Oct. 19 (Bloomberg) -- Softbank Corp. buys mobile-phone network gear from Chinese companies viewed as security threats by U.S. lawmakers, and the relationship may become an issue as regulators review its bid for Sprint Nextel Corp.
Softbank’s connections with Huawei Technologies Co. and ZTE Corp., China’s two largest makers of phone-network equipment, probably won’t kill its $20.1 billion offer for 70 percent of Sprint, said Stewart Baker, a former U.S. Homeland Security Department official. It’s likely, though, that U.S. officials will address those links when they scrutinize the deal, he said.
The House Intelligence Committee in a report last month urged U.S. companies to steer clear of Huawei and ZTE, citing concerns that the Chinese government could install malicious hardware or software in U.S. telecommunications networks.
“The flap over Huawei and ZTE means that at a minimum, the extent to which equipment from Huawei and ZTE would be introduced into the U.S. infrastructure will be an issue,” Baker, a partner with Steptoe & Johnson LLP in Washington, said. “This deal will probably end up getting approved but with a very detailed national security agreement.”
About 10 percent of capital expenditure by Tokyo-based Softbank goes to Huawei and ZTE for equipment, according to data compiled by Bloomberg.
“I am aware in the U.S., the government is sensitively looking at it, and we understand national security,” Softbank President Masayoshi Son said in an interview yesterday. “So if the U.S. government decides, don’t do it, we would comply.”
“It’s only one of our group subsidiary companies using Huawei and ZTE,” Son said. “It’s never our main investment.”
Sprint Chief Executive Officer Dan Hesse said in an interview that the combined company is set for an extensive regulatory review, and because of that doesn’t expect to close the deal until the middle of next year.
“We don’t foresee any issues at all with respect to regulatory approval,” Hesse said. “This will be seen as a positive -- it’s pro-consumer, it’s pro-competitive.” The deal will build the third-largest mobile carrier as a competitor to market leaders Verizon Wireless and AT&T Inc., he said.
Softbank buys base band units and antenna systems from Huawei and ZTE for its fourth-generation mobile network in Japan. Alcatel-Lucent and Ericsson AB provide the core network.
William Plummer, a Washington-based spokesman for Huawei, declined by e-mail to comment on the security review. ZTE isn’t commenting, Rory Davenport, spokesman for the company in Washington, said in an e-mail.
U.S. Commerce Secretary Gary Locke called Hesse in 2010 to express “deep concern” that Huawei might win a contract to upgrade the mobile-phone carrier’s network. After the call, Sprint awarded the work, worth as much as $5 billion, to companies based in France, Sweden and South Korea.
Huawei, founded in 1988 by former Chinese army officer Ren Zhengfei, has struggled to expand in the U.S. Huawei and Bain Capital Partners LLC dropped a bid to buy computer-equipment maker 3Com Corp. in 2008 after U.S. officials opposed the transaction. Last year, Huawei unwound the purchase of patents from a computer-services company, 3Leaf Systems Inc., after U.S. objections.
Huawei has hired six lobbying firms and spent $820,000 on lobbying in the first six months of this year, compared with $200,000 during the same period in 2011, according to U.S. Senate disclosures.
Softbank and Sprint will need to reach a national security agreement with the U.S. government’s “Team Telecom,” which includes the departments of Defense, Homeland Security and Justice, Farhad Jalinous, a partner with Kaye Scholer LLP in Washington, said.
Such an agreement would virtually guarantee approval of the deal by the Committee on Foreign Investment in the U.S., or CFIUS, he said.
CFIUS is an interagency committee headed by Treasury Secretary Timothy Geithner that reviews the national security implications of transactions that could lead to a non-U.S. citizen controlling a U.S. business.
A so-called mitigation agreement would also resolve any concerns about control of Overland Park, Kansas-based Sprint falling to a non-U.S. owner, Jalinous said.
John Taylor, a Sprint spokesman, said there is “ample precedent” for foreign ownership in the U.S. telecommunications market and that “any concerns can be adequately addressed.”
In 2001, members of Congress, to no avail, urged the Federal Communications Commission to block Deutsche Telekom AG’s purchase of the company that became T-Mobile USA Inc. because the Bonn-based buyer was controlled by the German government. The FCC approved the deal. Softbank isn’t government-owned. Verizon Wireless, the largest carrier in the U.S. market, is 45 percent owned by U.K-based Vodafone Group Plc and 55 percent owned by New York-based Verizon Communications Inc.
“The U.S. long ago decided to allow foreign ownership of a U.S. wireless operator when Deutsche Telekom bought T-Mobile,” Paul Gallant, a Washington-based analyst with Guggenheim Securities, said in a note Oct. 17.
FCC Chairman Julius Genachowski, when asked Oct. 17 whether foreign ownership of mobile providers is a cause for concern, said, “The focus is on driving investment and innovation in the U.S., benefiting our economy, benefiting American consumers.”
The FCC, in reviewing mergers, considers foreign ownership, according to a set of guidelines published by the agency. The national security agreement negotiated with Team Telecom is incorporated into the FCC licensing process, Steptoe & Johnson’s Baker said.
Softbank is based in a country that is an ally and major trading partner, and its investment would make Sprint a stronger rival Verizon Wireless and AT&T, Jeffrey Silva, a Washington-based analyst with Medley Global Advisors, said in an e-mail. Obama administration regulators have said they want to preserve competitors in the wireless marketplace.
“We do not anticipate any regulatory issues -- either antitrust or national security -- that would prevent Softbank from closing its planned acquisition of Sprint,” Guggenhiem Securities’ Gallant said.
Political concerns have sometimes overshadowed national security issues, as in 2006 when Dubai Ports World, a state-owned company in the United Arab Emirates, acquired commercial operations at six U.S. ports when it bought a U.K.-based company. While CFIUS approved the deal, Dubai Ports sold the operations after U.S. lawmakers objected to the foreign ownership.
Natalie Ernest Wyeth, a CFIUS spokeswoman, declined to comment on the proposed purchase of Sprint by Softbank.
“Right now China is in the crosshairs, but it’s very critical that the CFIUS process itself be narrowly focused on national security issues,” said Nancy McLernon, president of the Organization for International Investment, which represents more than 160 non-American companies with a presence in the U.S.
“The concerns over the security of supply chains that were raised in the House Intelligence report should be dealt with through our trade policy. The foreign ownership of the company is not the relevant factor.”