Sprint Connection

Deal with Japanese company could give Sprint a boost

Updated: 2012-10-14T22:07:12Z

By MARK DAVIS

The Kansas City Star

A Japanese telecommunications company is weighing a purchase of all or much of Sprint Nextel Corp. in a deal that could solidify Sprint’s long and still uncertain turnaround.

Sprint, based in Overland Park and the nation’s No. 3 wireless phone company, confirmed Thursday it is in talks about “a potential substantial investment” by SoftBank Corp.

SoftBank is a strongly competitive No. 3 wireless operator in Japan. It was the first carrier to offer the iPhone there and boasts surging profits and shrinking debt.

A deal, which has been variously valued from $12.8 billion to $19 billion, could be a huge boost to Sprint. Analysts say SoftBank could become the beefy checkbook that resolves doubts about Sprint’s expensive efforts to rebuild its network and battle its much larger U.S. rivals.

With 56.4 million subscribers, Sprint is roughly half as big as Verizon and AT&T Inc., each of which has more than 100 million subscribers. All three are building new networks based on faster Long Term Evolution, or LTE, technology, and Sprint trails in that effort.

“It would make Sprint a much more viable competitor,” telecom industry analyst Berge Ayvazian said of the money that SoftBank could bring to Sprint. “It would firm up their ability to compete in LTE.”

A possible turn in Sprint’s future marks a big moment for Kansas City, where 7,500 of its 40,000 employees work.

Any corporate takeover raises local concerns about the influence the distant buyer would exert on the hometown company. Potential layoffs could become a fear because buyers often look for duplication and savings. Also, Sprint had moved its own headquarters to Reston, Va., with its 2005 merger with Nextel Partners before returning it here.

A financially stronger Sprint, however, would help ensure continued significant employment by the company.

If a sale of Sprint comes, it would be the second large area business to be snapped up by an Asian buyer. AMC Entertainment was acquired this summer by Beijing-based Dalian Wanda Group.

Sprint’s shifting fortunes have been a strong influence on Kansas City’s economy.

During Sprint’s growth years it regularly plucked valuable workers from other companies even while employing local businesses as vendors. Its swelling ranks soaked up available office space, followed by a surge in local office vacancies when it built the large Sprint campus.

Sprint’s struggling years, which have included sizable layoffs, had contributed to Kansas City’s weak recovery from the 2001 recession, according to local economists.

In recent years, under chief executive Dan Hesse, Sprint has rebuilt its brand image, won industry awards for customer service and begun to attract new customers. Analysts’ doubts have focused largely on Sprint’s ability to continue to finance its costly turnaround.

Sprint’s confirmation of talks with SoftBank included no details about what’s on the table.

“Sprint today confirmed that it is currently engaged in discussions with SoftBank regarding a potential substantial investment by SoftBank in Sprint,” its announcement said. “Although there can be no assurances that these discussions will result in any transaction, or on what terms any transaction may occur, such a transaction could involve a change of control of Sprint. Sprint does not intend to comment further unless and until an agreement is reached.”

The Sprint announcement was notable because it was a break from the company’s practice of not responding to media reports of possible deals.

Speculation swirls

Speculative reports about the SoftBank talks have set outsiders’ heads spinning.

It’s a deal for 100 percent ownership of Sprint, one report says; 65 percent, says another; and 75 percent, according to yet one more. One said a deal could be announced in two weeks or less.

One report holds that SoftBank wants the deal to include Clearwire Corp., Sprint’s partner in providing faster WiMax wireless service and a key player in Sprint’s LTE plans — but others haven’t said so. Clearwire and SoftBank are using a similar technology to build their LTE networks.

The news drove Sprint’s stock up 72 cents, a 14.3 percent jump, to close Thursday at $5.76, which was its highest closing price since late 2008. The stock had reached $6.04 in earlier trading Thursday. The total value of its stock at Thursday’s close was nearly $17.3 billion.

Clearwire shares surged 92 cents, or 70.8 percent, to close at $2.22.

SoftBank shares trade in the United States through a special security called an American Depository Receipt. Its value fell more than 8 percent Thursday, a $1.53 drop to $16.95.

