Halfway down the aisle with Toyko-based SoftBank Corp., Sprint Nextel Corp. has gotten a new proposal — one that could leave Kansas City at the altar.
By MARK DAVIS and KEVIN COLLISON
The Kansas City Star
Dish Network Corp., the satellite TV service based in suburban Denver and led by dealmaker chairman Charlie Ergen, has offered to buy Overland Park-based Sprint for $25.5 billion.
The offer threatens to disrupt Sprint’s $20 billion deal with SoftBank, one that the companies hoped to complete this summer. It has been seen as a critical step in Sprint’s emergence as a stronger wireless competitor to Verizon and AT&T.
Dish, however, says it has bigger plans for Sprint. The company wants to marry its video expertise with Sprint’s mobile know-how to offer video, high-speed Internet and voice services in a single package. Dish officials say that would be faster and more affordable for consumers than buying those services separately. The key is video that is clogging the wireless pipelines with all the data streaming to smartphones and tablet computers.
“If you’re going to do lots of video, you better have a big pipe,” Ergen said in a Monday conference call. “Nobody’s going to have a bigger pipe than Dish/Sprint.”
Consumers “want broadband and video and voice in their home and want the exact same thing outside the home,” Ergen told The New York Times. “And they want it to look and feel and be priced outside the same as it is inside.”
The offer puts Sprint in a bit of quandary.
“They’ve got two suitors,” said Bill Ho, a wireless industry analyst. “Both are good deals.”
But the Kansas City area’s role in each deal may be quite different.
SoftBank has said it would leave Sprint largely intact, bringing money and expertise from Japan. Dish said it sees $11.1 billion in cost savings where it and Sprint duplicate efforts. Dish hasn’t said what changes it might make in Kansas City or elsewhere, assuming it is able to acquire Sprint.
But the cost cutting would hit many parts of the companies, from call centers and advertising to information technology and corporate overhead.
The unanswered question is where the cuts would land, and most importantly for the Kansas City area, whether the merged companies’ headquarters would be in Overland Park or Denver.
Sprint is one of the Kansas City area’s largest employers and an important business partner and civic contributor.
“That’s why we at the chamber are watching this scenario closely as it plays out,” said Tracey Osborne, the president of the Overland Park Chamber of Commerce.
The Dish offer
Dish’s offer for Sprint raises the ante in a battle for control of the nation’s No. 3 wireless telecommunications company. Sprint’s $20 billion deal with SoftBank last October would give SoftBank a 70 percent stake in Sprint.
SoftBank already has pumped $3 billion in fresh financing into Sprint in anticipation of the acquisition wrapping up this summer. This down payment on its deal with Sprint would turn into Sprint shares even in a Dish merger, leaving SoftBank with 5 percent of the merged companies’ shares, according to Dish.
Sprint, in turn, has used its new financial strength to buy part of smaller wireless operator US Cellular and bid for full ownership of its wireless partner Clearwire Corp.
Dish jumped into the mix Monday with a surprise offer. It would buy Sprint outright for $25.5 billion and merge the companies.
In a statement, Sprint acknowledged the offer but remained mum on its options.
“Sprint Nextel today confirmed it has received an unsolicited proposal from Dish Network to acquire the company. The company said that its board of directors will evaluate this proposal carefully and consistent with its fiduciary and legal duties. The company does not plan to comment further until the appropriate time,” the statement said.
Analysts called the Dish offer credible and said it is likely to put pressure on SoftBank to raise its offer.
Dish said its deal would deliver $4.76 in cash and a fraction of a Dish share for each share of Sprint. Combined, its deal amounted to $7 a Sprint share based on Dish’s stock price before the offer.
It would give Sprint’s current owners enough Dish shares to own 32 percent of the merged companies.
In comparison, SoftBank’s deal amounts to $4.03 in cash for each Sprint share and a continuing 30 percent stake in Sprint.
The news caused Sprint’s stock to jump 84 cents, or 13.5 percent, to close at $7.06 on Monday.
