CNBC is citing sources that a $20bn deal has finally been struck for Japan’s Softbank to acquire ‘70%’ of Sprint. The reported deal has three parts. Sunday night, the Wall Street Journal reported further details on a potential investment in Sprint by Softbank. The article indicated Softbank Corp (TYO:9984) would contribute $5bn to Sprint for new shares and $3bn for a convertible bond, with a further $12bn spent to raise its stake to 70%. The indicated share price is $7.30 for the publicly tendered shares, well above Friday’s closing price of $5.73.
Part 1 is Softbank Corp (TYO:9984)’s purchase of a $3bn, in-the-money, $5.25 convertible note which will infuse capital directly into Sprint Nextel Corporation (NYSE:S). The report sees this money going to shore up Sprint’s balance sheet as it works to secure control of 48% owned Clearwire Corporation (NASDAQ:CLWR). The report is not more specific about the mechanism to secure this control.
Part 2 is a direct $5 billion primary equity infusion at $5.25 per share.
Part 3 is a tender for Sprint Nextel Corporation shares from existing shareholders at $7.30 per share. A mix of primary + tender offer to acquire Sprint was as expected.
Doing the math suggests $6.32 blended S stock price
If Sprint Nextel Corporation (NYSE:S) issues US$3bn of convertible notes in the money at US$5.25, this equals 571m new shares. If Sprint Nextel Corporation issues US$5bn of primary shares at US$5.25, this is 952m shares which brings the expanded shares outstanding for Sprint to 4.524bn. If the total deal value is US$20bn as reported for 70% equity ownership, this implies a total value of $28.571bn or $6.32 per share.
Another possibility, if Sprint Nextel Corporation (NYSE:S) were to issue $5bn worth of equity at current prices, a $3bn convertible bond with a $5.25/share strike price, and tender for 1.6bn shares at $7.30 per share, Softbank would spend $20bn and have an approximate pro forma 70% ownership stake. These terms imply an average share price of $6.48 for Softbank Corp (TYO:9984)’s purchases.
Some investors are concerned that Softbank’s influence will bring deflationary pricing to the US wireless market. Credit Suisse Research believes this is unlikely – Softbank Corp (TYO:9984) is likely attracted to the current trends of stable prices, declining competition and improving margins and returns. These trends will likely be helped further by the wave of consolidation that they expect to follow. Carriers that Sprint will likely target stand to benefit the most; however, AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) should also benefit from an improved industry structure.
Citigroup Research notes that Synergies are likely to be limited. In their view, wireless mergers generally generate a large amount of synergies as the merging carriers are able to save on marketing and administrative costs, consolidate networks, and save on tower and equipment costs. Since Softbank does not have any existing U.S. wireless operations, synergies are likely to be modest. Given the limited synergies, they believe Softbank is unlikely to pay a large premium for a controlling stake in Sprint Nextel Corporation (NYSE:S) from the current price levels.
Disclosure: No position in any securities mentioned
