Surprise Bids for Sprint Have Further to Go: Real M&A

Sprint Nextel Corp., the wireless carrier that languished at a stock price below its liquidation value less than a year ago, has morphed into the target of a bidding war that traders are wagering may escalate even further.

After satellite-TV provider Dish Network Corp. offered $25.5 billion to top a bid from Japan’s Softbank Corp., Sprint traded as much as 38 cents higher than Dish’s cash-and-stock proposal yesterday. At its closing price of $7.06, Overland Park, Kansas-based Sprint was valued at 3 times its net assets, the highest in more than a decade, according to data compiled by Bloomberg. Since trading at a discount to book value as recently as June, Sprint has added iPhone customers and wound down the Nextel network, and now analysts project that it will return to profitability in 2015 after eight years of losses.

For Softbank, a Sprint deal would help founder Masayoshi Son in his goal to become the No. 1 carrier in the world by revenue. If Sprint’s board recommends the Dish offer, Softbank is likely to raise the cash portion of its bid to at least $7.50 a share and may negotiate a joint venture with Dish, said Macquarie Group Ltd. Charlie Ergen, the founder of Englewood, Colorado-based Dish, is so eager to break into the wireless market and bundle Internet and phone services with his pay-TV service that he may be prepared to come back with an even sweeter offer for Sprint, if needed, said Piper Jaffray Cos.

“It’s so important strategically for both Softbank and Dish that it’s highly likely that you’ll see Softbank either match or top it,” Keith Moore, an event-driven strategist at MKM Partners LLC in New York, said in a telephone interview. “I think Dish expects that to happen, so they probably haven’t put their best foot forward either.”

‘Poker Player’

Sprint said in a statement yesterday that its board will evaluate the Dish offer. Bill White, a spokesman for Sprint, said he couldn’t comment further.

Softbank’s offer will give Sprint’s shareholders “superior short and long term benefits,” compared with Dish’s “highly conditional preliminary proposal,” the Japanese company said in a statement on its website today. Softbank expects to complete the acquisition on July 1 under the existing terms, it said.

“We certainly wouldn’t put our strategy on the front page of the paper,” Ergen said in a phone interview yesterday, when asked if this is Dish’s best and final offer. “I’m a pretty good poker player when somebody shows me their cards, but most of the time when I play poker, people don’t show me their cards.”

Sprint Trading

Dish is offering Sprint’s owners $4.76 in cash and 0.05953 a share of Dish for each Sprint share, a stake that would represent about 32 percent of the combined company. Based on Dish’s $37.63 stock price at the end of last week, the bid was valued at $7 a share when it was announced yesterday. Dish said the offer is a 13 percent premium to the implied value of Softbank’s deal, which is also a combination of cash and stock.

The value of Dish’s proposal declined yesterday to $6.95 a share after its stock tumbled 2.3 percent. Sprint ended the day at $7.06, 1.6 percent more than Dish’s bid, signaling investors are betting that an even higher offer is on its way.

“We’re recommending that people sit tight and wait for the next move because there’s clearly going to be other developments,” Tom Burnett, director of research and vice chairman at New York-based Wall Street Access Corp., which specializes in mergers, said in a phone interview. “Sprint is well down the road with Softbank, so there are so many different ways that this thing could turn out.”

Softbank Favored

Today, shares of Sprint rose 2 percent to $7.20, while Dish added 3.2 percent to $37.93.

Softbank shares, which declined as much as 9.6 percent to 4,235 yen in Tokyo today, ended down 6.8 percent at 4,365 yen.

To win Sprint, Softbank will probably boost the cash portion of its bid to at least $7.50 a share from $7.30 and offer to pay cash for more than 55 percent of the stock, Amy Yong and Kevin Smithen, analysts at Macquarie in New York, wrote in a note to clients yesterday. Softbank’s Son also may try to negotiate a joint venture giving Dish a minority stake to avoid an ongoing bidding war, the note said.

