Is Softbank’s Plan B Threatening Sprint’s Position?

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Softbank’s plan to keep an alternative in case its deal with Sprint (NYSE: S) falls through is one of the hot topics in the wireless industry. The Japanese telecom player is thinking of making a bid for T-Mobile (NYSE: TMUS) if its attempt to acquire a 70% stake in Sprint fails. This clearly indicates that Softbank is extremely keen to enter the US wireless market.

Softbank had made an acquisition proposal last October to buy a 70% stake in the Kansas carrier for $20.1 billion, but Dish (NASDAQ: DISH) made a counterbid of $25.5 billion as part of its strategy to enter the telecom industry. Though Sprint recommends Softbank’s proposal, it is said to be considering Dish’s offer as well. Also, there are several shareholders who prefer Dish’s higher offer. The June 12 shareholders' vote is to decide the fate of the Sprint-Softbank combination and clear all doubts as to what shareholders want. This is the primary reason why the Japanese giant has made a backup plan.

Plan B

This is not the first time that Softbank is showing its interest in the fourth largest US carrier. The foreign player had earlier considered buying T-Mobile but took a step back when the latter was preparing for its reverse merger with pay-as-you-go carrier MetroPCS. The T-Mobile/MetroPCS combination is now complete, and talks between Softbank and T-Mobile have intensified recently.

There are solid reasons as to why Softbank has made a move towards T-Mobile. Firstly, the carrier is desperate to do business in the US telecom market. Second, it wants to keep an alternative as some Sprint investors have an inclination for Dish’s proposal. Thirdly, Softbank can enter into a separate agreement with the controlling stakeholders of T-Mobile to ensure that there is no possibility for a counteroffer. Finally, in case its combination with Sprint fails, Softbank would be compensated by nearly $5 billion, which would come from a convertible bond and currency hedges to cover the deal risks. Softbank could utilize these gains to acquire T-Mobile.

So where does Sprint stand now? Dish is blocking both the mergers in which Sprint is involved. Not only is it blocking Softbank from acquiring Sprint, but the satellite provider has made a counterbid for Clearwire (NASDAQ: CLWR) as well.

Where is Sprint headed?

Sprint’s shares reacted to the news of Softbank/T-Mobile talks and fell 1.4% in a day, the worst drop since May. The carrier is waiting for its last hurdle of the shareholder vote scheduled for June 12, which shall decide the final outcome of Softbank’s proposal. However, the news of Softbank’s interest in T-Mobile could be crucial to how investors decide to vote.

Proxy advisor Glass Lewis suggested Sprint shareholders not vote in favor of the Softbank deal while Sprint’s board is assessing Dish’s proposal. A BTIG analyst said that showing interest to combine with T-Mobile could be a Softbank strategy to press Sprint not to delay the shareholder vote for considering Dish’s offer.

Both Softbank and Sprint have successfully managed to overcome all regulatory hurdles and are awaiting the vote so that the foreign telecom player can conclude its deal with Sprint. In fact, to drive away all security concerns, Softbank and Sprint have agreed to have the retired and the highly admired Mike Mullen to join the combined company’s board. Mullen, a retired chairman of Joint Chiefs of Staff, would supervise and investigate the combined entity’s foreign purchases and transactions to ensure its compliance with their recently announced National Security Agreement with the regulators.

Dish, which is sponsoring an advertising campaign against Softbank to raise cyber security fears that pose a threat to national security, is also involved in a counterbid for Clearwire and is awaiting its shareholder vote slated for June 13.

The Clearwire saga

Sprint already owns over 50% of Clearwire and has an irreversible commitment from a set of strategic investors in Clearwire who would sell their share to Sprint. This would take Sprint’s interest in the spectrum-rich carrier up to 68.8%. The national carrier has made all arrangements to ensure that Clearwire remains in its hands. Clearwire has spectrum that both Dish and Sprint want. In fact the regional telecom player’s airwave is one of the primary reasons why Softbank wishes to acquire Sprint.

So what to expect next?

The Bottom line

Expect the unexpected! The wireless industry news has become one of the most difficult to predict, especially after Dish’s bid for telecom players. Sprint’s shareholder vote could be rescheduled in case Dish decides to make a formal offer to the Kansas carrier. This could further delay the Clearwire vote. And Softbank could finally be forced to get into some real serious talks with T-Mobile. It would be interesting to watch how things mature for each player and which merger combination actually materializes.

Despite the confusion built, I believe Sprint is going to benefit in a huge way and has great potential for growth with Softbank’s and Clearwire’s backup. The Softbank-Sprint merger is almost sure to happen and, as far as Clearwire is concerned, Sprint is doing all that is required to increase its holding in the company. What’s your take?

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