Softbank Wants Sprint For Smartphones, Subscribers And Spectrum

Oct.11.12 | About: Sprint Corporation (S)

According to the Nikkei newspaper, Softbank Corp (OTCPK:SFTBF) and (OTCPK:SFTBY), Japan's third largest mobile phone company, is in talks to buy a controlling stake of Sprint Nextel (NYSE:S) for more than 1 trillion yen, or about $12.8 billion. Softbank replied to certain media coverage by stating that:

The story about SoftBank and Sprint Nextel Corporation being reported is based on speculation. We have not announced anything. We do not comment on speculation.

That is not a no. Also, the Wall Street Journal subsequently added that the discussions are advanced.

Presuming such a deal were true, it would provide Softbank both a foundation for entering the U.S. market and access to some of Sprint's device distribution muscle for its Japanese business. Softbank's mobile business had over 56 million users at the end of the second quarter and offered Apple's (NASDAQ:AAPL) iPhone in Japan before either of its larger competitors.

Softbank has also been a strategic buyer of telecom assets. The company acquired Vodafone Japan from (NASDAQ:VOD) in 2006 and announced the acquisition of eAccess Ltd, a mobile WiFi router and LTE network services company, for about $1.84 billion deal, earlier this month. Such a deal should add about three million users to its business in the fourth quarter.

Such a deal would also closely follow other M&A activity in the domestic mobile world. Also this month, Deutsche Telekom (OTCQX:DTEGY) announced plans to acquire MetroPCS Communications (PCS) and merge it with its T-Mobile USA division. Last year, Sprint was interested in buying MetroPCS, but it abandoned those plans early in 2012.

Since obtaining the iPhone at the start of Q4 of 2011, Sprint has been able to somewhat right its business model, and the equity performance has dramatically improved. Within 2012 and prior to this recent speculation, Sprint shares more than doubled, with most of the gains based on the company's ability to maintain and grow a subscriber base due to the iPhone.

Sprint has also been an early adopter of many Google (NASDAQ:GOOG) Android OS-based phones, and was the first U.S. carrier to offer a 4G smartphone. Sprint's size and U.S. market exposure makes it an important partner for mobile device makers. Softbank is likely interested in the access to supply that it can secure through control of a U.S. mobile carrier, and the potential scale benefits from combining the third largest Japanese mobile carrier with the third largest U.S. mobile carrier.

Speculation also includes that Softbank may be interested in adding spectrum, including acquiring the spectrum held by Clearwire (CLWR), which is half-owned by Sprint. While smartphone makers and subscribers may come and go, spectrum may be seen as a more static commodity. Moreover, the use and need for spectrum is still young and growing. As LTE advances and smartphone penetrations proliferates, use of spectrum is likely to grow and the value of unused and underused spectrum should appreciate.

At the time this possible deal for Sprint was announced, shares were trading at around $5 per share. Though shares had traded over ten percent above the $5 mark in the past few weeks, they had occasionally fallen below it. Many investment funds and most open end mutual funds have policy restrictions that require a particular level of diversity and restrict managers from investing in equities that are valued below five dollars. This deal, and even speculation about it, appears poised to buoy Sprint at an at least slightly higher price, which should lure at least some institutional investors.

Beyond funds and institutions, many retail investors might now become interested in Sprint. Several traditional brokerage accounts restrict investments in penny stocks. A penny stock used to be defined as an equity that traded for less than one dollar per share, but the SEC expanded the definition to include equities below five dollars, because such equities are perceived as very risky. Most individual investors that have modern self directed investment accounts are not so restricted, but retail investors that rely upon traditional brokerage accounts and brokers are.

Additionally, many analysts are reluctant to recommend or upgrade equities that are below five dollars. After all, there would be little point in stating that a company is a buy, if a client will see that and contact their broker only to discover that they are restricted from owning it. Similarly, brokers do not suggest stocks to their clients that are restricted from being held in their accounts. All of this appears to bode well for Sprint equity.

Disclosure: I am long S. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.