Softbank's recent and continuing investment in Sprint Nextel Corp. (S), valued at about $20.1 billion, will give Softbank, the third-largest mobile services provider in Japan, control of the third-largest mobile carrier in the United States. Softbank's president, Masayoshi Son, will compete against the dominant U.S. mobile carriers, Verizon (VZ) and AT&T (T), by providing more data options than these larger competitors, including unlimited data plans.
Masayoshi Son's intentions are no mystery. His stated goal is to become the world's highest revenue earning mobile data provider. The combination of Softbank and Sprint would surpass AT&T's mobile services revenue, and only trail Verizon and China Mobile (CHL) in sales.
Softbank has been Japan's leading seller of smartphones since 2007, and increased its capacity at the start of October when it made a $2.3 billion acquisition of eAccess, a smaller competitor. Much of Softbank's success in luring customers from its larger, older and entrenched competitors, NTT DoCoMo and KDDI, came from offering more data options for smartphones, tablets, laptops and vehicles. Similarly, Sprint has pushed its unlimited data plans here in the United States, while Verizon and AT&T have discontinued their prior unlimited offerings. In a way, this would appear to equate to a similar culture and notion of branding at Softbank and Sprint.
Beyond data plans, another major driving force behind how Softbank managed to take so much market share in Japan was its early acquisition of Apple's (AAPL) iPhone. Softbank enjoyed iPhone exclusivity for the first few years, much like AT&T had in the United States. Though Sprint obtained the iPhone after both of its mammoth competitors, the company has often unveiled technology before Verizon and AT&T, including being the first to offer a 4G Google (GOOG) Android smartphone, and has a history of trying to distinguish itself through offering newer technology and superior data plans.
Since getting the iPhone to start Q4 of 2011, Sprint has experienced a strong start to its long-term turn-around plan. The benefits Sprint has seen have included subscriber growth after years of a declining subscriber base, increased average fees per subscriber and happier customers that were less likely to return their phones or contact customer service with problems. All in all, the trend has been good, with Sprint gaining higher paying subscribers that may end up costing less to service.
Softbank's investment in Sprint includes $8 billion in new capital to fortify Sprint's balance sheet, pay down debt and invest in its network, including making strategic acquisitions. The costs of building a network to contend with Sprint's giant competitors are substantial, and have required Sprint to borrow money at rates well above those at which its competitors can finance its expenses. With this new capital and the improved credit quality at which Sprint will now be able to finance its development, the company should be able to give Verizon and AT&T a run for their money. This is very different than the past, where Sprint often had to shelve its network development ambitions due to its weak balance sheet.
Softbank's backing makes things easier for Sprint, but the company is not without its issues. Sprint is still burdened with about $23.7 billion in debt, and has not turned an annual profit in years. Still, Sprint will now be able to refinance its debt at a preferable interest rate, and the reduction in interest expense should lighten the burden. Further, the once significant risk that Sprint may go bankrupt is now a highly unlikely occurrence.
As a result, the turn-around that Sprint has seen over the last year is likely part of a trend that will continue for several more years. While the deal for Sprint may place a temporary cap on Sprint's shares, the deal should also provide a level of support to Sprint shares that investors may grow to appreciate in this highly volatile market.
Disclosure: I am long S.