Is Metro PCS Next for SoftBank?

— October 16, 2012

SoftBank Corp. and Sprint Nextel Corporation announced that they have entered into a series of definitive agreements under which SoftBank will invest $20.1 billion in Sprint, consisting of $12.1 billion to be distributed to Sprint stockholders and $8.0 billion of new capital to strengthen Sprint’s balance sheet. Following closing, SoftBank will own approximately 70% and Sprint equity holders will own approximately 30% of the shares of New Sprint on a fully-diluted basis.

The Wall Street Journal called it “the biggest-ever overseas acquisition by a Japanese firm.” The publication credits a “strong yen and cheap borrowing costs” to the “record pace” at which Japanese companies are spending. However, despite scope, Reuters reports today that the deal is not a “game changer.” This is mainly due to what analysts view as one of Sprint’s top challenges — to gain market share by gaining customers.

Steve Martin, a partner at the advisory firm of Pace Harmon says, “This is probably a matter of survival for Sprint’s wireless business. The company needs to crack the code of how to add subscribers without bleeding earnings.”

According to SoftBank’s statement: “SoftBank’s cash contribution, deep expertise in the deployment of next-generation wireless networks and track record of success in taking share in mature markets from larger telecommunications competitors are expected to create a stronger, more competitive new Sprint that will deliver significant benefits to U.S. consumers.”

Chris Nicoll, principal analyst and lead for wireless networks research for Analysys Mason agrees that Sprint will gain some benefit from SoftBank’s multi-technology experience, he also says, “Sprint is nearly twice as large as SoftBank already and is well underway with its Network Vision consolidation project, so the question remains what additional experience SoftBank will bring. However, the announcement of using TD and FD LTE adds yet another layer of network complexity.”

In addition to complexity, Nicoll says that Sprint has significant technical and market challenges to overcome in the next 12-24 months. And while he is “cautiously positive” about the funding, he points out, “Foreign investment in U.S. telecoms has had a decidedly neutral result to date.”

Some of this timing to “overcome” the challenges Nicoll cited will coincide with the closing of the transaction, which has been approved by the boards of directors of both SoftBank and Sprint, but is subject to Sprint stockholder approval, customary regulatory approvals and the satisfaction or waiver of other closing conditions. The companies expect the closing of the merger transaction to occur in mid-2013.

SoftBank Chairman and CEO, Masayoshi Son, said, “This transaction provides an excellent opportunity for SoftBank to leverage its expertise in smartphones and next-generation high speed networks, including LTE, to drive the mobile internet revolution in one of the world’s largest markets. As we have proven in Japan, we have achieved a v-shaped earnings recovery in the acquired mobile business and grown dramatically by introducing differentiated products to an incumbent-led market. Our track record of innovation, combined with Sprint’s strong brand and local leadership, provides a constructive beginning toward creating a more competitive American wireless market.”

Among benefits the SoftBank transaction is expected to deliver — it provides Sprint with $8.0 billion of primary capital to enhance its mobile network, strengthen its balance sheet and improve operating scale.

Nicoll commented, “The $8 billion into Sprint is a significant investment and should allow Sprint to complete not only the Network Vision network consolidation project on-time, but also to speed deployment of LTE in the U.S. which is needed in order to keep up with AT&T and Verizon Wireless and try and get ahead of T-Mobile. Yet, all of this investment still puts Sprint in a distant No. 3 position in the U.S. with an aggressive T-Mobile close behind.”

Additional Acquisition?

Earlier this month, T-Mobile agreed to merge with Metro PCS. Interestingly, the Japanese press reported the possibility that SoftBank may also look to acquire MetroPCS.  SoftBank is currently the third-largest wireless operator in Japan and this deal positions it to be the same in the U.S.

“Will SoftBank go on a Yen-infused spending spree in the U.S.? SoftBank prides itself on being a mobile Internet company, not just an operator. As such, its portfolio of mobile Internet assets in the U.S. is decidedly weak. We anticipate SoftBank will be shopping around for assets to complement this proposed Sprint acquisition – including MetroPCS and Clearwire,” says Steve Hilton, principal analyst and lead for enterprise research for Analysys Mason.

Clearwire is 49% owned by Sprint, but the transaction does not require Sprint to take any actions involving that company, other than those set forth in agreements Sprint had previously entered into with Clearwire and certain of its shareholders.

Nonetheless, Nicoll asserts, “We believe the next step for SoftBank is to acquire the rest of Clearwire. The 2.5GHz spectrum licensed by Clearwire could provide 50-100Mbps internet service with the proper technology investments (TD-LTE). Funding has been a problem for Clearwire, and this is a perfect fit for SoftBank’s larger corporate strategy.”
    
New Sprint - Literally
SoftBank will form a new U.S. subsidiary — New Sprint — and after closing, Sprint’s headquarters will continue to be in Overland Park, KS. New Sprint will have a 10-member board of directors, including at least three members of Sprint’s board of directors. The current Sprint CEO, Dan Hesse, will continue his role at New Sprint and as a board member.

Hesse says, “This is a transformative transaction for Sprint that creates immediate value for our stockholders, while providing an opportunity to participate in the future growth of a stronger, better capitalized Sprint going forward. Our management team is excited to work with SoftBank to learn from their successful deployment of LTE in Japan as we build out our advanced LTE network, improve the customer experience and continue the turnaround of our operations.”

This plays into Martin’s call for success through subscriptions, and he does see opportunity for the end user here. “It [the deal] has the potential to be good news for U.S. consumer and enterprise customers. Much like the wireline world back in the late 1990s/early 2000s, enterprise customers were better off with three viable providers — which at the time were AT&T, MCI (now Verizon), and Sprint — as soon as Sprint became less relevant in the wireline business, enterprise customers felt the pain of the effective duopoly with much less leverage than they had previously had.”

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