Dish And Softbank Trade Salvos, As The Competition For Sprint Heats Up

| About: Sprint Corporation (S)
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In the battle for control of Sprint (NYSE:S), rather than getting into a bidding war with Dish Network (NASDAQ:DISH), SoftBank (OTCPK:SFTBF) instead opted to make a logistical attack. Dish was happy to fight fire with fire. Sprint is clearly taking both bids seriously, as on May 20, it reported receiving a waiver from Softbank that permits Sprint to have discussions with Dish, including providing non-public information and engaging in negotiations.

With the knowledge that Dish's rival bid for Sprint requires a substantial amount of financing, Softbank has implied that providing Dish with backing might affect the ability to participate in the public offering of Alibaba Group Holding Ltd, a substantial Chinese e-commerce business in which Softbank owns a 33 percent stake. Dish responded by writing a letter to the FCC that states "If SoftBank has the power to influence crucial financing decisions of a Chinese company and enlist those decisions in the service of its effort to acquire Sprint, then the proposed foreign ownership needs to be assessed in light of this Chinese company as well."

Dish needed to raise $9 billion in order to finance its rival offer for Sprint, and its quest to obtain this financing is ongoing and likely to face pressure from Softbank. Dish's proposed deal includes the intention to fund the $17.3 billion cash portion of its $25.5 billion offer by using $8.2 billion in balance sheet cash and raising $9 billion in additional debt financing. Last week, Dish sold $2.6 billion in senior secured notes, but this still leaves a $6.4 billion shortfall. Further, the company may be required to obtain some additional financing in case a bidding war with Softbank does ensue, requiring Dish to up its offer.

Though Softbank does not overtly make decisions for Alibaba, its sizable stake in the business makes it a party that investment banks are unlikely to want to cross in advance of Alibaba's IPO. At this point, Alibaba has yet to set any timetable for an IPO or even hire any underwriters, but it is likely that investment banks have been courting the company.

Anti-tying rules prohibit a bank from offering a product to a company on the condition that it obtains other business. This situation is somewhat inverse to those contemplated under such rules, where the offering of a product to a competitor company might preclude the bank from obtaining a role in a transaction. Moreover, corporate clients are not prohibited from selecting underwriters on the condition that the banks refrain from participating as underwriter to a competitor.

Dish's counsel likely explained that it could not complain solely about Softbank's influence over financiers, but that it could use Softbank's association with Alibaba as a way to tie the Japanese company with China. U.S. regulators are generally cautious of allowing Chinese ownership or control over businesses deemed systemically important. Softbank's proposed deal for Sprint has already raised concern that it would use Chinese suppliers, such as Huawei Technologies, with the company subsequently making assurances that it would refrain from using Huawei products to build out Sprint's network. Huawei subsequently wrote a letter to the FCC arguing that such assurances are unwarranted and improper. Nonetheless, Softbank's stake in Alibaba appears distant enough from the telecommunications business to have much of a basis of concern regarding this proposed transaction.

Barclays (NYSE:BCS) is advising Dish, and Jefferies Group (JEF) was disclosed as a source of potential financing, though its funding will be irrelevant if Dish cannot find other banks willing to finance the balance it must still raise to fund its present bid for Sprint. Additionally, Dish may need to raise its bid, meaning that the company may require a little more financing as wiggle room. Such sizable financing will likely require Dish to make deals with multiple additional banks, and potentially issue more bonds.

This logistical attack by Softbank is rather sensible given that Dish's present lack of committed financing should be a key issue to Sprint's special committee, and especially if Dish will need to increase its offer. Another reason that this financing approach is smart is because many substantial financing sources, including Bank of America Corp (NYSE:BAC), Citigroup (NYSE:C), UBS AG and Deutsche Bank (NYSE:DB) are not financing options for Dish. Bank of America is advising Sprint's special committee, Citigroup and UBS are advising Sprint, and Deutsche Bank is participating in SoftBank's financing.

Dish was immediately opposed to the Sprint-SoftBank deal, as well as Sprint's subsequent attempt to acquire Clearwire (CLWR), where Dish also made an unsolicited bid. If allowed to wholly acquire Clearwire, Sprint would become the nation's largest holder of spectrum. In January, Dish made an attempt to break up the deal through an unsolicited $2.2 billion bid for approximately one-quarter of Clearwire's spectrum, which it claims values the total company at $3.30 per share, or 11% more than Sprint's offer for the total company. Of course, not all spectrum is of equal value, and Dish's attempt to cherry-pick some spectrum cannot be taken as a pro-rated fair value for the entire business.

Both the Clearwire and Sprint deals are largely about the spectrum, which is necessary for any plan to compete against the dominant U.S. mobile carriers, Verizon (NYSE:VZ) and AT&T (NYSE:T). Like Sprint within the United States, SoftBank has gained market share from its larger competitors in Japan by providing more data options, including unlimited data plans. If Sprint acquired Clearwire, it would be the largest domestic spectrum holder. Dish also already owns a good deal of spectrum and is clearly interested in obtaining more.

SoftBank has been a consistent strategic telecom dealmaker. The company entered the mobile service carrier business in 2006 by acquiring Vodafone Japan from Vodafone (NASDAQ:VOD). The following year, it inked an exclusivity deal with Apple (NASDAQ:AAPL) for the iPhone. In 2012, before making its bid for a majority stake in Sprint, SoftBank also announced the acquisition of eAccess Ltd, a mobile WiFi router and LTE network services company, for about $1.84 billion.

Also last year, Sprint and Dish discussed the possibility of Sprint hosting Dish's wireless spectrum on Sprint's mobile towers, but the deal subsequently fell apart. Dish then made a failed attempt to acquire MetroPCS Communications (PCS) for about $4 billion. These deals indicated Dish's true interest in acquiring a mobile data provider, and that Dish and Sprint are already reasonably familiar with each other.

Another possibility is that Dish ends up consolidating with Sprint and SoftBank and/or entering some sort of joint venture. If Dish is looking to own a wireless company, obtaining an interest in Sprint and SoftBank may be a better option than Dish's attempting to develop a new competitor on its own. Moreover, the combined entities would house even more spectrum, and also combine Softbank's deep pockets with Dish's satellite network. Such a deal could create a new and formidable global data powerhouse.

In the near term, as the courtship competition continues, Sprint shareholders appear reasonably secure in their investment. Not only do Sprint shares have the potential to make further gains in the coming weeks if either suitor ups its offer, but shares are also less likely than the greater market to decline if a broad market sell-off occurs.

Disclosure: I am long C. 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.