Sprint (NYSE:S) has survived for years, despite being in a very disadvantaged place next to its two big behemoth rivals, AT&T (NYSE:T) and Verizon (NYSE:VZ), who have a virtual duopoly on the domestic wireless market. It has survived by offering consumers a decent network of coverage and by offering a diverse lineup of devices, most substantially its recent ability to sell Apple's (NASDAQ:AAPL) iPhone. But just surviving should be a thing of the past as Japan's SoftBank (STFBF.PK) has announced plans to merge with Sprint. This merger will mean more than just a boon for current Sprint stockholders, who will see $12.1 billion from the deal, but will also inject $8 billion in cash to the company.
Sprint has had a good run starting in the last quarter of 2011 when they began selling Apple's iPhone. The company has failed to show a profit for some time but its shares doubled due primarily to maintaining a strong customer base thanks to iPhone sales. This was after strong speculation that Sprint would be bankrupt soon. While the turnaround may have begun at the end of 2011, this recent announcement will be the rocket that sees a strong rise in Sprint's share price for the next few years.
Sprint's stock has already been impacted by the announcement and has risen roughly 15% in the last 10 days. The tender price SoftBank announced as part of the deal is $7.30 per share but due to the nature and structure of the deal the weighted price can actually be as low as $6.38 a share. Further, the stock is trading at a discount since the deal is not planned to take effect until mid-2013. Nonetheless, assuming a $5.75 per share price you could instantly see an 11% return in a matter of months, making Sprint a strong buy.
This deal will make Sprint a major player in the wireless market and threatens the near duopoly that Verizon and AT&T enjoy, not surprisingly that is making the latter two companies uneasy. The $8 billion dollar cash infusion Sprint will receive from the deal will go a long way in helping it build its 4G network. Building this network is crucial as data users will continue to grow into the future. By 2016 there will be more than 10 billion devices in use and mobile data traffic will increase 18-fold by that time. Sprint is now poised to capitalize greatly on this growth in the coming years by being able to build out in nationwide 4G network. This makes Sprint extremely attractive as it will grow for several years. Suddenly Sprint will not be taking a back seat to AT&T and Verizon. What is more, this deal means that Sprint can upgrade its network and not acquire debt in doing so, a huge advantage going forward.
Even with this announcement there are still analysts who are bearish on Sprint. One concern is that the deal must still pass approval from regulatory agencies. This will happen as Sprint will still have smaller customer base than both AT&T and Verizon. Furthermore, SoftBank is not attempting to buy Sprint and dismantle the company - something that might be a problem to regulators. Rather, it is attempting to build Sprint into a more competitive company. Regulatory approval should not deter anyone from buying Sprint going forward.
A second concern is that Sprint will still be a distant third after this merger. That is true, but going forward, this deal will most definitely see Sprint grow its customer base. Sprint has the devices customers want - offering the iPhone and several top Android devices, and it will soon have the 4G network across the nation that customers desire. Growth of market share will definitely happen. Sprint's current management team will also remain after the deal is completed. This is the same management team that took Sprint from the cusp of bankruptcy to a doubling of its stock price over the last year. This team will know how to price and market their plans to customers.
Because of this deal and the cash infusion Sprint will receive, the company has bought a majority stake in Clearwire (CLWR). What a majority stake in Clearwire means for Sprint is wireless spectrum. Wireless carriers need this wireless spectrum for their 4G networks, and it is in high demand. By acquiring a majority stake in Clearwire, Sprint is making clear it is ready to challenge AT&T and Verizon in the mobile data market. Clearwire's interests will now be aligned with Sprint's interests, and that means plenty of spectrum for Sprint to grow its 4G network and compete with Verizon and AT&T. This is more evidence that Sprint is going to see significant growth over the next few years.
Sprint is a great stock to buy right now. The return on investment will be high as we move into the future. As Sprint increases its 4G network it will gain market share from Verizon and AT&T. Because of the deal with SoftBank Sprint will be able to build a competitive 4G network without taking on more debt to do so - a huge plus for investors. While AT&T and Verizon try to keep smaller carriers out of the 4G market by insisting on special equipment for wireless spectrum users, Sprint has bypassed that problem by taking a majority interest in one of the country's largest holders of wireless spectrum. Being shut out of the 4G market or having to replace equipment with different types, which can be expensive, is no longer a possibility for Sprint. The company has also made sure it will not suffer for lack of wireless spectrum and will maintain a good 4G network for customers. Sprint is a strong buy and should reward investors nicely for years to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.