Sprint (NYSE:S) announced Monday morning that it has reached an agreement to sell a 70% stake to Japanese telco SoftBank for $20.1 billion, a deal which will see 55% of shares being purchased at $7.30 in addition to an $8 billion cash infusion.  The cash infusion will bolster Sprint’s highly leveraged balance sheet and provide more flexibility with respect to the company’s expensive 4G LTE rollout and Network Vision initiative. The shares traded up slightly to about $5.75 in early trading Monday. This is significantly below the tender price, and is a result of the mechanics of the deal, which we explain below.
For more information on the deal and its impact on Sprint’s fundamentals, see our article Sprint’s Fundamentals Would Benefit From A SoftBank Investment.
Overall Value For Shareholders Much Less Than $7.30
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Under the terms of the deal, SoftBank will purchase 55% of existing shares for $7.30 in cash. The remaining 45% of shares will be converted into 30% of the New Sprint shares. SoftBank will be investing $3.1 billion up front in debt, convertible to New Sprint shares at $5.25 per share.  When the deal closes SoftBank will invest another $4.9 billion in New Sprint shares at $5.25 per share. SoftBank will also receive a warrant to purchase 55 million New Sprint shares at $5.25 per share.  This structure is the reason that Sprint shares have been trading well below the $7.30 tender price. Assuming shares are purchased on a pro rata basis, meaning all investors elect to receive cash for 55% of holdings, the remaining 45% of shares will be diluted by the conversion at $5.25 per share, which results in a weighted price of $6.38 (55% at $7.30, 45% at $5.25). The stock is trading at a discount to this price as the purchase likely wouldn’t occur until mid-2013 and there is some regulatory risk involved. We do, however, expect the deal to be completed and approved.
Huge Boost to Sprint’s Balance Sheet, Credit Profile
The $8 billion cash infusion provides Sprint with a significant cushion as it undertakes its expensive 4G LTE network rollout and network modernization project. It will also reduce the company’s net debt (long-term debt, excluding operating leases, minus cash) to $6.5 billion from $14.5 billion. As a result, its net leverage – the ratio of net debt to EBITDA – would decline from about 3x to 1.3x. This could lead to credit rating upgrades, and as a result lower borrowing costs for the company.Notes: