The fight for Sprint (NYSE:S) seems to have taken a decisive turn away from Dish Network (NASDAQ:DISH) with SoftBank’s improved bid for the carrier receiving unanimous backing from not only Sprint’s board but also its largest shareholder. Under the revised deal, SoftBank has increased the total value of its offer by $1.5 billion to $21.6 billion for an additional 8% stake in the new company. More importantly for Sprint’s investors, the cash part of the bid has received a significant boost meaning that they stand to gain an additional $1.48 per share in cash for a total cash payout of $4.5 billion. However, $3 billion of this payout will come from Sprint’s coffers itself, leaving it with less cash for its Network Vision Plan and LTE build-out.
While backing SoftBank’s revised offer, Sprint said that it has ended discussions with Dish after a long due diligence process that led the board to conclude that Dish’s offer was not “reasonably likely to lead to a proposal superior to SoftBank’s”. With Sprint’s second largest shareholder Paulson & Co. (7%+ stake in Sprint) also backing SoftBank, the door seems to have shut on Dish, but Sprint has given it one more week to come up with a fully-financed “best and final” offer. Sprint’s shareholders were due to vote on the deal June 12, but the date has been pushed to June 25 in light of the recent developments. It is not yet clear how the revised bid will impact its ambitions of acquiring Clearwire, considering that the new Sprint will now have less cash to enter into a bidding war with Dish.
Clearwire’s fate undecided
Clearwire has been an interesting part of the Sprint puzzle with both SoftBank and Dish looking to use the smaller carrier’s spectrum hoard to further their wireless ambitions and diversify away from their respective stagnant businesses. While Dish wants to bundle its existing pay-TV service with a wireless one, SoftBank is betting on the future of LTE and its ability to derive greater synergies out of running similar networks in the U.S. and Japan. Clearwire’s spectrum is central to both their plans, but gaining control of the same without Sprint on board will be tough because Sprint is Clearwire’s majority shareholder with over 50% stake. Dish has been looking to get SoftBank to back away from Sprint by making Clearwire a costlier acquisition target but the recent turn of events has put paid to those hopes.
However, Clearwire is far from being a done deal for Sprint as SoftBank’s revised offer for Sprint leaves it with less cash to work with. Being the latest of the three to launch a 4G LTE network, the carrier far trails both Verizon and AT&T in LTE deployment. But, in order to bridge the gap, the carrier is accelerating its LTE buildout and incurring huge capital expenditures. The Network Vision Plan, which is seeing large-scale LTE deployment and the shutdown of iDEN, has cost Sprint over $4.4 billion in the last three quarters and will see another almost $6 billion being invested in the rest of the year.
Network Vision cost efficiencies may help
As can be seen below, these capital expenditures are much more than what Sprint has historically spent. Moreover, Sprint is highly sensitive to CapEx increases, which can be seen by moving the trend line in the forecast chart above and following the corresponding impact on its price estimate. Additional spectrum capacity from Clearwire will enable Sprint to lower its long-term CapEx spend on capacity increases following the initial deployment phase. But if Clearwire gets any costlier to acquire, Sprint may be forced to negotiate with Dish and acquire only part of Clearwire’s spectrum.
How much Sprint will be willing to pay for Clearwire will depend on the operating and capital efficiencies that the carrier believes it will be able to extract from partnering with SoftBank. Sprint and SoftBank said that they revised their original estimates of cost benefits after nine months of due diligence, which is what allowed SoftBank to increase the cash payment to shareholders in the new deal. Margin improvement is also one of the key goals of Sprint’s Network Vision plan – a successful implementation of which will help reduce operating expenses substantially by eliminating duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN will now be available for the CDMA/LTE network. Also, since 4G LTE is more efficient at handling data, Sprint will be able to realize the margin benefits as it rolls out in new LTE markets and more people adopt the high-speed technology.