SoftBank Corp. (9984) won U.S. national-security clearance for its $20.1 billion takeover of Sprint Nextel Corp. (S), helping shore up the deal as the Japanese company tries to ward off a counteroffer from Dish Network Corp. (DISH)
SoftBank and Sprint were notified yesterday by the Committee on Foreign Investment in the U.S. that it has completed its investigation of the proposed transaction and found no unresolved national-security issues, according to a statement today. SoftBank expects the deal to close July 1.
Dish Network Corp., which made a $25.5 billion bid last month for Sprint, has said allowing Tokyo-based SoftBank to control a U.S. phone network would compromise national security. The most contentious matter was whether SoftBank would use Chinese-manufactured equipment in Sprint’s network, something it pledged not to do. Gaining the CFIUS’s blessing removes some ammunition from Dish in its attacks on the deal.
“One political barrier is cleared and it’s a plus for SoftBank,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co., which oversees the equivalent of $4.8 billion in assets. “Dish has criticized this.”
Shares of Overland Park, Kansas-based Sprint climbed 0.1 percent to $7.28 at the close in New York, while Dish fell 2.2 percent to $39.25. SoftBank rose 2.1 percent to 5,320 yen at the close in Tokyo.
The national-security agreement requires the companies to appoint an independent security director to the new Sprint board, according to a regulatory filing. The security director will be approved by U.S. agencies and serve as a contact between the government and Sprint. Regulators also will have oversight on network-equipment and service purchases by the company.
SoftBank and Sprint also agreed to create a small subsidiary company to handle classified government work, according to a person familiar with the negotiations. Similar provisions were established when Paris-based Alcatel combined with New Jersey-based Lucent Technologies Inc., and when Bermuda-based Global Crossing Ltd. got an investment from Singapore Technologies Telemedia Pte.
“CFIUS has historically been active in the telecom space because there have been so many cross-border acquisitions,” said Nancy McLernon, president of the Organization for International Investment, a Washington-based lobbying group that represents more than 160 companies that invest in the U.S. “The SoftBank-Sprint approval appears to signal an increased focus on the supply chain by CFIUS.”
The acquisition would give SoftBank 70 percent of Sprint, the third-largest U.S. wireless network. Last week, Sprint said it had received the final necessary state regulatory approvals for the SoftBank merger.
The SoftBank transaction is also under review by the Federal Communications Commission. Dish, a satellite-TV provider controlled by billionaire Charlie Ergen, has urged the FCC to delay any action on its review of the SoftBank deal.
Sprint’s future is “unsettled” while the company considers the Dish offer, the satellite company said in a filing last month.
SoftBank has argued that Dish would load Sprint with too much debt if it’s allowed to acquire the carrier. To finance the deal, Dish has raised about $2.6 billion in a bond offering managed by Barclays Plc, Jefferies Group LLC, Macquarie Group Ltd. and Royal Bank of Canada. It tapped the same banks, along with Bank of Nova Scotia (BNS), for a total of $9.3 billion in loans.
In reaction to the national-security agreement, Dish spokesman Bob Toevs said SoftBank’s deal still presents risks.
“The U.S. government should continue to proceed with deliberation and caution in turning over assets of national strategic importance -- such as the Sprint fiber backbone and wireless networks -- to a foreign-controlled entity with significant ties to China,” said Toevs, whose company is based in Englewood, Colorado.
The use of Chinese-made equipment became a bigger issue after a House Intelligence Committee report last year urged U.S. companies to steer clear of Huawei Technologies Co. and ZTE Corp., citing concerns that the Chinese government could install malicious hardware or software in U.S. telecommunications networks.
SoftBank, Japan’s third-largest wireless carrier, uses some base band units and antenna systems from Huawei and ZTE for its fourth-generation mobile network. Alcatel-Lucent and Ericsson AB provide the core network.
The merged company also will have to deal with Huawei gear in the network of Clearwire Corp. (CLWR), a Sprint takeover target. After the proposed combination with Clearwire, which is slated for a shareholder vote this week, Sprint will have to absorb that company’s network into its own. Sprint said in today’s filing that it plans to remove the Clearwire equipment in question by the end of 2016 under the CFIUS agreement.
William Plummer, a U.S.-based spokesman for Huawei, said the debate over using Chinese equipment is off-base. Every major U.S. carrier uses some supplies from the country, he said.
“No matter who wins the bid for Sprint, the future Sprint network will be sourced, in part, from China, just as are the networks of AT&T and Verizon and every other carrier,” Plummer said. “Every telecom infrastructure vendor, regardless of geography of headquarters, conducts R&D, codes software and manufactures gear on a global basis, including -- all -- in China. All rely on common supply chains, and all are subject to common vulnerabilities.”
Crest Financial Ltd., a Clearwire investor that is opposing the Sprint takeover, sent a letter to the FCC complaining that SoftBank and Sprint are already behaving like a merged company - - even as the commission continues to evaluate the deal.
“SoftBank and Sprint have jumped the gun on the commission’s review, showing their apparent indifference to the commission’s public interest inquiry,” Crest said in the letter. “Although the commission’s review remains ongoing and SoftBank itself is locked in a bidding war with Dish Network for Sprint, SoftBank has been directing and manipulating Sprint’s critical business decisions as if its merger with Sprint were already approved.”