwire’s supply yet, both Sprint and SoftBank have said that they would take steps ‘to replace Huawei equipment in the Clearwire network’ as per Mike Rogers, Chairman of the intelligence committee.

Summing up

The network equipment purchase shouldn’t bother the U.S. intelligence agency and the government so much. A network security agreement could be formed with Sprint and SoftBank as both parties have given their assurance of excluding those specific China-based equipment makers to manage security issues.

Rajesh M. has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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