Softbank’s (OTCPK:SFTBF) proposed takeover of Sprint (S) received a shot in the arm Tuesday after the companies reached a tentative agreement with the U.S. government to win national security clearance for the $20 billion deal. According to the Wall Street Journal, the companies have agreed to let a government-approved national security committee sit on the board of the new Sprint as well as have a say in all future telecom equipment purchases that the company makes. Sprint will also be required to replace some Chinese equipment from the networks of one of its affiliates, Clearwire, by the end of 2016. The agreement, which will take a few more days to finalize, mitigates concerns that the deal may allow Chinese equipment manufacturers deeper access to U.S. telecom networks -- especially given that Softbank uses equipment manufactured by Huawei and ZTE in its home network.
With the government approval out of the way, two more hurdles stand in the way of a Softbank-Sprint merger. The FCC is expected to start reviewing the merger soon, but considering that the deal doesn’t reduce competition but in fact makes Sprint a stronger rival to the duopoly of Verizon and AT&T, securing the FCC’s approval shouldn’t be much of a concern. On the other hand, getting shareholder approval for the merger could prove tricky due a rival bid by Dish Network (DISH), which (according to Dish) is about 13% higher than Softbank’s. Sprint shareholders are expected to vote on the Softbank deal June 12.
Dish Wants to Sell TV Plus Wireless Bundled Services
Dish’s motivation behind the Sprint bid is most likely driven by the need to diversify its business away from a sluggish pay-TV market. With mobile data usage on the rise, as mobile devices such as smartphones and tablets proliferate and subscribers transition to high-speed 4G LTE networks, Dish wants to be able to bundle wireless services with its pay-TV and broadband services to better serve customers. The trend towards triple-play bundles was set in motion last year when Verizon signed co-marketing deals with cable companies Time Warner Cable, Comcast and Cox to promote each others services in their respective stores. Dish doesn’t want to be left behind as these trends take root. It is in fact taking it a step further by looking to market all these services under a single brand at a national level instead of hedging its bets by just partnering with a carrier.
Such a move however changes little from a customer’s perspective, aside from the obvious convenience of having to pay just a single bill for all the services. It will be tough for Dish to realize synergies out of running a wireless mobile network and a satellite home service together, and hence little by way of cost savings can be passed on to the customers. On the other hand, a Softbank deal will give Sprint the ability to negotiate better terms with handset makers such as Apple and Samsung. Lower subsides will help Sprint offer customers more competitive rates on its wireless plans without taking a hit on margins.
Cash Infusion Paves Way for Clearwire Acquisition
As far as Sprint is concerned, either deal will give it enough cash to implement its Network Vision plan and be more aggressive in laying out its next-generation 4G LTE network. Both Softbank and Dish will also want Sprint to acquire Clearwire completely, which should give Sprint enough nationwide spectrum to provide superior data and voice services as the industry moves towards an all-LTE standard. In fact, we see Dish’s aggressive bid on Sprint to have been prompted by Clearwire’s acceptance of a second monthly financing from its majority shareholder Sprint, which made pursuing Clearwire all the more futile for Dish. (see "Clearwire Rebuffs Dish By Accepting Second Monthly Financing From Sprint").
Acquiring Clearwire will give Sprint access to its vast swathe of 2GHz spectrum, which would go a long way in bolstering its LTE network. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average. Moreover, the two companies already have a deal in place, according to which Sprint will be able to offload 4G LTE traffic onto Clearwire’s planned TD-LTE network. Additionally, Clearwire’s spectrum will enable Sprint to lower its long-term capex spend on capacity increases following the initial deployment phase which is seeing burgeoning investments on LTE. Sprint is highly sensitive to capex increases, which can be seen by moving the trend line in the forecast chart below and following the corresponding impact on its price estimate. Additional spectrum capacity will go a long way in bringing these costs down.
Disclosure: No positions.