This morning, Sprint Nextel Corporation and Softbank Corp confirmed last week’s speculation that Softbank was about to make a major investment in Sprint. The companies have now entered into an agreement under which Softbank will invest $20.1 billion into Sprint. The deal will provide Sprint with substantial capital that will enable the company to continue investing in its network and possibly participate in industry consolidation and/or spectrum sales. Both companies provided some details on the merger on a conference call today.

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Details

Softbank will invest $20.1 billion in  Sprint Nextel Corporation in total, including $8 billion in new capital. In the near term, Softbank Corp (TYO:9984) will invest $3.1 billion in newly issued Sprint converts, which will convert at $5.25 per share into shares of “New Sprint” immediately prior to the merger.

At the time of the merger, Sprint Nextel Corporation (NYSE:S) will also use $4.9 billion to purchase newly issued shares at $5.25 per share. The remaining $12.1 billion of the investment will be distributed to existing Sprint shareholders in exchange for approximately 55% of outstanding shares (works out to $7.30 per share). After the completion of the merger, Softbank will own 70% of New Sprint shares. The deal is expected to close mid-2013, after approvals from stockholders and regulators.

The immediate benefit to the company is that the deal recapitalizes Sprint’s balance sheet. $8 billion in cash reduces the leverage ratio
(year-end 2012 net debt to 2011 EBITDA) from 3.4x to 1.8x.

Conference Call

Sprint and  Softbank Corp (TYO:9984) hosted a joint conference call today.

On the call were Sprint Nextel Corporation (NYSE:S)’s CEO and CFO (Dan Hesse and Joe Euteneuer) as well as Softbank’s CEO. Both companies went through logic of the deal from each of their perspectives. Wells Fargo Securities has some notes on the highlights of the call.

SOFTBANK LIKES THE US MARKET DYNAMIC

Softbank Corp (TYO:9984) CEO Masayoshi Son made the point that where they have had success before is in ”duopoly” markets, which he believe the US market resembles with AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). Son likes the US market for this reason as he sees opportunity to make strong # 3 player.

SPRINT BALANCE SHEET SIGNIFICANTLY STRONGER POST DEAL

Hesse made the point that post this deal, Sprint’s balance sheet and leverage ratio will be close to that of Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T).

SPRINT TO USE CASH TO PURSUE STRATEGIC OPPORTUNITIES

Sprint Nextel Corporation (NYSE:S) will use this investment to pursue opportunities and strategic options that were not possible with the current balance sheet.  Softbank Corp (TYO:9984) will purchase a $3B convertible right away so that Sprint can move forward on opportunities prior to the close of the transaction.
SOFTBANK BELIEVES IT CAN DELIVER A SUPERIOR MOBILE INTERNET EXPERIENCE THROUGH SPRINT

Son believes that download speeds in the United States are very slow compared to Japan. He expects to deliver a superior experience and significantly faster download speeds to US consumers through Sprint. Softbank has a successful history of competing with a duopoly, which was how he described the situation in the US, and he believes he can leverage that success in the United States. Son would not elaborate on other pressing concerns in the US like spectrum shortages or LTE.
SYNERGIES

There are no traditional cost synergies because the businesses do not overlap, but the companies expect to realize handset purchasing synergies and a lower borrowing cost at Sprint. They pointed to the fact that there will be a combined 96MM customers between the 2 companies which should allow for great purchasing power.

We think that funding could be an issue and prevent this deal. We will be providing an in-depth outlook on that issue shortly.

Disclosure: No position