With buyers willing to pay more than Dish’s deal is worth, investors evidently expect a higher counter offer from SoftBank.
Dish shares lost value Monday, falling 2.3 percent to $36.77, effectively reducing the value of its bid.
What Dish wants
To Dish, a merger with Sprint would culminate what it called years of planning for the next big thing by combining Dish’s video business with Sprint’s mobile capabilities.
“This unique, combined company will have a leadership position in video, data and voice and the necessary broadband spectrum to provide customers with rich content everywhere, all the time,” Dish’s description of the plan said.
The idea is that consumers would buy a bundle of these services from one company, a merged Dish and Sprint, to use at home and outside the home.
Dish’s 35 million users in 14 million households would get access to wireless cell services, while Sprint’s 46 million retail subscribers in 17 million households would get offers from Dish for satellite TV services.
Dish’s effort falls along industry trends to combine more and more services under one supplier.
“Things are already converging,” said Tuna Amobi, an equity analyst with Standard & Poor’s Corp.
Video is the key, particularly in the push outside the home. Each second of video requires lots of data to flow to the customer’s smartphone or tablet.
Dish owns the rights to a lot of data capacity or wireless spectrum, which are the licensed airwaves wireless companies need to carry data to customers. Dish’s capacity is largely unused, giving Sprint room to deliver vast services to customers through the companies’ combined wireless spectrum.
It would be enough capacity to allow Dish/Sprint customers to watch TV inside and outside the home, analyst Philip Cusick at JPMorgan Chase & Co. told Bloomberg News.
Ergen said Sprint’s contribution goes beyond its unfolding wireless network, which is adding faster technology called Long Term Evolution, or LTE.
“We know video pretty well,” Ergen said. “We’d be relying on the Sprint management team, on the Sprint expertise on the wireless side, where they have great expertise.”
An immediate payoff of a merger would allow Dish to market its satellite TV and other products to Sprint’s customers and Sprint’s products to Dish’s customers.
Analysts said Dish also sees a move into wireless networks as moving beyond its satellite TV business. It currently is the third-largest pay TV service, but that industry is not growing much.
Ergen is “trying to transform his own business,” Vijay Jayant, an analyst at International Strategy & Investment Group, told Bloomberg News. “He’s trying to reinvent himself, moving from satellite to wireless.”
Impact on KC area
One unanswered question is how the Kansas City area would be affected, should Dish’s bid overtake Sprint’s current plans with SoftBank.
Analysts said cost savings of $11.1 billion may be hard to come by, but the effort puts a question mark over Sprint’s Kansas City role under a Dish merger.
With 7,500 local employees earning a combined payroll of $712 million, Sprint has an outsized presence in the Kansas City area. Anything affecting it would have substantial repercussions.
“Those employees are contributing to the economy through home ownership, creating businesses for others, sales taxes and there are lots of businesses large and small who they deal with,” said Osborne, the president of the Overland Park chamber.
One estimate is that for each Sprint employee, another 2.7 jobs are created or supported in Johnson County.
Sprint’s 3.9 million-square-foot campus at 119th Street and Nall Avenue has a big economic effect.
“Every day, we see hundreds of Sprint employees over here having lunch and shopping,” said Melanie Mann, a co-developer of Park Place, a retail and office center across from Sprint’s headquarters.
Sprint also has a huge role in local philanthropy and civic leadership. In 2012, the company and its foundation contributed $5.7 million to United Way and other cultural institutions and social service groups.
“It’s also a magnet that attracts energetic, talented young folks to Kansas City,” said Jim Heeter, the president of the Greater Kansas City Chamber of Commerce.
Chris Kuehl, an economist with Armada Corporate Intelligence, suggested that Kansas City might not fare so poorly. It might be the Denver area that would lose jobs, he said.
“Moving things to Denver means going from a less expensive business environment to a more expensive one,” Kuehl said. “Kansas City is cheaper.”