Yet another chapter has begun in the quest to own Sprint (S). The wireless carrier, which was wholly unloved this time last year, appreciated by about 163 percent over the last twelve months. Now, the company appears to be the belle of the ball, with new entrants to the domestic wireless data business competing for ownership of the carrier.
On Monday, Dish Network Corp. (DISH), the second largest U.S. satellite television provider, offered to buy Sprint for $25.5 billion in cash and stock. The offer is attempting to better SoftBank's (OTCPK:SFTBF) October 2012 proposal to buy 70 percent of Sprint for $20.1 billion. SoftBank is the third largest wireless carrier in Japan.
Dish has been opposed to the Sprint-SoftBank deal for a while, including Sprint's subsequent attempt to acquire Clearwire (CLWR). If allowed to wholly acquire Clearwire, Sprint would become the nation's largest holder of spectrum. In January, Dish made an attempt to break up the deal through an unsolicited $2.2 billion bid for approximately one-quarter of Clearwire's spectrum, which it claims values the total company at $3.30 per share, or 11% more than Sprint's offer for the total company.
Of course, not all spectrum is of equal value, making it difficult to gauge a true valuation of the three-quarters that would remain after such an acquisition. The piecemeal bid looked more like a measure to break-up Sprint's bid for Clearwire than to truly acquire anything. Nonetheless, this new offer indicates that Dish is more serious about entering the mobile data business than the prior offer suggested.
This deal is all about the spectrum, which is necessary for any plan to compete against the dominant U.S. mobile carriers, Verizon (VZ) and AT&T (T). Like Sprint within the United States, SoftBank has gained market share from its larger competitors in Japan by providing more data options, including unlimited data plans. If Sprint acquired Clearwire, it would be the largest domestic spectrum holder. Dish also already owns a good deal of spectrum, so a combination of all of those businesses may require it to actually sell some of its spectrum, depending on determinations made by the Department of Justice and/or the Federal Communications Commission.
If Dish or any other entity wants to enter the business, they will need spectrum and a network, both of which are expensive. The costs associated with acquiring spectrum and a network are burdensome enough to prevent much new competition in the near term. Dish, like SoftBank, are interested in getting into the mobile data market, which looks poised for years of growth, as more consumers adopt smartphones and tablets, and mobile data use expands.
SoftBank has been Japan's leading seller of smartphones since 2007. SoftBank took much of its Japanese market share thanks to its initial exclusivity contract with Apple (AAPL) for the iPhone for several years, much like how AT&T had iPhone exclusivity in the United States. Additionally, SoftBank had great success in luring customers by offering more data options for smartphones, tablets, laptops and vehicles. Similarly, Sprint has pushed its unlimited data plan options within the United States, while both Verizon and AT&T have moved to discontinue unlimited data plans.
SoftBank has been a consistent strategic telecom deal maker. The company entered the mobile service carrier business in 2006 by acquiring Vodafone Japan from Vodafone (VOD). The following year, it inked an exclusivity deal with Apple for the iPhone. In 2012, before making its bid for a majority stake in Sprint, SoftBank also announced the acquisition of eAccess Ltd, a mobile WiFi router and LTE network services company, for about $1.84 billion. The deal for Sprint, and its associated deal for Clearwire, appeared to be SoftBank's limit.
Also last year, Sprint and Dish discussed the possibility of Sprint hosting Dish's wireless spectrum on Sprint's mobile towers, but the deal subsequently fell apart. Dish then made a failed attempt to acquire MetroPCS Communications (PCS) for about $4 billion. These deals indicate Dish is serious about acquiring a mobile data provider, and that Dish and Sprint are already familiar with each other.
SoftBank appears rather serious about continuing its growth through acquisition and it would not be surprising if the company pushes to prove its offer is superior, or if it produces a slightly higher offer in order to remove any doubt as to which is the better offer. Sprint shareholders will enjoy any such bidding war that ensues, and the valuation support that the company should sustain through what has become a volatile market.
SoftBank's owner, Masayoshi Son, is believed to be highly interested in completing the deal, and also known to be a competitive deal maker. So far, the deal has worked out well for Son and SoftBank. After announcing its Sprint investment last October, SoftBank said it hedged its acquisition costs with a forward exchange rate of 82.2 yen to the U.S. dollar. This has worked out to a savings of about 200 billion yen ($2.04 billion), because the yen has since weakened by about one quarter against the dollar due to an aggressive monetary policy that Japan's central initiated at the start of 2013. Further, SoftBank can gain approximately $1 billion from a $3.1 billion convertible bond it purchased from Sprint last year. SoftBank can convert the bond immediately if it abandons the deal for Sprint. Nonetheless, the more apparent likely move by Son will be to use some of that $2 billion in currency hedging savings to boost its offer.
Yet another possibility is that Dish ends up consolidating with Sprint and SoftBank and/or entering a joint venture. If Dish is looking to own a wireless company, obtaining an interest in Sprint and SoftBank may be a better option than Dish's attempting to develop a new competitor on its own. Moreover, the combined entities would provide SoftBank with even more spectrum, as well as a stake in a major satellite data provider. Such a deal would create a new and formidable global data powerhouse.
In the near term, Sprint shareholders appear likely to hear more good news as the courtship competition continues. This not only means that Sprint shares have the potential to make further gains in the coming weeks, but also that shares are less likely than the greater market to decline if recent weakness continues. As a result, recent strength looks likely to continue.