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June 12, 2013

Softbank Rejiggers Sprint Offer and ups its Bid to $21.6B - What Will Dish Do?

We've been watching the ongoing Sprint acquisition Olympics since the first day Softbank became involved with Sprint. Things have certainly been interesting. Between its alternative bid for Sprint and its alternative bid for Clearwire, Dish Network has been acting quite aggressively in looking to make both acquisitions. At the very least it is certainly making Sprint's life a bit harder than it might otherwise be - although in the end Sprint's and Clearwire's shareholders won't have anything to complain about. We're certain that Dish truly wants to make the acquisitions, though if unsuccessful it will still have generated some storms.

Also caught up in these storms has been Softbank, whose original $20.1 billion offer to acquire 70 percent of Sprint and loan it $5 billion dollars has been overshadowed by Dish's own subsequent $25.5 billion bid for Sprint. To date, Softbank has been quietly asserting that its own deal is better than the Dish offer, but now Softbank is making some moves to further sweeten the pot for shareholders. Softbank chairman Miyoshi Son is adamant about not overpaying for Sprint, but Dish has caused him to rethink the price.

Towards that end, SoftBank has been working closely with Sprint (actually still "Sprint Nextel") - which clearly prefers the Softbank ownership to Dish - and has reached an agreement to up its bid to $21.6 billion. The back room negotiations haven't only been about share price however. Softbank and Sprint have worked an additional kink - in the form of a poison pill - into the financial machinery to make it harder for Dish to emerge as the successful bidder.

Also an integral part of the deal, Softbank has modified the original terms of its offer relative to a $3.1 billion loan/cash infusion (in the form of a bond purchase) Sprint was going to receive to ensure it maintains strong forward momentum in building out its data networks and in capturing subscribers - especially in the face of a continued loss of Nextel subscribers as Sprint phases Nextel out. This change in the deal would give SoftBank a 78-percent stake in Sprint, rather than the 70 percent Softbank would have owned under the original deal. Keep in mind, though, that the bonds would ultimately have been converted into an opportunity to buy up more Sprint shares down the road at a potentially very sweet share price in the $5 range.

Softbank will fund the revised offer directly through its own cash. The company will not be reaching out to any banks to fund the additional $1.5 billion. Softbank is estimated to have at least another $3.5 billion in cash on hand.

That roughly $3 billion worth of cash would now go to Sprint’s shareholders to counter the Dish bid. The new $1.5 billion outlay and the conversion of the cash infusion towards shareholders means that Softbank will now lay out close to $4.5 billion more directly to shareholders. The additional dollars translate into an increase per share from the original $6.30 a share to $7.48 a share. That, in turn, counters - and trumps - Dish's offer of $7 a share.

Larger Sprint shareholders - most notably Paulson & Company, Sprint’s second-largest shareholder - like the sweetened offer enough to state they would vote their shares for Softbank. Softbank hopes that the revised offer is enough to drive the deal to a close in July 2013, as was originally planned.

The side bet on the shifting of the $3 billion is that Softbank and Sprint will find enough overlap in services to trim the need for the original $3 billion cash infusion. We would be very surprised if the two companies were to actually be able to pull off the cash savings - Sprint needs to invest and build and tactical cuts will not help it against AT&T and Verizon Wireless.

The new agreement requires Dish to deliver its best - and final - offer by June 18. Sprint shareholders will vote on the SoftBank deal June 25. The new agreement also requires Dish to specifically lay out how it will fund its own revised offer - in detail. Any offer must further be funded only by clearly recognized financial institutions - Dish has to put real money completely backed by committed financial institutions of suitable size for the deal on the table in clearly defined ways. It has not done this relative to its original offer.

The poison pill we noted earlier creates a shareholder rights plan that will limit any one investor outside of SoftBank from owning more than 17 percent of Sprint shares. The point of this little provision is to ensure that Dish cannot sidestep the Sprint board and take its offer directly to Sprint's shareholders. Sprint has had to deal with this issue on Dish's Clearwire offer, which has indeed resulted in Dish being able to sidestep Sprint entirely in seeking to take over Clearwire with its superior share price offer. Sprint hasn't been helped on the Clearwire end of things - a recent study suggests that Sprint's deal is significantly undervalued. The poison pill will prevent Dish from undermining the Sprint-Softbank deal in the same way it has undermined the Clearwire deal to date.

What will Dish do? At the very least it has already put more strain on both Sprint and Softbank financially. We do not doubt that Dish will be able to come up with the additional dollars - and the newly required financial institutional commitments - if it really wants to own Sprint. It will be interesting to see if Dish will make the move to counter the Softbank offer. The key issue here is that Softbank will not look to pay more for Sprint than it believes the company is worth.

Will Dish "overpay" to keep Softbank out? That is the question that Dish is now wrestling with.

Edited by Alisen Downey

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