Sprint Lenders Clash With Owners on Dish Bid: Corporate Finance

Sprint Nextel Corp. bondholders are at odds with shareholders from Leon Cooperman to John Paulson who’ve praised a takeover bid from Dish Network Corp. that may amplify the largest junk issuer’s debt load by 31 percent.

Average yields for Sprint’s $20 billion of bonds, which had plunged 1.33 percentage points to 4.64 percent since the third-largest U.S. mobile-phone company said in October it may receive a “substantial” investment from Softbank Corp., have jumped 0.31 percentage point this week following Dish’s unsolicited offer. That contrasts with a 15 percent stock surge for Sprint.

While Cooperman’s Omega Advisors Inc. and Paulson & Co. say the $25.5 billion bid by Charlie Ergen’s Dish offers more value than a $20 billion deal endorsed by Overland Park, Kansas-based Sprint’s board that would give Softbank a 70 percent stake, the new proposal threatens to boost leverage at a company that already has more than twice the debt relative to earnings as AT&T Inc. and Verizon Communications Inc.

“The proposed transaction with Dish leaves the combined entity with potentially too much leverage for a company with investment-grade competitors,” said George Goudelias, a money manager at Seix Investment Advisors LLC in Upper Saddle River, New Jersey, which oversees $28 billion and owns Sprint debt. “As a high-yield investor in Sprint, you want the deeper pockets of Softbank, which can keep the company liquid.”

‘Vast Majority’

Dish’s offer includes stock and $17.3 billion of cash, $8.2 billion of which will come from the Englewood, Colorado-based company’s balance sheet, according to an April 15 statement. That signals a deal may require more than $9 billion of new financing, and “the vast majority of that would be raised on the Sprint side,” Dish Treasurer Jason Kiser said on a conference call that day to discuss the proposed merger.

That makes Dish’s leveraged bid an “about-face” relative to Tokyo-based Softbank’s planned investment, which is aimed at improving the U.S. wireless carrier’s balance sheet, Bank of America Corp. analysts led by Ana Goshko wrote yesterday in a report. At 4.85 times, Sprint’s ratio of total debt to its $5 billion of earnings before interest, taxes, depreciation and amortization compares with 2.24 at AT&T and 1.76 at Verizon.

Better Benefits

A combined company would be able to cut its debt load while investing in the business, said Tom Cullen, a Dish spokesman. As much as $2.9 billion of savings in the first two years following a completed transaction would help the company “to deleverage quickly,” he said.

“The synergies and opportunities that Dish brings in a merger, those don’t exist in the Softbank proposal,” Cullen said in a telephone interview. “We’ve done a lot of homework behind this.”

Scott Sloat, a spokesman for Sprint, declined to comment on Dish’s proposal. Softbank said in an April 16 statement that its offer has better short- and long-term benefits, compared with Dish’s “highly conditional preliminary proposal.”

Dish’s Ergen is gambling two underdogs can transform the communications industry by giving customers cheap mobile-phone service and the ability to watch television wherever they want. While Dish currently doesn’t have any mobile customers, the company has been snapping up wireless spectrum in preparation for a move into the market. Ergen has already tried to topple Sprint’s pending purchase of Clearwire Corp. with a higher bid.

Projected Leverage

Clearwire, which agreed to be bought by Sprint in December, had $4.31 billion of total debt at the end of 2012, while Sprint had $24.3 billion, Bloomberg data show. By layering an additional $9 billion on a combined Sprint-Clearwire business with a current projected leverage ratio of 6.3 times, the gauge may exceed 8, according to data compiled by Bloomberg based on trailing 12-month Ebitda.

“The higher leverage with Dish is going to drive a preference for Softbank from the bondholder’s perspective,” Sajod Moradi, a Philadelphia-based credit analyst at Delaware Investments, said in a telephone interview.

Ergen’s newest proposal has sparked an 8-cent drop in Sprint’s $2 billion of 8.75 percent securities due March 2032, which traded at 115 cents on the dollar to yield 7.28 percent at 10:57 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds had traded as high as 124 cents in December to yield 6.54 percent.

Separate Challenges

“Sprint bondholders are obviously not pleased with this,” Robert Rock, the Boston-based head of credit research at Manulife Asset Management, said in a telephone interview. Rock estimates that two-thirds of new debt that would be raised to complete a takeover by Dish would rank above existing Sprint bondholders.

While acquiring Clearwire and Sprint would provide Dish with an “impressive spectrum position,” the businesses are struggling with separate challenges, CreditSights Inc. analysts led by Chris Ucko wrote in an April 15 report. Sprint needs more towers and network improvements to compete with AT&T and Verizon, whereas Dish requires a better broadband product, according to the New York-based bond-research firm.

“We don’t see how this combination solves either of these strategic issues,” said the analysts, who have “underperform” ratings on Dish and Sprint bonds. “We expect more debt, higher capex and operational growing pains, and we don’t believe bondholders are getting paid enough to carry the brunt of the upfront risk.”

Billionaire Battle

Ergen is competing with fellow billionaire Masayoshi Son, the founder of Softbank, who sees Sprint as key to U.S. expansion in his goal of creating the largest mobile-services provider in the world by revenue. Softbank plans to pay $12.1 billion to Sprint shareholders in a deal that includes $8 billion of new capital “to strengthen Sprint’s balance sheet,” according to an Oct. 15 statement.

Softbank said today it is preparing to sell $3.3 billion of bonds denominated in dollars and euros after increasing the size of its offering by more than 50 percent. It may sell seven-year debt split between $2.45 billion of notes yield 4.5 percent and a 650 million euro ($847 million)portion, yielding 4.5 percent, according to a person familiar with the transaction.

“The debt load that they’re talking about with the current Sprint-Softbank deal is more sustainable for sure,” said Spencer Godfrey, a credit analyst at KDP Investment Advisors Inc. in Montpelier, Vermont. “The Dish deal, while it’s better for shareholders, it’s certainly the opposite for bondholders.”

Moody’s Investors Service ranks Sprint B1, four levels below investment grade, and Standard & Poor’s grades it an equivalent B+. AT&T and Verizon each have investment-grade ratings of A3 at Moody’s and A- at S&P.

‘Weaker Credit’

Dish, which said its offer represented a 13 percent premium to the value of Softbank’s proposal, is gaining support from Sprint shareholders. Paulson, whose hedge fund owns about 4.2 percent of Sprint shares, said he favors Dish’s proposal. Cooperman, whose Omega holds a 1.9 percent stake in the wireless carrier, said yesterday that Dish’s offer was “superior.”

Sprint rose to 7.13 cents at 12:01 p.m. in New York from $6.22 at the end of last week.

While Sprint’s stock is benefiting after languishing at price below its liquidation value less than a year ago, higher leverage, strained liquidity or weaker cash flow following a successful takeover by Dish could lead to a cut in Sprint’s credit rating, according to an April 15 Moody’s statement.

“A Dish outcome gives you the weaker credit profile,” Scott Kimball, a money manager at Taplin Canida & Habacht LLC, a BMO Financial Group unit that oversees $8 billion, said in a telephone interview. “From a bondholders’ perspective, Softbank is likely to give support to capital expenditures and keeping the funds flowing without disruption.”