On October 11, 2012, Sprint (NYSE:S) shares jumped 18% pre-market based on the news that Japanese telecom company Softbank Corp (OTCPK:SFTBF) could buy Sprint for more than 1 trillion yen, or $12.8 billion.
The Great Telecom Consolidation
The telecommunications sector in the U.S. has been buzzing with M&A activity for many years.
Vodafone owns 45% of Verizon Wireless (NYSE:VZ), and had made a bid to buy AT&T in 2004. Ultimately, that bid failed because Cingular Wireless successfully outbid Vodafone. More recently though, the industry has seen more potential M&A action:
- Failed talks of a merger between AT&T (NYSE:T) and Germany-based Deutsche Telekom's (OTCQX:DTEGY) T-Mobile USA in 2011
- Failed talks between Sprint and MetroPCS (PCS) early in 2012, after Sprint's board stepped in to stop the deal
- Deutsche Telekom's merger talks with MetroPCS that have not yet come to fruition
- Talks of Sprint considering a move to outbid Deutsche Telekom to chase a deal with MetroPCS
Amid this chaos, Softbank Corp's bid for Sprint could be an "aha" moment for keen market observers.
In 2006, Vodafone's Japan unit -- conveniently named Vodafone Japan -- changed its corporate name to Softbank Mobile after a merger between Vodafone Japan and Softbank. The company operates a 3G network that uses W-CDMA technology, and a 4G network that uses TD-LTE/LTE technology. The company was the first to offer the iPhone in Japan (in 2008), beating its competitors KDDI and NTT Docomo (which has close ties with AT&T in the U.S.) Softbank has also been aggressive in acquiring smaller service providers like eAccess Ltd (recently in October 2012) to gain market share -- this deal would put Softbank ahead of KDDI in the Japan telecom markets.
Softbank's Sprint bid makes sense, and here are some reasons why:
- A Sprint acquisition could make it cheaper for Softbank to procure smartphones and tablets. Softbank declined to comment about this and so did Sprint, but if you look at the technologies (CDMA and TD-LTE) used by both companies, there are lot of similarities and scope for synergies. Also, Softbank and Sprint share pretty similar product offerings that include devices made by HTC, LG, Samsung, Kyocera and Research In Motion, in addition to Apple, of course.
- Clearwire (CLWR) could be another reason for Softbank's interest in Sprint. Spring owns Clearwire, and Clearwire owns of a sizable chunk of spectrum in the U.S. Clearwire is also working on a next-generation network using TD LTE technology, which aligns with Softbank's network plans. Specifically, Clearwire controls 120 million MHZ of spectrum across the country, including areas with high demand, and that spectrum is important for any market entrant. No wonder Clearwire's shares shot up 23% pre-market as the reports about the Softbank acquisition came out. Spectrum has remained an important factor for telecom companies, and carriers are likely to continue their quest for additional spectrum -- an apt example is Verizon's purchase of spectrum from cable companies, and AT&T's Qualcomm deal for the latter's spectrum.
- The acquisition process could be easier compared to other U.S.-based mergers because regulators might consider a deal that involves a non-U.S. player more favorably than an all-U.S. deal that would reduce the number of national carriers, creating potential monopolies.
- Sprint allows other companies to resell their access to its network, and also under their own brands (for example Republic Wireless, Y PrepaYd , Zuma Prepaid, to name a few, use the Sprint network). This kind of arrangement is called an MVNO, or mobile virtual network operator. Take a look at the list of MVNOs operating in the US -- Sprint is the leader in this market. A Sprint acquisition could give Softbank an opportunity to expand its brand and enter the U.S. markets.
- NTT Docomo's closeness with AT&T could also be a factor in Softbank's decision to approach Sprint.
Sprint confirmed the news of the deal today, after The Wall Street Journal reported (also today) that the acquisition talks are in an advanced stage. If this is true, it remains to be seen whether these talks impact Sprint's potential MetroPCS bid or its ownership of Clearwire. Investors will watch closely to see whether Softbank wants to buy Sprint in its entirety, or if it wants to purchase Sprint's stake in Clearwire, or Clearwire in its entirety.
My take on this development is that both Clearwire and Sprint stocks should get increased attention in the coming weeks. Investors who sold Sprint stocks based on the MetroPCS/T-Mobile deal could have lost a big profit opportunity due to an unnecessary knee-jerk reaction.
Regardless of all this M&A activity, Sprint's stock had room to go much higher, thanks to CEO Dan Hesse's aggressive customer acquisition tactics and more importantly, his execution of these tactics, and the company's network modernization plans, which will make Sprint an advanced network provider in the next couple of years.
Disclosure: I am long S, AAPL. 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.