Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

The consolidation in the US wireless market is picking up pace. Last week rumors surfaced in the market that Japanese Softbank (OTCPK:SFTBF) is willing to take a majority stake in Sprint Nextel (S) in order to get involved in the consolidation in the US wireless market.

Sunday's Reports

On Sunday night news reports hit the wires indicating that Softbank is near a $20 billion deal to buy a majority stake in Sprint Nextel.

Softbank's shares fell 17% in Friday's trading session in Japan. The telecom and internet company will acquire a 70% stake in Sprint Nextel. Softbank will buy $12 billion in shares in the open market, by making a tender offer of $7.30 per share.

Softbank will buy $8 billion shares from the company itself, at a price of $5.25 per share, by making a direct investment in the company. The $8 billion equity being purchased from the company includes a $3 billion convertible bond purchase. Sprint is heavily indebted and a $8 billion investment could allow Sprint to build out its next-generation wireless network.

Sprint Nextel could use the funds to acquire, or gain control of Clearwire (CLWR), which is currently valued at $3.4 billion. Shares of Clearwire have already risen 72% over the past week, on takeover speculation.

MetroPCS Communications

Despite the cash infusion, Sprint Nextel will most likely not make a counter-bid for MetroPCS (PCS). T-Mobile USA is likely to acquire the ailing pre-paid wireless carrier. Combined, the combination would be the fourth largest US carrier with annual sales of $24.8 billion and 42.5 million subscribers.

Future Consolidation

Sprint currently has 56 million subscribers. Softbank's $8 billion cash infusion allows the company to reduce its debt position, acquire Clearwire Corporation and update its network. Softbank hopes that success of LTE wireless services in Japan, can be successfully exported to Sprint Nextel in the United States.

The grand plan according to people close to Softbank is to await this first round of consolidation. Softbank gives Sprint Nextel to opportunity to possibly acquire Clearwire and upgrade its network. At the same time, MetroPCS and T-Mobile USA would start their integration process.

In a few years time, Softbank would possibly like to merge, or acquire the assets of T-Mobile USA with Sprint Nextel. Combined, Sprint Nextel, T-Mobile USA and MetroPCS Communications have 98 million subscribers. The operator would own an upgraded wireless LTE network.

The future consolidation would create a sizable competitor against Verizon Wireless, a joint venture of Verizon Communications (VZ) and Vodafone, and AT&T (T). Both competitors have roughly 100 million subscribers in the US market for wireless communications.

Surprising Developments

It was widely known that MetroPCS was in play, but it comes as a big surprise to many that Japanese Softbank got involved in the consolidation efforts. Expect a lot of action in Monday's trading session and further rumors impacting the share prices of the companies involved.

While the involvement of Softbank in the consolidation process has surprised many commentators, the track record of Masayoshi Son, the CEO behind Softbank is good. The CEO has made bets in Alibaba Group and Yahoo Japan which turned into billion dollar investments.

Source: Sprint For Sprint Nextel