While Sprint’s stock has certainly benefited from these talks, we believe that a potential deal would boost the company’s fundamentals as well, most notably its highly leveraged balance sheet. Softbank’s interest in Clearwire’s spectrum could also prop up Sprint, which plans on using the latter’s spectrum resources for additional 4G capacity down the road. 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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Sprint’s cost of capital could decrease
If negotiations between the two parties lead to a deal, Softbank’s financial backing could push Sprint’s value higher. Softbank’s deep pockets (it has about $13 billion of cash and cash equivalents on its balance sheet) as well as access to cheap capital could decrease Sprint’s cost of capital for future investments. This should help lower our estimates for Sprint’s discount rate as well, which is over 10% currently.
Sprint has $21 billion of long-term debt compared to market capitalization of about $17 billion which includes less than $9 billion in cash and equivalents. Additionally, the company has made an expensive $15.5 billion bet on the iPhone and 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 iPhone deal has worked well so far, and we expect the margin benefits from Network Vision to more than compensate for the initial capital expenses, a deal with Softbank would likely make the project’s costs significantly more manageable.
Sprint could benefit from a stronger Clearwire
However, Clearwire’s financial position is not strong and the carrier could run into hurdles in expanding its LTE network. A deal with Softbank would allow debt-strapped Clearwire to roll out its LTE network more rapidly, which Sprint can then use to boost its 4G coverage and capacity (though the two networks are currently incompatible). With Sprint lagging far behind AT&T (NYSE:T) and especially Verizon (NYSE:VZ) in terms of LTE coverage, this would be a huge positive development for the company.
- Sprint confirms in talks on potential sale to Softbank, Reuters, October 10th, 2012 [↩]