Sprint $8 Billion War Chest Threatens AT&T-Verizon Reign

Softbank Agrees to Buy 70% Sprint Stake in $20.1 Billion Deal
Softbank and Sprint boards have both approved the deal, which the two companies expect to close by mid-2013, according to the statement. Photographer: David Paul Morris/Bloomberg

Softbank Corp.’s $20 billion deal with Sprint Nextel Corp. gives Chief Executive Officer Dan Hesse the firepower to bring renewed competition to the U.S. mobile-phone industry, creating benefits for consumers and challenges for AT&T Inc. and Verizon Wireless.

Softbank, based in Tokyo, will deposit $8 billion into Hesse’s war chest as part of a deal in which the Japanese company will take a 70 percent stake in the third-largest U.S. wireless operator. The money will allow the CEO to improve Sprint’s network, compete for the latest smartphones, reduce debt and potentially make acquisitions.

The deal marks a turnaround for Hesse, 58, who took over five years ago in the aftermath of the failed Nextel merger and hasn’t booked an annual profit since. Just last year, he warned that the U.S. wireless market was headed toward a duopoly and that Sprint’s survival as an independent company was in doubt. With Softbank’s backing, Hesse has the cash and investor support to challenge his larger rivals like never before.

“This opens strategic options we have not had at any time during my tenure,” said Hesse on a conference call yesterday. “Sprint, for the first time in many years, will have the strengthened flexibility to play a key role in the evolution of the industry.”

Cash Infusion

The deal has major risks for both sides. For Softbank, the agreement will mean taking on $19 billion in debt to expand into the U.S. market, where foreign companies have often fared poorly. Its stock plunged the most ever after the deal was made public. For Sprint, it will still have to compete against rivals that are twice as large, with the additional burden of answering to owners 14 time zones ahead.

Softbank, Japan’s third-largest wireless carrier, is creating U.S. holding entities to make the acquisition, the companies said. About 55 percent of Sprint stock will be bought for $7.30 a share in cash, and the rest will convert into 30 percent of a newly capitalized company, which will include the $8 billion cash infusion, Sprint said in a presentation to investors. Softbank will also receive a warrant to purchase 55 million additional Sprint shares at an exercise price of $5.25 per share.

Sprint, based in Overland Park, Kansas, was unchanged at $5.69 at the close in New York. Clearwire Corp. slid 17 percent after doubling in the prior three trading days as investors speculated that Sprint would seek to build on its 48 percent stake in the Bellevue, Washington-based wholesale carrier to gain more capacity for mobile data service.

Market Leaders

Verizon Communications Inc., which controls the biggest U.S. wireless company, fell 0.9 percent, and Dallas-based AT&T, the second-largest, rose 0.5 percent. Sprint is a distant third behind Verizon and AT&T, which together have about 75 percent of U.S. wireless customers on contracts, according to Goldman Sachs Group Inc.

Hesse has come a long way since October 2011, when participants in an investor meeting complained about a lack of forecasts for profits and revenue as Sprint spent to improve its network and to begin selling Apple Inc.’s iPhone.

Both of those endeavors are helping Sprint’s comeback. The iPhone helped boost the amount subscribers spend on their monthly phone bills by 6.6 percent in the first quarter of this year compared to a year earlier. Sprint began offering LTE service in five cities in July, with plans to add more this year.

‘Much Stronger’

“People perceive he’s made operational improvements to the company and is now bringing in cash to help it succeed,” Walter Piecyk, an analyst at BTIG LLC in New York, said of Hesse in an interview yesterday. “Within a year, we could see Sprint in a much stronger technology position than AT&T and Verizon” if Sprint uses its newfound cash to acquire Clearwire, he said.

Mike DiGioia, a spokesman for Clearwire, declined to comment, as did Torod Neptune, a spokesman for Basking Ridge, New Jersey-based Verizon Wireless, and Mark Siegel, a spokesman for AT&T.

Hesse’s new ally is Masayoshi Son, the 55-year-old billionaire who controls Softbank. Like Hesse, Son said yesterday he views the U.S. market as a duopoly ripe for an ambitious third party that can use high-speed Internet plans to lure users.

“For a challenger like us, the market is offering a compelling opportunity, maybe like what Softbank has gone through in Japan,” Son said on a conference call.

Son acquired Vodafone Group Plc’s mobile-phone business in Japan in 2006 and helped the company boost net income sevenfold over the past four years, aided by becoming the country’s first carrier for the iPhone and iPad.

“Japanese companies are not necessarily known for fast decision-making, but we have a slightly different case in Softbank.” said David Heger, an analyst at Edward Jones & Co. “We have a very aggressive company and a fast-moving CEO.”

Investors Balk

Son’s strategy was too aggressive for Softbank investors, who have sold off the company’s shares on concern it will pile on too much debt to fund the acquisition. Softbank shares closed at 2,485 yen, down 14 percent from Oct. 11, when the company’s talks with Sprint were first reported.

Standard & Poor’s placed Softbank’s debt rating of BBB on watch for a possible downgrade, saying the transaction could hurt Softbank’s risk profile.

With Sprint’s 56.4 mobile-phone subscriptions, Softbank will have a total of 96 million wireless lines across the U.S. and Japan, boosting its negotiating leverage to get lower prices from handset makers and network equipment manufacturers. That will help Hesse compete against the buying power of AT&T and Verizon, Heger said.

More Deals?

Sprint could also use its new funding to purchase the rest of Clearwire or bid for MetroPCS Communications Inc., people familiar with the matter have said. While Hesse said yesterday that the U.S. wireless market offers a “significant consolidation opportunity,” he declined to discuss specific transactions.

Softbank and Sprint are focused on closing their deal over the next six to eight months and can’t engage in further mergers or acquisitions until that work is complete, people with direct knowledge of the situation said yesterday. Clearwire dropped to $2.23 after closing yesterday at $2.69.

Acquiring the rest of Clearwire would give Hesse the capacity he needs to keep offering unlimited data plans without saturating Sprint’s network, said Charles Golvin, an analyst at Forrester Research. That will put more competitive pressure on AT&T and Verizon, which no longer offer unlimited plans, he said.

Winning Consumers

Hesse should commit to keep providing low-priced data plans to show consumers Sprint is serious about winning their favor, said Joel Kelsey, legislative director at Free Press, a Florence, Massachusetts, policy group.

“This deal has the potential to do great things for consumers,” he said. “If the deal didn’t come through, Sprint would have built its network much more slowly. It would have meant a longer wait time for better coverage and doing away with unlimited plans.”

Scott Sloat, a Sprint spokesman, said in an e-mail that “we believe unlimited data plans are a key differentiator and have not announced any plans to move away from them.”

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