Sprint’s (NYSE:S) stock surged by more than 10% Thursday morning as rumors swirled that Japanese telco Softbank was in talks to acquire a majority stake of Sprint’s stock, rumors which were later confirmed by Sprint.  Meanwhile the stock of 4G operator Clearwire, in which Sprint has a nearly 50% stake, was up nearly 40% following the news. Softbank is believed to be interested in Clearwire’s massive spectrum position and some form of ownership of Clearwire would likely be a part of any deal.  While Sprint’s stock has certainly benefited from these talks, we believe that a potential deal would benefit the company’s fundamentals as well, most notably its highly leveraged balance sheet.
We recently revised our price estimate for Sprint to about $5.30, which is slightly behind the current market price following the news. For more information about those revisions, see our article Sprint is Worth $5.30 Excluding Takeover Rumors.
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- Why We Increased Our Price Estimate For Sprint
- Key Takeaways From Sprint’s Q3 Earnings
- Sprint Q3 Preview: Postpaid Phone Adds, Margins In Focus
- A Sprint-T-Mobile Merger Would Make Financial Sense, But It’s Unlikely To Materialize
- Sprint Stock Doubled This Year: Was The Rally Justified?
Softbank Could Be Interested in Clearwire Spectrum
Softbank’s motivation may be related to Clearwire’s massive spectrum position in the 2.5 GHz frequency band, as Softbank already owns a swath of spectrum in the same frequency and both companies utilize similar TDD-LTE technology.  A deal could allow debt-strapped Clearwire to roll out its LTE network more rapidly, which could eventually boost Sprint’s 4G LTE coverage (though the two networks are currently incompatible). Given that Sprint lags far behind AT&T (NYSE:T) and especially Verizon (NYSE:VZ) in terms of LTE coverage, this would be a hugely positive development for the company.
Balance Sheet Benefits
Another important benefit of a deal would be from a balance sheet perspective. Sprint has $21 billion of long-term debt compared to a market capitalization of less than $17 billion which includes less than $9 billion in cash and equivalents, and the company is currently in the midst of a massively expensive network modernization plan and LTE rollout. Management expects that its Network Vision initiative alone will cost between $4 and $5 billion. While the expected margin benefits should more than compensate for the initial costs, a deal with Softbank would likely make the project’s costs significantly more manageable.Notes:
- Sprint Confirms Talks With Softbank For Major Stake Sale, RTT News, Oct 11, 2012 [↩]
- Sprint-Softbank Talks Said to Include Clearwire, Formerly Included T-Mobile, 24/7 Wall St, Oct 11, 2012 [↩]
- Why Clearwire Stock Is Up 30% On Sprint Acquisition News, Wall Street Journal Blogs, Oct 11, 2012 [↩]