Softbank has finally completed its $21.6 billion takeover of the third largest wireless carrier in the U.S., which gives it a 78% controlling stake in what was formerly Sprint Nextel and will now be called Sprint Corporation. Sprint’s (NYSE:S) dropping of the Nextel moniker is also symbolic of its recent shutdown of the iDEN network, which the carrier had assumed control of more than 7 years ago after merging with Nextel. The iDEN shutdown as well as the cash infusion from the Softbank merger paves the way for a much more competitive Sprint, which has for years been struggling under a huge debt load and in a duopolistic industry hugely dominated by Verizon (NYSE:VZ) and AT&T (NYSE:T). It also ends Softbank’s protracted months-long battle with Dish Network (NASDAQ:DISH) that had threatened to distract the third-placed carrier from its turnaround plans.
As part of the Softbank deal, Sprint’s shareholders will receive $16.6 billion in cash and the new company’s balance sheet gets a $5 billion boost. The $5 billion figure is however down from the initial offer of $8 billion, which had to be revised in order to pay Sprint’s shareholders more cash and sweeten the deal in response to Dish’s counterbid. Moreover, most of this cash infusion will go towards funding the acquisition of Clearwire, which Sprint finally managed to close this week after staving off Dish’s threat (again) with a $5 per share offer. This leaves the carrier with less cash for its Network Vision Plan and LTE build-out. Sprint has however made good progress on its Network Vision plan, removing the cost inefficiencies arising out of running different networks together (with the iDEN shutdown) and improving cash flows. This should help Sprint meet the deficit, as well as fund the acquisition of Clearwire with some of its own cash.
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Clearwire Key to Sprint’s Turnaround
Sprint’s offer of $5 per share of Clearwire values the firm at $14 billion, which means that Sprint is paying about $7 billion to buy the rest 50% of the smaller carrier’s shares. This is a premium of almost 50% over its previous bid and shows the value that Clearwire holds for Sprint despite its loss-making business.
The reason Sprint went after Clearwire so aggressively is because of its huge spectrum holdings which would have had to be auctioned off to pay the debtors in case of bankruptcy. Sprint’s majority stake-holding would have then counted for zilch, and it would have had to fight with other deep-pocketed rivals such as Verizon and AT&T for Clearwire’s spectrum. This scenario would have made it even more expensive for Sprint, not only in terms of money but also precious time lost. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average, which will give Sprint a boatload of spectrum and go a long way in bolstering its LTE network. Moreover, the two companies already have a deal in place, according to which Sprint will be able to offload 4G LTE traffic onto Clearwire’s planned TD-LTE network.
Clearwire is central to SoftBank’s plans for Sprint as well. The Japanese carrier has experience running a TD-LTE network in its home country, and it plans to bring that expertise to the U.S. market. Being able to run similar networks in two different countries would give SoftBank the scale to negotiate better deals with not only the network equipment manufacturers but also handset companies such as Apple. This would bring about better synergies to the deal and allow Sprint to reduce its cost of operations a lot more, thereby helping it compete more aggressively against the duopoly of Verizon and AT&T. Clearwire’s spectrum would also allow Sprint to continue to offer unlimited data plans for a few more years without the fear of congestion and lower network speeds.
However, acquiring Clearwire means that Sprint will also have to absorb the latter’s almost $3.5 billion in net debt and more than $300 million in operating losses every quarter. But considering that the government’s TV spectrum auctions are years away and Sprint now has the financial cushion of Softbank to make this aggressive move, Clearwire’s spectrum does seem like a very attractive option. With Clearwire’s spectrum, Sprint will not only be able to build out a robust LTE network but also compete more effectively with Verizon and AT&T, who are farther ahead in their LTE deployment plans.