Despite Minor Opposition, Softbank, Sprint And Clearwire Should Integrate

Includes: AAPL, GOOG, S, SFTBF, T, VZ
by: Zvi Bar

Clearwire (CLWR) investor Crest Financial announced that it plans to ask the U.S. Federal Communications Commission ("FCC") to block Sprint Nextel's (NYSE:S) takeover of Clearwire, as well as a separate deal where a majority of Sprint would be acquired by Softbank of Japan (OTCPK:SFTBF). Crest Financial claims that the deal undermines the value of Clearwire's spectrum. Clearwire is majority-owned by Sprint.

Crest Financial and any other entities that wish to block these deals must file a complaint with the FCC before January 28. Crest already initiated a shareholder lawsuit seeking to stop Softbank's $20.1 billion deal to acquire 70 percent of Sprint, which was announced in October. Last month, Sprint subsequently negotiated to acquire the portion of Clearwire it does not already control for $2.97 per share, with Clearwire's board approving of the transaction.

While it appears unlikely that the FCC would be particularly swayed by Crest Financial's valuation concern, the organization and possibly U.S. Department of Justice ("DOJ") may find other reasons to have issue with the dealings. The DOJ prevented AT&T (NYSE:T) from acquiring T-Mobile USA for $39 billion over concerns that the combination of the second and fourth largest U.S. mobile service providers could hurt competition and raise prices.

By acquiring Clearwire, Sprint will acquire its spectrum and the combined spectrum currently under the control of Sprint and Clearwire would make Sprint the nation's largest holder of spectrum. This would also mean that if Softbank controlled the majority of Sprint, then the nation's largest holder of spectrum would be controlled by a foreign entity.

If the deals are approved, Softbank, the third-largest mobile services provider in Japan, would control of the third-largest mobile carrier in the United States and compete against the dominant U.S. mobile carriers, Verizon (NYSE:VZ) and AT&T. The company has a clear plan to compete against these larger competitors by providing more data options, including unlimited data plans.

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 Japanese 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. Therefore, this deal appears to bring two similar businesses together.

Beyond data plans, another major driving force behind how Softbank managed to take so much market share in Japan was its early offering of Apple's (NASDAQ: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 frequently unveils technology before Verizon and AT&T, including being the first to offer a 4G Google (NASDAQ:GOOG) Android smartphone. Sprint has a history of trying to distinguish itself through offering newer technology and superior data plans, and also now offers a prepaid iPhone option, while AT&T and Verizon only offer the iPhone through contracts for at least a two-year term.

After getting the iPhone to start the fourth quarter of 2011, Sprint experienced a strong start to its long-term turn-around plan. After years of a declining subscriber base, Sprint began to again realize subscriber growth as well as increased average fees per subscriber. Moreover, the company indicated that its new customers were happier and less likely to return their phones or contact customer service than their prior average user.

Softbank's proposed 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 (such as Clearwire). With this new capital and the improved credit quality that comes with it, Sprint should be more capable of competing with Verizon and AT&T. Nonetheless, Sprint is still burdened with about $21 billion in debt, and has not turned an annual profit in years. Still, if the Softbank deal goes through, Sprint should be able to refinance its debt at a superior interest rate, and the reduction in interest expense should lighten the company's substantial burden.

All in all, the claims Crest Financial appears likely to raise should be deemed insubstantial to block these deals from occurring. The deal for Sprint by Softbank appears good for competition and prices, and the deal will likely get approved in 2013. Similarly, the deal for Clearwire appears likely to get approved, and one would expect a competing bid to exist if the deal did significantly undervalue the spectrum. In the coming months and quarters, Sprint appears poised to continue appreciating, as the Softbank deal and Sprint's long-term turn around continue to develop.

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.

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