In this article, I will discuss why Sprint Nextel (S) investors should sell their shares and cash out the recent price increase in their shares. The outlook for a merged company is poorer than its original parts, and in Sprint's the case, this merger is thought to be only the first of many.
Prior to an official announcement of recent the M&A deals, the cash reserves of Sprint Nextel had reached a high of $6.8 billion, and its stock price had doubled. With appreciated equity and cash reserves as collateral, it was thought that Sprint was ready to make game-changing acquisitions. Analysts speculated that such a deal would enable a scaled-up Sprint to better compete with Verizon Wireless (VZ) and AT&T (T).
With Sprint making a turnaround, Gabelli & Company analysts speculated that the company could widen its customer base by acquiring Leap Wireless (LEAP) or Metro PCS (PCS). In an interview at Sprint's Overland Park headquarters, CEO Dan Hesse said that consolidation "would be constructive" for the industry. Hesse also added that "Sprint will play a role in that some way."
Analysts were surprised when they found out that Softbank (SFTBY.PK) agreed to accumulate a 70% interest in Sprint. There was not much discussion of a Softbank acquisition amid the talk of analyst-envisioned business combinations deal prior to its announcement, even though it is Japan's third-largest mobile-phone company. Analysts were actually anticipating that Sprint would make acquisitions of its own. In particular, there was considerable speculation of a potential takeover of Metro PCS by Sprint.
There is still considerable potential for currently unannounced mergers and acquisitions in the wireless space. Just because executives have not announced them and analysts have not yet conceived of them does not mean they will not transpire.
In the game of predicting corporate matchmaking, these analysts got one of the brides right, but there was another groom. T-Mobile and Metro PCS announced that they are merging. Wilder still, Softbank came from out of nowhere to buy a 70% stake in Sprint.
Analysts were right in that some kind of scale-enhancing merger would result in M&A activity. In a telephone interview, Zack Shafran of Waddell & Reed said, "You have two very large players in the form of AT&T and Verizon and now it's argued that a strong No. 3 would be a welcome player. Looks like Sprint are on the verge of perhaps being that strong third player."
Sprint and Softbank have since clarified the terms of their proposed deal, and have dispelled rumors of other targeted takeovers. Softbank will pay $20.1 billion for a 70% stake in Sprint. Of these funds, $12.1 billion will be paid out to shareholders, and $8 billion will be new funds available to Sprint. Sprint insiders have also explained that Sprint management will be focused on the Sprint/Softbank deal for the next few months, and that no other deals are planned. This clarification sent shares of Clearwire (CLWR) 20% lower. Clearwire shares had doubled previously based on speculation of a Sprint buyout. For now, Sprint, which previously held a 48% ownership stake in Clearwire, may only wish to acquire 2% more shares to gain a majority.
Wireless Consolidation Likely
Once the deal is consummated, the combined Softbank/Sprint may want to acquire a takeover candidate for potential sales growth. On the basis of historical sales growth, there are seven possible acquisition targets that are as promising as Leap Wireless:
Here are the financial metrics for some of the stocks in the wireless industry:
Market Cap ($ Billions)
Past 5 Years Sales Growth
Telephone & Data Systems
United States Cellular
Leap Wireless International
There is no shortage of acquisition targets that Softbank/Sprint could court and try to acquire. If the sales growth of Leap Wireless is considered attractive, then there are six other more attractive targets on this list on the basis of sales growth.
Bear in mind that acquisitions could get very, very expensive, since T-Mobile and Softbank/Sprint are both known to be in the M&A market. Investors should be very fearful of purchasing potential acquirers, since any deals will undoubtedly be consummated at fat premiums.
Conclusion: Sell Sprint and Clearwire
If you are currently a Sprint shareholder, consider yourself lucky and sell your shares. If you are a Clearwire shareholder, sell your shares before the price appreciation from hypothetical takeover scenarios deteriorates further. If you are a MetroPCS shareholder, wait for prices to climb based on rumors of T-Mobile or Softbank/Sprint maneuvers, and then sell your shares.
Do not buy into these companies at this point. Most of the money that is to be made is already baked into their shares, and there is substantial risk of any deal falling through. Expect any combination of firms to find a host of problems from incompatible networks, billing databases, and elusive synergies. Hence, investors should have a gloomy outlook for Softbank, because acquisitions can cause serious problems for the acquiring firm, and because these deals often cost a hefty premium.
Additionally, Sprint has been burned by rough takeovers before. For example, Sprint's Nextel acquisition left Sprint with a marriage of irreconcilable networks, fleeing subscribers, and a five-year string of losses. Future M&A activity by Sprint/Softbank could be a source of further confusion and losses.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.