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October 11, 2012

Softbank to Acquire Sprint? Not Necessarily a $12.8 Billion Deal Made in Heaven

Some of us like to think of Sprint as the little red engine that could…almost.

Sprint Nextel is a perennial also-ran company in the big North American wireless carrier market. For years the company has run a third place campaign that has often taken wrong turns, played perhaps to the wrong markets in terms of long term growth (Nextel and Push to Talk - P2T - comes to mind), and notably missed getting on the iPhone train until that train was almost out of the station. It has been working on a seemingly never-ending turnaround since 2007, when current CEO Dan Hesse took the reins. 


Image via Shutterstock

Sprint has made some strides of late in any case. It did finally get on the iPhone train, which saved it from what otherwise would have been massive subscriber churn over the last year, it went on the offensive in combating the AT&T and T-Mobile merger (which we believe would have been a great deal for consumers, contrary to Sprint and others arguing otherwise), which preserved that long term number three ranking for Sprint, and the company has made some headway in pushing out Long Term Evolution (LTE) infrastructure, though it has a long way yet to go there.

Finally, our last and most recent foray into the land of Sprint focused on Clearwire, which Sprint owns 49 percent of. It isn't all that clear to us how Clearwire might play out in Sprint's future, and that future becomes even cloudier if Sprint moves forward with a merger - no matter what shape that merger might take.

M&A Mania

Last week, we heard plenty of noise concerning T-Mobile's (and parent Deutsche Telekom AG's) bid to merge with MetroPCS. Once the deal was announced we also heard noises about Sprint making its own bid for MetroPCS, though it Sprint's case it was indeed merely noise rather than an actual bid that emerged.

Now we are hearing that Sprint is in "serious and advanced talks" with Softbank - Japan's third largest wireless operator - to be acquired by Softbank for possibly as much as $12.8 billion. Predictably, Sprint shares jumped more than 16 percent in premarket trading on the news (the stock rose 81 cents to $5.85 before the market opened). Conversely, in trading on the Tokyo Stock Exchange Thursday, Softbank's shares closed down 1.4 percent at ¥2,881.

The Wall Street Journal reports that "A Softbank representative says the story is based on speculation" and added, "We do not comment on speculation." As we write, Sprint itself has confirmed that the two companies are in deep talks. Softbank is certainly known to jump on M&A as a means to delivering what it needs to quickly. For example, Softbank recently announced it would buy smaller Japanese rival eAccess for $1.84 billion. The deal - essentially a technology tuck-in, makes sense as it will allow Softbank to expand its Long-Term Evolution ( LTE) infrastructure. Sprint is a hell of a lot more than a tuck-in however.

Softbank, which is based in Tokyo, has the interesting distinction of being the first wireless carrier in Japan to sell the iPhone, something it did dating back to 2008 - and something that helped drive its business. Clearly, Softbank chief executive Masayoshi Son and his management team have the capability to be forward-thinking, and perhaps Softbank has the necessary management chops to actually be successful with a Sprint acquisition.

Plenty of Ifs

As good as the Softbank team has been in execution in Japan, that isn't going to translate into an automatic win for Softbank. The Sprint deal might pay off - even if it pays off only to a small degree - or it may prove a huge pitfall for Softbank. The company did successfully buy the Japanese arm of Vodafone Group in 2006. That acquisition absolutely helped move Softbank into becoming a serious wireless communications player. Of course, a winning bet may not show up right away. You have to be in it to win it (or even to manage a non-trivial profit as a third place player).

Our colleague and senior editor Peter Bernstein, who has been a telco insider, analyst, and direct industry participant for more years than we can remember, and who has seen it all before, notes the following:

"Since the dawn of the cellular era, industry consolidation in the U.S. and around the world has been a constant. The hunters around the world are always on the lookout for opportunities to expand their footprints to grow revenues and hopefully profits. Assuming the speculation about Softbank being interested are true it is in line with recent news involving T-Mobile agreeing to combine its operations with MetroPCS in the U.S. and rumors of Verizon’s interest in China. Sprint needs a deep pocket and Softbank has one. Whether they are the right company to sell to is problematic. It will also be very interesting to see how the Feds feel about the third and fourth largest wireless companies in the United States being foreign owned. It's certainly another interesting 'As the World Turns' chapter."

There is no doubt that Softbank - if it pulls the trigger on the deal, would be doing so at a good time relative to affordability. When Hesse took over in 2007, Sprint's shares were in the $13 range - a significantly more expensive proposition than today's $5 range makes it. The cheaper the price, the less long term risk. Nevertheless, the market is heavily skewed in favor of the two giants - AT&T and Verizon. Making inroads won't be easy and it won't be simple.

Verizon Wireless - New Competitor…and Partner?

An interesting aspect of the deal is that Softbank and Verizon are actually industry partners. How so? We asked our colleague and Crossfire Media co-founder Carl Ford - our very own telecom industry insider - to elaborate on this:

"When Verizon runs its developer conferences it points to their network APIs. Softbank, Vodafone and China Mobile have all worked together in developing their ecosystem. In addition most of them have a strong CDMA history. In looking at the Softbank potential we can see where Sprint and Clearwire's spectrum can be very valuable. It is unclear whether that makes a stronger bond in technology between VZ and Sprint."

Carl adds that, "In making this move, we're not sure if we should see this as a change of partners. On the other hand, this may be a sign of things to come since roaming on LTE is not going to work the same way as it has for GSM. We may be seeing the start of spectrum alliances forming."

It's certainly something that would make for a very interesting industry dynamic.

Ultimately, our guess is that the competitive angle would play out a great deal more than the partnership. The last thing Verizon Wireless and AT&T want is a stronger third place player. Sprint would certainly give Softbank a significant jumpstart into expanding its wireless business outside of Japan. A combined Sprint and Softbank might just be the right formula to give both of the leader board players a headache.

We will be following the Softbank/Sprint and T-Mobile/MetroPCS deals (or potential deals) closely. Stay tuned for more chapters of As the World Turns - at least in the wireless carrier space.




Edited by Brooke Neuman


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