Softbank to buy 70 percent of Sprint for $20.1B

Associated Press Modified: October 15, 2012 at 5:46 pm •  Published: October 15, 2012
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NEW YORK (AP) — Sprint dug a hole for itself when it bought Nextel in 2005 in one of the worst deals in telecom history. Now, a deep-pocketed friend from overseas could help the company climb out of its hole and reinvigorate its fight against AT&T and Verizon Wireless.

Japan's Softbank Corp. has agreed to buy a controlling stake in Sprint Nextel Corp. for $20.1 billion, money that will be divided by the company and its shareholders.

Announced Monday in Tokyo, the deal positions Sprint as a stronger competitor to its two biggest rivals, AT&T and Verizon.

The agreement, however, doesn't solve all of Sprint's underlying problems. Sprint, which is based in Overland Park, Kan., has been limping along since it purchased Nextel. The merger quickly turned sour, saddling Sprint with the cost of running two incompatible networks while customers fled.

Sprint has more than 56 million subscribers, compared to AT&T's 105.2 million and Verizon Wireless' 94.2 million. No. 4 U.S. carrier T-Mobile has over 33 million U.S. customers.

Softbank Corp., a holding company with investments in Internet and telecom businesses, made its own venture into the wireless world in 2005, with the acquisition of Vodafone Japan. It turned that business around, giving President Masayoshi Son the confidence that he can make Sprint a profitable company again after five straight years of losses.

Sprint CEO Dan Hesse has laid the groundwork for a turnaround but his efforts haven't had an immediate impact on profitability. In particular, the company's reputation for customer service has improved during his tenure, as he's focused on enhancing the store and call center experience. The company scored the highest of the Big 4 wireless carriers in the American Customer Satisfaction Index this spring.

Hesse has also coaxed Sprint subscribers to pay more, helping the company stem its financial losses. But the highest-paying customers keep leaving for the larger, faster networks of AT&T and Verizon. On its own, the company would have a hard road ahead, as it pays for a network revamp and fulfills a commitment to buy $15.5 billion in iPhones from Apple.

Under the deal, Sprint shareholders can turn in 55 percent of their shares to Softbank in exchange for $7.30 per share. Sprint shares fell 4 cents Monday to close at $5.69, suggesting that investors mostly felt comfortable with the valuation they pegged for the company last week, when they sent the stock up 14 percent based on reports of talks between Softbank and Sprint.

Softbank's is paying $12.1 billion for the 55-percent stake. It's buying an additional $8 billion worth of shares from the company, for a total stake of 70 percent. That investment will dilute the value of existing shares, and is the reason Sprint's stock didn't trade higher on Monday.

"This is a transformative transaction for Sprint that creates immediate value for our stockholders, while providing an opportunity to participate in the future growth of a stronger, better capitalized Sprint going forward," said Hesse, who will remain the company's chief executive.

Analysts were more reserved in their judgment.

"While we believe it will take far more than capital for Sprint Nextel to effectively compete with Verizon Wireless and AT&T Mobility, we believe the deal announced today, without question, strengthens Sprint's position in the long-run," said Christopher King at Stifel Nicolaus.

Kevin Smithen at Macquarie Capital said the deal doesn't improve Sprint's access to space on the airwaves, which is critical to improving its wireless data network, nor does it provide a path to improving its profitability. A merger with T-Mobile USA might still be needed to deal with those problems, he said.

T-Mobile USA has its own plan: two weeks ago, it struck a deal to buy MetroPCS Communications Inc., the No. 5 carrier in the U.S.

Moody's said Monday that it would consider upgrading Sprint's credit rating as a result of the deal. Standard & Poor's, another ratings firm, made a similar announcement last week. A higher credit rating would mean lower borrowing costs for Sprint.