Analyst Craig Moffett at Sanford C. Bernstein Co. said in a note to clients that variations of the unconfirmed reports being floated mean Sprint might be worth as much as $8 a share in a deal, worth $6.22 a share or even an “obviously ridiculous” reading that puts a negative value on Sprint shares.

The lack of details means there is no certainty that SoftBank would fund Sprint’s network upgrade and other efforts to compete against Verizon and AT&T, said analyst Jonathan Atkin at RBC Capital Markets.

SoftBank may simply see Sprint as an undervalued publicly traded company and consider a negotiated purchase of shares as an investment play, Atkin said. He said it may see Sprint’s 48 percent ownership in Clearwire as a strategic technology move because Clearwire’s version of LTE is the same as SoftBank’s.

In any case, SoftBank’s interest in Sprint could help shake up an already-stirring U.S. telecom industry.

Earlier this month, No. 4 carrier T-Mobile USA agreed to merge with smaller MetroPCS Communications Inc., though reports early this year had Sprint seeking a MetroPCS purchase.

T-Mobile and Sprint have long been considered candidates to merge, but AT&T unsuccessfully tried to acquire T-Mobile last year.

Regulators, worried about losing T-Mobile’s competitive influence in the marketplace, nixed the AT&T deal.

Experts said they don’t expect SoftBank to face similar regulatory concerns over buying Sprint, if that is the deal in mind.

“SoftBank stepping into Sprint’s shoes raises no antitrust issues, it doesn’t affect competition, it’s pro-competitive,” said antitrust lawyer Allen Grunes, at Brownstein Hyatt Farber Schreck LLP.

There may be more concerns about allowing a SoftBank-owned Sprint to pursue a counter bid for MetroPCS, which is exactly what one Japanese newspaper reported was on SoftBank’s agenda. Even greater regulatory concerns would meet a SoftBank-Sprint bid for T-Mobile, which another unconfirmed report suggested.

As a foreign buyer, however, its ownership of U.S. wireless licenses would come up in a government review of any proposed deal.

Telecom analyst Ayvazian said such concerns did not stir when Germany-based Deutsche Telekom became the parent of T-Mobile. He said it may be a different question to allow a second foreign-based company to buy a still larger U.S. carrier, putting that much more of the U.S. market under foreign control.

Who is SoftBank?

In Japan, Tokyo-based SoftBank is the third-largest wireless carrier with 30 million subscribers. Its chief rivals are NTT DoCoMo Inc. with 60 million and KDDI Corp. with 36 million. SoftBank also is acquiring eAccess Ltd., a smaller telecom company in Japan.

SoftBank’s chief executive officer is its 55-year-old billionaire founder Masayoshi Son. Bloomberg lists him as the second-richest man in Japan, worth $9.3 billion. Born in Japan to Korean immigrants, he has studied in the United States.

Ayvazian said if SoftBank does end up running Sprint it could force improvements in U.S. customer service, which he said is much better in Japan, and lead to greater sophistication of cellphone use by customers, another trait of Japan’s market.

Financially, SoftBank is larger and stronger than Sprint with $41 billion in revenues last year, based on current exchange rates for the Japanese yen, and $4 billion in profits. Sprint lost money on $33.7 billion in revenues in 2011.

Sprint owed $21 billion in long-term debt, and continues to borrow to finance its network upgrade. It also has been a principal financial source for Clearwire, which has $4.2 billion in long-term debt.

SoftBank has been reducing its debts steadily in the last few years but may borrow to finance any investment in Sprint.

The company began as a distributor of packaged software. It entered the traditional phone business in 2004 by acquiring Japan Telecom Co. Ltd. At the time, former Sprint CEO William Esrey was chairman of Japan Telecom, but does not have a connection to SoftBank today. Esrey is now chairman of Spectra Energy Corp., a publicly traded company in Houston.

SoftBank’s entry into the wireless telephone business came from a 2006 acquisition of Vodafone Group Plc.’s Japan operations. Vodafone is a significant owner of Verizon Wireless.

Bloomberg News contributed to this article.

To reach Mark Davis, send email to mdavis@kcstar.com or call 816-234-4372.

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