“Softbank would be our favorite to prevail at the end of the day,” the analysts wrote.

Softbank’s investment-grade credit rating and 1.07 trillion yen ($11 billion) of cash and equivalents give it the firepower to sweeten its bid if Sprint’s board deems Dish’s offer superior, said Kirk Boodry, a London-based analyst at New Street Research LLP. Dish, with about $10 billion of cash and equivalents after raising more money in the debt market this month, has a junk rating, data compiled by Bloomberg show.

‘Compelling Partner’

Unlike Dish, shares of Softbank have doubled since it bid for Sprint in October. Entering the U.S. allows billionaire Son to participate in a market that’s still growing in contrast to Japan, where handset shipments have fallen. Sprint and Softbank together would create the world’s third-largest mobile-phone services provider by revenue, Son said in October.

On the other hand, Dish said on a conference call yesterday that a combination with Sprint will result in $11 billion of cost synergies, including a 3.3 percent reduction in expenses the first year.

Still, Boodry said Softbank’s offer is already superior to Dish’s because Dish is underestimating the amount of capital it’s going to need to run Sprint.

“Softbank would be a more compelling partner for Sprint,” Boodry said. “They don’t have to match what Dish does because the value proposition after any deal closes we think is stronger with Softbank than it is with Dish.”

For Dish, a Sprint takeover would provide a use for the company’s cash, which has tripled to a record in the past year, as Ergen seeks to add mobile data and voice services amid slowing growth in the satellite-TV market.

Ergen’s Ambitions

The Dish founder and chairman, who said in October he was willing to spend “billions” to position his pay-TV provider to compete with AT&T Inc. and Verizon Wireless, has already tried to topple Sprint’s planned purchase of Clearwire Corp. with a higher bid. In addition, Dish made an offer for MetroPCS Communications Inc. before the carrier agreed to a merger with Deutsche Telekom AG’s T-Mobile USA Inc., according to a person familiar with the matter. Ergen also informally approached Deutsche Telekom about a merger with T-Mobile, people close to the situation said last week.

Big Deal

Chris Larsen, a New York-based analyst at Piper Jaffray, estimates the Dish proposal is worth 8 percent to 11 percent more than Softbank’s deal, accounting for the $600 million breakup fee, Dish’s spectrum and bonds convertible into Sprint shares that are held by Softbank. The analysis does not take into account projected synergies. Softbank would need to boost the cash portion of its bid by as much as $2 billion to match Dish, he wrote in a note to clients yesterday.

“This is just the beginning, not the end, of this discussion,” Larsen wrote. “We think it’s possible that Softbank could increase its bid; it’s also possible that this is not the best and final bid by Dish.”

With Sprint, Dish is pursuing a larger company in terms of market value, sales and number of users. Sprint has more than 47 million mobile-phone customers and a market value of $21.3 billion, while Dish has about 14 million satellite-TV subscribers and $16.7 billion in market value.

“It’s pretty ballsy,” Scott Schermerhorn, chief investment officer of Concord, New Hampshire-based Granite Investment Advisors Inc., said in a phone interview. “This is big. Once this deal is done, you’re going to own a wireless company that oh, by the way, happens to have a satellite-TV division to it.”

Schermerhorn’s firm oversees about $550 million and sold its Sprint shares after the Softbank bid was announced.

Sprint Revival

The desire for Sprint’s wireless network has ignited a bidding war over a company that saw its stock touch a low of $1.37 less than five years ago amid losses and customer defections following its failed 2005 purchase of Nextel Communications Inc.

Sprint traded as low as 0.18 times book value in November 2008 before rebounding under a turnaround led by Chief Executive Officer Dan Hesse aimed at returning the company to profitability.

“I’m surprised Sprint ended up getting a valuation over $7,” Wall Street Access’s Burnett said. “But you’ve got two large, wealthy companies that have clearly indicated they want to control Sprint. You’ve got two big guys slugging it out over this property. Neither wants to miss the opportunity.”

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