Feature Article

October 15, 2012

Softbank Hits Banks for Loans to Pony up $20 Billion to Acquire Sprint - Great for Sprint but What About Softbank?

Following up on last week's news that Sprint Nextel and Softbank were in talks for Softbank to acquire Sprint for about $12.1 billion, Softbank has reached out to a trio of Japanese banks (Mizuho Financial Group, Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group - Japan's three largest banks) and Deutsche Bank to gain access to ¥1.6 trillion ( $20.4 billion) in loans that it will need to make the acquisition a reality. Assuming that Sprint shareholders and United States federal regulators approve the deal, it would become the single largest M&A deal ever for a Japanese company to have made outside of Japan. Softbank anticipated the deal closing sometime around the middle of 2013, and the plan is for Sprint CEO Dan Hesse to retain his current role at Sprint once the merger goes through.

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Last week, we noted that the deal might be worth as much as $12.8 billion relative to Sprint's share price. As it turns out, Softbank will acquire up to 70 percent of Sprint for $12.1 billion, at a share price of $7.30, $2.05 over Sprint's $5.73 closing price last week. The company would also buy $8 billion in shares directly from Sprint. There is more to the deal however - Softbank will buy $3.1 billion worth of bonds that will provide Sprint with a critical working infusion of cash - a deal component that was not on the table in deal reports last week.

The bonds will have a seven year maturity and will convert to Sprint stock at that time at $5.25 per share. That may result in a very positive investment for Softbank if the deal proves to be a game changer for both companies and Sprint's stock price ends up reflecting a positive change.

Softbank sees the cash infusion as vital for insuring that Sprint is able to maintain momentum within the United States, especially on its buildup of new LTE infrastructure. The newly combined company will have approximately 90 million total subscribers, more or less putting the combined company into a third place tie with AT&T as the world's third largest wireless player - a significant leap for both companies over their current third place positions as individual companies within the United States and Japan. China Mobile and Verizon will continue to hold on to their current first and second positions respectively.

The more massive number of subscribers that Softbank and Sprint - which will be renamed the "New Sprint" after the deal goes through - will certainly provide much more leverage in terms of the smartphone and tablet vendors, and should lead to more favorable deals for the combined company than they would otherwise be able to muster individually.

The deal continues to strike us as one that - as we noted in our earlier story - is not made in heaven. Softbank is acquiring a company that is - even following the cash infusion from the deal - steeped in substantial debt. Softbank itself is saddled with debt from previous acquisitions it has made that we noted in our earlier article. On the other hand, Softbank knows a good industry when it sees one - and the wireless communications world has only one place to go - up. This will be the case for at least the rest of the decade, so the deal - even if it proves ultimately to fall short of high end expectations, will never the less result in a win-win for both companies. The question is how much of a win-win will they need for the deal to prove itself a game changer? Softbank is a company that is always looking to change the game - that is key for it to remain happy with the Sprint deal.

Neither AT&T nor Verizon will let up on Sprint - ultimately New Sprint will still remain the third place player in the United Stated. It is arguable whether Softbank's cash and the subscriber pool it brings to the game will change any dynamics in the United States. That is what is at the heart of the issue - it isn't a deal made in heaven and may not quite live up to expectations.

There is no argument that Softbank's acquisitions - not to mention that it was the first Japanese vendor to deliver the iPhone - have enabled it to wage a successful battle against Japanese giant NTT DoCoMo and KDDI. We tend to want to put our money on the outcome ultimately not living up to expectations, but we hope for the best - a strong New Sprint would help consumers in a big way by offering a substantial third choice for them - competition is great when there is in fact a competition.

Edited by Brooke Neuman

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