Sprint’s Softbank Deal Seen Roiling U.S. Mobile Market

Sprint Nextel Corp. (S) Chief Executive Officer Dan Hesse’s talks to align with Softbank Corp. (9984) have the potential to reshape the U.S. wireless landscape, creating a more viable competitor to Verizon Wireless and AT&T Inc. (T) and sparking a new round of consolidation.

Sprint’s discussions involve Softbank, Japan’s third- largest wireless carrier, taking a stake of as much as 75 percent and providing capital for investments, according to two people familiar with the matter. The Nikkei newspaper said Softbank may pay 1.5 trillion yen ($19 billion), without saying where it got the information.

A deal between Softbank and Sprint would disrupt a wireless industry that has been increasingly dominated by Verizon and AT&T, a duopoly that has fueled government concern. The transaction would give Sprint financial support to build a competitive wireless network with a chance to be first to offer the latest mobile devices, plus the means to buy control of Clearwire Corp. (CLWR) to get more capacity for data transmissions.

“This must be causing chills to run down the spines of AT&T and Verizon executives,” said Tero Kuittinen, an analyst at Alekstra Oy, a mobile diagnostics company. “They are ripe for an aggressive new challenger to attack.”

Verizon and AT&T together control 75 percent of the market for U.S. contract customers, according to Goldman Sachs Group Inc. (GS), giving them economies of scale and the first shot at the latest smartphones that draw customers. Overland Park, Kansas- based Sprint has 15 percent and T-Mobile USA Inc. 10 percent.

Exclusive IPhone

AT&T had exclusive rights to Apple Inc. (AAPL)’s iPhone for almost four years before Verizon (VZ) and later Sprint were able to offer the device. Last year, AT&T had to drop its $39 billion acquisition of T-Mobile USA because of opposition by regulators.

A new investor could help Hesse, 58, speed up his $7 billion network-upgrade plan to catch his two bigger rivals, who have begun blanketing the U.S. with 4G wireless coverage. Sprint needs to improve its own technology to lure more users craving mobile video and faster download speeds, its ticket to growth as the wireless voice market has become saturated.

Sprint also could use financial strength from a Softbank deal to gobble up smaller wireless companies, adding more airwaves to increase its capacity as users demand more Internet services.

Clearwire Control

Softbank may help Sprint buy full control of Clearwire, a wholesale U.S. wireless carrier, though no decision on that step has yet been made, one of the people familiar with the matter said. Sprint already owns 48 percent of Bellevue, Washington- based Clearwire, which has airwaves in the same frequency as Softbank and the same TDD LTE variant of network technology.

“Sprint is unprofitable, but the reason for that is spending to set up its LTE network, so we can expect it to turn around in the future,” Shinji Moriyuki, an analyst at SMBC Nikko Securities Inc. in Tokyo, said in a report today.

A Sprint-Softbank deal could also create an operator financially strong enough to eventually bid for the assets Deutsche Telekom AG (DTE)’s T-Mobile USA is trying to combine with Richardson, Texas-based wireless carrier MetroPCS Communications Inc. (PCS), said a person familiar with Softbank’s plans, declining to be identified as the discussions are private. Deutsche Telekom said Oct. 3 it agreed to merge the U.S. unit with MetroPCS.

Softbank Decline

Sprint is holding off on an immediate counterbid for MetroPCS to gain time to scrutinize the planned combination with T-Mobile USA, people familiar with the situation said Oct. 10. Softbank, based in Tokyo, plans to buy MetroPCS through Sprint, Nikkei reported yesterday.

In a statement confirming talks for a “substantial” investment from Softbank, Sprint said it couldn’t assure a transaction would occur and didn’t provide any other details. Softbank also confirmed the talks in a statement to the Tokyo Stock Exchange today. MetroPCS, Clearwire, AT&T and Verizon also declined to comment.

