Softbank to buy 70 percent of Sprint for $20 billion
TOKYO — Japan’s Softbank has agreed to buy 70 percent of Sprint for $20.1 billion, giving the struggling U.S. cellphone company an infusion of cash and confidence.
The deal, announced Monday in Tokyo, positions Overland Park, Kan.-based Sprint Nextel Corp. as a stronger competitor to market leaders Verizon Wireless and AT&T, but it doesn’t solve some of the company’s underlying problems.
Softbank Corp. is the No. 3 cellphone company in Japan, but has a better track record. Originally a holding company with investments in Internet and telecom businesses, it bought Vodafone Japan in 2005 and turned it around. Softbank President Masayoshi Son said he is confident he can help improve Sprint’s profits.
Sprint CEO Dan Hesse has laid the groundwork for a turnaround — the company’s reputation for customer service has improved during his tenure. But his efforts haven’t had an immediate impact on profitability. Sprint has lost money for five years straight, and isn’t likely to reverse that trend in the next few years. On its own, the company would have a hard road ahead, as it pays for both a network revamp and $15.5 billion in iPhones from Apple.
Under the deal, Sprint shareholders can turn in 55 percent of their shares to Softbank in exchange for $7.30 per share. Sprint shares were up just 3 cents at $5.76 in morning trading Monday, suggesting that investors had accurately pegged the value of the transaction last week, when they sent the stock up 14 percent based on reports of talks between Softbank and Sprint.
Softbank’s outlay for the 55-percent stake will be $12.1 billion. It’s buying an additional $8 billion worth of shares from the company, for a total stake of 70 percent. That investment will dilute the value of existing shares, and is the reason Sprint’s stock didn’t trade higher on Monday.
“This is a transformative transaction for Sprint that creates immediate value for our stockholders, while providing an opportunity to participate in the future growth of a stronger, better capitalized Sprint going forward,” Hesse said.
Analysts were more reserved in their judgement.
“While we believe it will take far more than capital for Sprint Nextel to effectively compete with Verizon Wireless and AT&T Mobility, we believe the deal announced today, without question, strengthens Sprint’s position in the long-run,” said Christopher King at Stifel Nicolaus.
Kevin Smithen at Macquarie Capital said the deal doesn’t improve Sprint’s access to space on the airwaves, which is critical to improving its wireless data network, nor does it provide a path to improving its profitability. A merger with T-Mobile USA, the No. 4 carrier, might still be needed to deal with those problems, he said.
T-Mobile USA has its own plan: two weeks ago, it struck a deal to buy MetroPCS Communications Inc., the No. 5 carrier in the U.S.
Softbank shares fell 5.3 percent on the news, as Japanese investors worried that the company is making a huge gamble. The shares have fallen by a third over a week. Standard & Poor’s had placed Softbank on “credit watch negative,” meaning its credit rating could be downgraded.
The deal has been approved by the boards of both companies. It still needs approval from Sprint shareholders and U.S. regulators. Softbank said the transaction is expected to be completed by the middle of next year.
Analysts say buying a foreign cellphone company makes little sense in terms of operational synergies. There’s little opportunity to improve service by combining networks or saving money by combining operations.
But Son said the U.S. and Japanese markets have much in common now that smartphones are all-important in both countries, and the two companies could benefit and learn from each other. By joining forces, Sprint and Softbank will become one of the world’s top smartphone carriers, gaining greater bargaining power with the manufacturers of the gadgets and network equipment suppliers.