The Softbank-Sprint Tie-Up Seems Like Only The Beginning

By Stephen D. Simpson, CFA | October 16, 2012 AAA

Sprint Nextel (NYSE:S) has always seemed to be uncommonly controversial for a carrier. Not only has the company had its ups and downs with mergers and acquisitions, but the Street has never seemed entirely comfortable with the its plans vis-a-vis Clearwire (Nasdaq:CLWR). Even now, after the company has reached an agreement to sell a controlling stake to Japan's SoftBank, it doesn't look like there's any imminent end to the controversy and uncertainty.

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A Somewhat Convoluted Deal
SoftBank's deal for a stake in Sprint is not exactly a simple deal. If it all goes according to plan, SoftBank will be buying about 70% of the company for a total of $20.1 billion. Due in part to uncertainties with the deal, however, it is going to be structured a little unconventionally. First, SoftBank will pay about $3.1 billion for a new convertible bond that will be issued exclusively to SoftBank at a conversion price of $5.25 (with a seven-year term, and a 1% coupon). If the deal moves forward, SoftBank will convert the bond and spend $17 billion more on Sprint equity - $4.9 billion for newly-issued shares at $5.25 each, and the remaining $12.1 billion for a tender offer of roughly 55% of Sprint's outstanding shares at $7.30 per share. When it's all said and done, Sprint will be getting about $8 billion in direct funding from SoftBank.

Why all the Caveats?
Investors may notice that there's a little more "if/then" to this deal than most. SoftBank has likely learned from the AT&T (NYSE:T) failure to acquire T-Mobile and has structured the deal in such a way as to limit its downside exposure. Although this deal isn't likely to have the market concentration worries that seemed to scuttle the AT&T/T-Mobile merger, the fact that SoftBank is a foreign company does complicate the things and requires more coordination between U.S. government departments/regulators. It may also be the case, however, that the deal is structured this way to protect SoftBank in case a follow-on transaction cannot be executed.

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Sprint Today ... and then Clearwire?
In particular, SoftBank may be structuring this deal in this way so as to limit the downside regarding Sprint's ability to control Clearwire. In fact, the investment of new funds into Sprint may be a part of facilitating a deal for Clearwire, as Sprint doesn't need the capital that badly. Adding Clearwire to the mix would make sense in multiple respects. First, Sprint already owns quite a lot of Clearwire, and while Clearwire's spectrum holdings are valuable, they're not really adequate for establishing its own national network. Second, SoftBank is deploying its own 2.5GHz TD-LTE network and that could make a Clearwire acquisition more valuable in terms of driving better equipment prices from vendors such as Alcatel-Lucent (NYSE:ALU) and Ericsson (Nasdaq:ERIC).

The Deal Makes Sense for SoftBank Either Way
Combining Clearwire into Sprint would arguably make more sense for SoftBank, but even Sprint as a standalone would be a good deal. Softbank has done quite well with Vodafone Japan, and Sprint could definitely use some new blood and new ideas in the boardroom. It's also well worth noting that Japan is not exactly a high-growth market for SoftBank and the U.S. market is still attractive. What's more, Sprint was the cheapest available asset with real scale.

The Bottom Line
Sprint's stock has been quite strong since the early summer, more than doubling from the $2.50 level and spiking up from $5 on rumors that the company was in play. That said, the stock is clearly trading below the $6.49 per share implied value of the Softbank investments. Some of this may be due to the uncertainties of the deal, including both the ability of the companies to get regulators to sign off and the potential of including additional assets (such as Clearwire) in the mix. Whatever the case may be, it seems to me that it's hard to argue that SoftBank's involvement is not a net positive for the company and its shareholders. A straight-up 100% cash take-out of Sprint would arguably have been more appealing for today's shareholders, but I believe incorporating Clearwire's spectrum assets and SoftBank's management (and access to funds) will make Sprint a better company and a better stock in the near future.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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