On Monday, October 15, before U.S. markets opened, Softbank Corp and Sprint Nextel (S) announced that they have concluded negotiations on a deal where Softbank will obtain a 70% stake in Sprint for $20.1 billion. The deal would consist of approximately $12.1 billion to be paid to Sprint shareholders and $8 billion in new capital to be used to strengthen Sprint's balance sheet, and fund its network development. Sprint shareholders and regulatory bodies such as the Federal Communications Commission and the Department of Justice must still approve the deal.
Softbank Chairman and CEO, Masayoshi Son, commented on this deal, stating:
"This transaction provides an excellent opportunity for Softbank to leverage its expertise in smartphones and next-generation high-speed networks, including LTE, to drive the mobile Internet revolution in the world's largest market. As we have proven in Japan, we have achieved a V-shaped earnings recovery in the acquired mobile business and grown dramatically by introducing differentiated products and innovative services to an incumbent-led market. Our track record of innovation, combined with Sprint's strong brand and local leadership, provides a constructive beginning toward creating a more competitive American mobile market."
If approved, Softbank anticipates that the acquisition could be completed by mid-2013, where a subsidiary of Softbank will be created, called New Sprint, which shall replace Sprint. The combined subscriber base from the merger of the third-largest mobile carriers in both Japan and the U.S. would make it one of the world's largest mobile carriers and the third largest mobile service provider based upon revenue.
Such a deal would also closely follow other M&A activity in the domestic mobile world. Also this month, Deutsche Telekom (DTEGY.PK) 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.
Beyond the potential benefits to Softbank that it may realize though this significant increase in its size and scale, Sprint's U.S. business should benefit from the infusion of $8.0 billion of new capital. Sprint will be able to use the funds to advance its mobile network and fortify its balance sheet. Both the added cash and the superior credit quality of Softbank should help improve Sprint's own credit rating, thereby reducing its borrowing costs. Sprint last reported having about $21.6 billion in debt and about $6.7 billion in cash.
Following receipt of Sprint shareholder and regulatory approvals, Sprint shareholders will receive approximately 30% of the fully-diluted equity of New Sprint and approximately $12.1 billion cash in exchange for their Sprint shares. Individual Sprint shareholders will have the right to elect to receive, per share, either $7.30 in cash or one share of New Sprint stock. New Sprint is expected to succeed Sprint's New York Stock Exchange listing as a publicly traded company.
Another point to note from this deal is that Sprint's current CEO, Dan Hesse, will stay on board and be the CEO of New Sprint. Further, on the 10-member board of directors that New Sprint will have a, Mr. Hesse and three current Sprint Board of Directors members will sit.
Dan Hesse commented on this deal, stating:
"This is a transformative transaction for Sprint that creates immediate value for our stockholders, while providing an opportunity to participate in the future growth of a stronger, better capitalized Sprint going forward. Our management team is excited to work with Softbank to learn from their successful deployment of LTE in Japan as we build out our advanced LTE network, improve the customer experience and continue the turnaround of our operations."
Softbank has been a strategic buyer of telecom assets. The company entered the mobile service carrier business when it acquired Vodafone Japan from Vodafone (VOD) in 2006. Softbank also announced the acquisition of eAccess Ltd, a mobile WiFi router and LTE network services company, for about $1.84 billion deal, earlier this October, which is expected to add about three million users to its Japanese business in the fourth quarter. Softbank's mobile business had over 56 million users at the end of the second quarter and was the first of the main Japanese mobile providers to offer Apple's (AAPL) iPhone.
Since obtaining the iPhone at the start of Q4 of 2011, Sprint's previously dwindling business has undergone a noticeable turn around. Within 2012 and prior to last week's speculation of this deal, 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 had success with multiple Google (GOOG) based Android phones, and was the first U.S. carrier to offer a 4G phone. The combined businesses should be able to negotiate better terms to secure access to future phone models, with both businesses likely desiring the same devices, assuming network compatibility.
This deal appears very likely to go through, given that the nature of the transaction, including Softbank's apparent interest in improving Sprint rather than dismantling it. Further, the acquisition valuation of $7.30 is about a 25% premium to Friday's closing price, where Sprint shares were up about 145 percent since the start of 2012.
Disclosure: I am long S.