Sprint 55% Get Best Payout Since ’99 as Softbank Sinks
For Sprint Nextel Corp. (S) investors that get to cash out on 55 percent of their stock, the deal with Softbank (9984) Corp. represents the mobile-phone industry’s steepest premium in more than a decade for a company languishing at the cheapest valuation.
Japan’s third-biggest mobile-phone operator announced an agreement yesterday to buy out about 55 percent of Sprint’s stock for $7.30 a share in a deal that will ultimately give Softbank a 70 percent controlling stake and infuse the U.S. carrier with $8 billion of new capital to help reduce debt. The 36 percent premium to the stock’s 20-day average is the largest since 1999 and the third-highest on record for cellular telecommunications acquisitions of more than $5 billion, according to data compiled by Bloomberg.
Sprint Chief Executive Officer Dan Hesse, seeking to challenge bigger rivals Verizon Wireless and AT&T Inc. (T) and combat the industry’s lowest price-sales ratio, secured an offer that’s more than triple the stock’s closing level in 2011. While the remaining shares will convert into only a 30 percent stake in the new company and Softbank will be able to purchase more at $5.25 apiece, the deal has wiped out a fifth of the Tokyo-based acquirer’s market value and jeopardized its credit ratings.
“It’s nice to be able to cash out,” Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York, said in a telephone interview. “Whatever uncertainty was out there about Sprint’s prospects is, for the time being, taken away. Softbank shareholders obviously don’t think much of the deal” because of “how much they’re paying and how much debt that Softbank will be taking on,” he said.
“This transaction benefits both companies by providing Softbank the opportunity to apply lessons learned in Japan to a larger, faster growing market and create significant value for shareholders,” Scott Sloat, a spokesman for Overland Park, Kansas-based Sprint, said in an e-mailed statement. The deal also gives Sprint “significant new financial flexibility, allowing for strategic investment and supporting its development of a next-generation high-speed network.”
Softbank will pay $12.1 billion to Sprint shareholders in addition to investing the $8 billion of new capital. The $20.1 billion transaction will help Softbank add growth overseas after handset shipments in Japan tumbled 27 percent from 2007 through the end of 2011, data compiled by Bloomberg show.
Softbank also will receive a warrant to purchase 55 million additional shares in the new company at an exercise price of $5.25 a share.
Sprint’s stock closed at $5.69 yesterday. The shares won’t climb as high as $7.30 because only 55 percent are being bought out at that price, Moffett said. He estimates that the ongoing business is worth about $4 a share.
“The shares are going to trade at the blended average of the $7.30 partial tender plus what you think the stock is actually worth,” Moffett said. “At the end of the day, shareholders are going to get $7.30 for some of their shares, but the rest of them are going to be trading at a valuation that’s set by expectations for the company itself.”
Today, shares of Sprint were unchanged at $5.69.
Combined, Sprint and Softbank will create the world’s third-largest mobile-phone services provider by revenue, billionaire Masayoshi Son, Softbank’s president, said yesterday on a conference call. The group will have 96 million users after the transaction, according to a presentation to investors yesterday.
“The U.S. is a large and growing mobile market, with the highest smartphone penetration in the world and high revenue per user, yet it is hampered by relatively slow network speeds,” John Christiansen, a spokesman for Softbank, said in an e-mailed statement. “This presents tremendous growth opportunities for Softbank, and we think this is an equally great deal for both companies.”
Hesse will remain CEO, and the boards of both companies have approved the deal, which is expected to close by mid-2013, according to the statement.
Softbank’s $8 billion cash infusion will reduce Sprint’s net debt to about $6.5 billion from $14.5 billion, according to the presentation.
“We have been at a significant disadvantage with a weak balance sheet and a competitive environment dominated by two very well capitalized and much larger competitors,” Hesse told analysts on yesterday’s conference call. The investment will give Sprint the “financial flexibility to pursue opportunities and strategic options that would not be possible with our current balance sheet.”
