In what can only be considered surprising news, in our view, Japanese press reports are suggesting this morning that Softbank Corp. is in “advanced talks” to acquire Sprint Nextel Corporation (NYSE:S) in a deal expected to exceed $12.81 billion in total value. Shares of sprint are sky-rocketing, up 18% at the time of this writing.
The value of the deal would presumably be for a majority stake, but not the entirety of the company, as Sprint currently has an Enterprise Value of over $30 billion this morning, following the news, however initial reports have not been clear on that, with some suggesting that Softbank is looking for a two-thirds stake in the company.
The challenges of Network Vision would still remain – even if the company is acquired. However, the addition of Softbank would provide a deep-pocketed partner – removing any financing risk and meaningfully reducing Sprint Nextel Corporation (NYSE:S)’s ongoing cost of capital.
The transaction would give Sprint Nextel Corporation (NYSE:S)’s operations access to very deep financial pockets however, and transform the company’s levered balance sheet, as Softbank is one of Japan’s largest corporations.
A foreign buyer may have some issues from a regulatory approval standpoint (particularly concerning federal government contracts from Sprint’s wireline unit).
NewCo Would Have Leverage of ~2x Net Debt/EBITDA according to Barclays.
They estimate that the combined entity would have leverage of ~2x 2013E EBITDA, vs. Softbank’s current 0.5x leverage, and Sprint Nextel Corporation (NYSE:S)s 3.1x leverage. This would be a substantial increase for SOFTBANK TECHNOLOGY CORP. (TYO:4726). That said, in the current debt market, we wouldn’t expect the companies to have difficulty in raising the financing. In addition, SOFTBANK TECHNOLOGY CORP. (TYO:4726) has approximately $12BN in cash on the books, meaning that true incremental debt needs would be modest.
Oppenheimer in a research note yesterday, predicted that Sprint would make some move, although not with Softbank Corp (TYO:9984). They note:
We expect the five smaller wireless carriers to merge into one company. The easiest path to do this is for Sprint to acquire LEAP in the next six months, and to then merge with the combined PCS/Deutsche Telekom AG (ETR:DTE) (FRA:DTE)’s T-Mobile within two years. CLWR (CLWR) would be last in the process.
We believe that Deutsche Telekom AG (ETR:DTE) (FRA:DTE)’s T-Mobile acquired MetroPCS Communications Inc (NYSE:PCS) for its spectrum and to gain a public currency and would like to have LEAP’s spectrum also. MetroPCS Communications Inc (NYSE:PCS) gives TMobile an attractive and unique 20×20 LTE network, but with limited geographic coverage without LEAP. Sprint has a major incentive to acquire Leap Wireless International, Inc. (NASDAQ:LEAP) before T-Mobile does, as it will be at a network advantage and may have a tough time negotiating a merger with T-Mobile.
Right now, we only believe there is a 30% probability that Sprint bids on MetroPCS Communications Inc (NYSE:PCS) prior to the merger closing but we see an 80% probability of acquiring Leap Wireless International, Inc. (NASDAQ:LEAP) and if this works another 80% probability of a bid for the combined PCS/T-Mobile within the next three years. We understand the rationale for a Sprint merger with PCS now (synergies, improved scale etc.), but believe the synergies and logic of a merger with Leap Wireless International, Inc. (NASDAQ:LEAP) make it is easier to eventually merger with the combined PCS/Deutsche Telekom AG (ETR:DTE) (FRA:DTE)’s T-Mobile after than merger closes. In a year to 18 months Sprint should see major EBITDA expansion and the beginnings of subscriber growth at the exact point when Deutsche Telekom AG (PINK:DTEGY) and PCS will be trying to consolidate to one network. This PCS/T-Mobile consolidation process will be expensive and entail some network disruptions (whether or not T-Mobile does it or Sprint) which will present Sprint with the opportunity in two years or so.
SOFTBANK TECHNOLOGY CORP. (TYO:4726) has said that any reports are based on speculation.
Disclosure: I owned Sprint for an account I manage. I just sold the shares this morning.
