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.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

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.

SEE: Biggest Merger and Acquisition Disasters

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.

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Mutual Funds & ETFs

    Top 4 Utilities Mutual Funds

    Discover which mutual funds in the utilities industry are top rated, and learn how investors can include utilities as part of an asset allocation strategy.
  9. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  10. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!