Sprint has no immediate plans to take over Clearwire Corp., people with direct knowledge of the situation said yesterday. Softbank’s and Sprint’s priority is to close the deal, which will take six to eight months, and until the deal is completed, the companies can’t engage in extraordinary activities such as further mergers or acquisitions, these people said.
Today, Clearwire shares fell 17 percent to $2.23.
Sprint is overhauling its network to use a faster technology called long-term evolution, or LTE. The Softbank deal should help Sprint build out the network and better compete with larger rivals, said Matthew DiFilippo, who helps manage $1.1 billion as chief portfolio strategist at Stewart Capital in Indiana, Pennsylvania.
“Sprint was facing the struggle of a high debt load and that impaired its ability to invest in its network and keep up with Verizon and, to a lesser extent, AT&T,” DiFilippo said in phone interview. “This deal gives them the ability to perhaps close the competitive gap, or maybe just see that that gap doesn’t get any larger.”
Even after surging 143 percent this year, Sprint traded yesterday at a 51 percent discount to its revenue in the last 12 months. That’s the lowest price-sales multiple among U.S. telecom carriers with a market capitalization of more than $2 billion, according to data compiled by Bloomberg.
The $7.30 purchase price for the 55 percent of the stock being bought out is rewarding Sprint investors at a level the shares haven’t reached since 2008. The 36 percent premium compares with an average of 23 percent among cellular telecommunications deals valued at more than $5 billion, data compiled by Bloomberg show.
“It’s a terrific deal for Sprint shareholders,” Keith Trauner, a Miami-based money manager at GoodHaven Capital Management LLC, which oversees about $325 million, including Sprint shares, said in a phone interview. “It takes a company whose balance sheet was quite stretched to a point where, if they don’t do anything foolish with capital, their balance sheet now looks far better.”
Softbank’s $20.1 billion deal would be a Japan-based company’s largest publicly announced acquisition of a non- Japanese business since at least 2000, data compiled by Bloomberg show.
“The only reason Softbank is making this investment is because they think they can make money off of it,” Scott Schermerhorn, chief investment officer of Concord, New Hampshire-based Granite Investment Advisors Inc., which oversees about $550 million, including Sprint shares, said in a phone interview. “They think the stock is worth more than $7.30, or why would they bother?”
The deal allows Sprint “to accelerate things quicker as far as building out their LTE network, so that’s of value,” he said.
The combined company would garner $32 billion in mobile- phone sales, placing it just behind Verizon Wireless with $37 billion and on par with AT&T, Sprint and Softbank said in yesterday’s presentation.
Since Softbank doesn’t currently operate in the U.S., the deal with Sprint won’t garner the same cost-saving benefits that T-Mobile USA and MetroPCS Communications Inc. (PCS) can achieve through their planned merger, according to Tom Burnett, director of research and vice chairman at Wall Street Access, which specializes in mergers and event-driven research.
Softbank had plunged 21 percent since the Nikkei newspaper first reported last week that the mobile-phone seller was in talks to buy Sprint, reducing its market value to 2.5 trillion yen ($32 billion) yesterday. The stock closed yesterday at 2,268 yen in Tokyo, the lowest since April.
Today, shares of Softbank rose 9.6 percent to 2,485 yen.
Given the risks tied to the deal, Softbank investors “are voting with their feet” and abandoning the stock, New York- based Burnett said in a phone interview. “It’s a huge gamble. This is a new culture, a new regulatory world” and “there’s some very significant competitive pressures over here that pushed Sprint down in the first place.”
With the deal to be funded through cash on hand and a syndicated loan, Moody’s Investors Service said yesterday that it may cut Softbank’s Baa3 credit grade to junk because of the additional debt. High-yield, high-risk or junk bonds are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s. Later the same day, Moody’s said Sprint’s B1 rating, which is four levels below investment grade, may be raised.
While Softbank’s debt ratings are in question, for Sprint stockholders this deal is “manna from heaven,” said Michael Holland, who oversees more than $4 billion in assets as chairman of New York-based Holland & Co.
“The wonderful thing about the stock market is you get an immediate vote,” Holland said in a phone interview. “And the vote here is that this is a much better deal for Sprint shareholders than it is for Softbank.”
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