The deal talks made for the worst week in more than three years for Verizon and AT&T shareholders. AT&T fell 5.9 percent and Verizon decreased 5.2 percent respectively this week, the worst slide since 2009. Clearwire rose 4.5 percent to close at $2.32 in New York, adding to yesterday’s 71 percent gain. MetroPCS advanced 2 percent to $11.88. Sprint fell 0.5 percent to $5.73, after gaining 14 percent yesterday. The stock has more than doubled this year, giving Sprint a market value of $17.2 billion.

Softbank shares fell 17 percent, the most on record, to 2,395 yen in Tokyo today. The stock has gained 5.7 percent this year, compared with a 0.9 percent increase in the Nikkei 225 Stock Average.

Convertible Bonds

The cost to insure Softbank’s debt against non-payment climbed 136 basis points to 307 basis points as of 3:30 p.m. on Oct. 12 in Tokyo, the highest since Jan. 16, according to data provider CMA.

The spread on Softbank’s 45 billion yen of 1.1 percent bonds due 2016 relative to government debt jumped 98.1 basis points as of 5:11 p.m. in Tokyo on Oct. 12 to 139.9, its highest since issuance, according to Japan Securities Dealers Association prices on Bloomberg.

Standard & Poor’s Ratings Services placed its BBB long-term corporate credit and senior unsecured debt ratings of Softbank on creditwatch with negative implications because of possible investment in Sprint Nextel.

“The transaction, if it proceeds, may undermine Softbank’s financial risk profile, in our view,” S&P said in the statement. Regardless of how the company finances the potential investment, Sprint’s “significantly weaker” financial risk profile may materially undermine Softbank’s financial risk profile, it said.

Faster Technology

Sprint and Softbank are still negotiating over price, said one of the people familiar with the matter. While a price of about $6.50 per share for Sprint has been discussed, no specific price has yet been reached, the person said.

Softbank’s investment in Sprint would include buying out some holders of publicly traded Sprint shares and supplying Sprint directly with capital, one person said. Sprint could use the capital to build its LTE network, the person said.

Sprint started service using the faster technology called LTE, or long-term evolution, in July in Atlanta, Dallas, Houston, San Antonio and Kansas City, with plans to add more this year to catch up with its larger competitors. Verizon Wireless, which had a one-year head start on the upgrades, has the service in about 340.

Softbank is working with lenders on how much it will need to borrow for the deal, trying to minimize how much its credit rating may be downgraded, said one of the people familiar with the matter. Moody’s Investors Service upgraded Softbank’s debt to investment grade last year, and Standard & Poor’s rates it two levels above investment grade after an upgrade in January. Both have junk ratings on Sprint debt.

First IPhone

At $19 billion, the deal would be the biggest outbound acquisition since Japan Tobacco Inc. (2914)’s takeover of Gallaher Group Ltd. in 2007.

If completed, it would put Japanese overseas takeovers on track for a record year. Companies in Asia’s third-largest economy have announced $59.9 billion of acquisitions abroad this year, compared with $88 billion last year, according to data compiled by Bloomberg.

Softbank, the fastest-growing Japanese mobile-phone provider, was the first carrier in Japan to offer the iPhone. That helped it boost earnings by more than sevenfold over the past four years and close the gap with larger NTT DoCoMo Inc. (9437) and KDDI Corp. (9433)

Softbank may be looking toward the U.S. because it doesn’t have as many alternatives in faster-growing developing countries, which typically limit foreign investment, said Yoshihisa Toyosaki, a Tokyo-based analyst with Architect Grand Design, an electronics research and consulting company.

“Softbank is trying to take advantage of the economic turmoil in the U.S. to buy a majority stake in a carrier,” he said. “This represents an opportunity for them.”

Entering the U.S. market allows Softbank to participate in a bigger and growing market. Mobile-handset sales in the U.S. totaled 191 million units last year, compared with 182 million units in 2007, according to data compiled by IDC.

In contrast, handset shipments declined to 38 million units in Japan last year from 52 million in 2007, according to IDC.

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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