Sprint dug a hole for itself when it bought Nextelin 2005 in one of the worst deals in telecom history. Now, a deep-pocketedfriend from overseas could help the company climb out of its hole andreinvigorate its fight against AT&T and Verizon Wireless.
Japan's Softbank Corp. has agreed to buy a controlling stakein Sprint Nextel Corp. for $20.1 billion, money that will be divided by thecompany and its shareholders.
Announced Monday in Tokyo, the deal positions Sprint as astronger competitor to its two biggest rivals, AT&T and Verizon.
The agreement, however, doesn't solve all of Sprint's underlyingproblems. Sprint, which is based in Overland Park, Kan., has been limping alongsince it purchased Nextel. The merger quickly turned sour, saddling Sprint withthe cost of running two incompatible networks while customers fled.
Sprint has more than 56 million subscribers, compared toAT&T's 105.2 million and Verizon Wireless' 94.2 million. No. 4 U.S. carrierT-Mobile has over 33 million U.S. customers.
Softbank Corp., a holding company with investments inInternet and telecom businesses, made its own venture into the wireless worldin 2005, with the acquisition of Vodafone Japan. It turned that businessaround, giving President Masayoshi Son the confidence that he can make Sprint aprofitable company again after five straight years of losses.
Sprint CEO Dan Hesse has laid the groundwork for aturnaround but his efforts haven't had an immediate impact on profitability. Inparticular, the company's reputation for customer service has improved duringhis tenure, as he's focused on enhancing the store and call center experience.The company scored the highest of the Big 4 wireless carriers in the AmericanCustomer Satisfaction Index this spring.
Hesse has also coaxed Sprint subscribers to pay more,helping the company stem its financial losses. But the highest-paying customerskeep leaving for the larger, faster networks of AT&T and Verizon. On itsown, the company would have a hard road ahead, as it pays for a network revampand fulfills a commitment to buy $15.5 billion in iPhones from Apple.
Under the deal, Sprint shareholders can turn in 55 percentof their shares to Softbank in exchange for $7.30 per share. Sprint shares fell4 cents Monday to close at $5.69, suggesting that investors mostly feltcomfortable with the valuation they pegged for the company last week, when theysent the stock up 14 percent based on reports of talks between Softbank andSprint.
Softbank's is paying $12.1 billion for the 55-percent stake.It's buying an additional $8 billion worth of shares from the company, for a totalstake of 70 percent. That investment will dilute the value of existing shares,and is the reason Sprint's stock didn't trade higher on Monday.
"This is a transformative transaction for Sprint thatcreates immediate value for our stockholders, while providing an opportunity toparticipate in the future growth of a stronger, better capitalized Sprint goingforward," said Hesse, who will remain the company's chief executive.
Analysts were more reserved in their judgment.
"While we believe it will take far more than capitalfor Sprint Nextel to effectively compete with Verizon Wireless and AT&TMobility, we believe the deal announced today, without question, strengthensSprint's position in the long-run," said Christopher King at Stifel Nicolaus.
Kevin Smithen at Macquarie Capital said the deal doesn'timprove Sprint's access to space on the airwaves, which is critical toimproving its wireless data network, nor does it provide a path to improvingits profitability. A merger with T-Mobile USA might still be needed to dealwith those problems, he said.
T-Mobile USA has its own plan: two weeks ago, it struck adeal to buy MetroPCS Communications Inc., the No. 5 carrier in the U.S.
Moody's said Monday that it would consider upgradingSprint's credit rating as a result of the deal. Standard & Poor's, anotherratings firm, made a similar announcement last week. A higher credit ratingwould mean lower borrowing costs for Sprint.
Analysts also speculated that Softbank could buy outClearwire Corp.'s shareholders and combine the company with Sprint. TheBellevue, Wash., company operates a wireless broadband network, but its networkupgrades have been hamstrung by a lack of funds. Sprint already owns 48 percentof the company and resells access to its network as "Sprint 4G." Thespeculation sent Clearwire's stock up 16 percent on Monday. It has doubledsince Wednesday.
Softbank shares fell 5.3 percent on the news, as Japaneseinvestors worried that the company is making a huge gamble. The shares havefallen by a third over a week. Standard & Poor's had placed Softbank on"credit watch negative," meaning its credit rating could bedowngraded.
The deal has been approved by the boards of both companies.It still needs approval from Sprint shareholders and U.S. regulators. Softbanksaid the transaction is expected to be completed by the middle of next year.
Analysts say buying a foreign cellphone company makes littlesense in terms of operational synergies. There's little opportunity to improveservice by combining networks or saving money by combining operations.
But Son said the U.S. and Japanese markets have much incommon now that smartphones are all-important in both countries, and the twocompanies could benefit and learn from each other. By joining forces, Sprintand Softbank will become one of the world's top smartphone carriers, couldnegotiate better deals from the companies that make phones and networkequipment.
Softbank was the first carrier to offer the iPhone in Japan.The iPhone has been such a hit in there that it has shaped Softbank's brandimage and helped it lure customers away from its two bigger rivals.
Son said Sprint and Softbank can work together to developnew technology for faster data networks. Softbank recently bought smallerJapanese rival eAccess, largely to gain access to the latest fourth-generation,or "4G" networks.
Son likes to take chances in a culture that doesn't alwaysreward risk. A graduate of the University of California, Berkeley, he was only16 when he ventured alone to the U.S.
"I am happy to be able to tell you today of my bigcomeback to the U.S.," he said. "This is going to be an even biggerchallenge."
Son has made no secret that he has been looking abroad fornew growth as the Japanese mobile market has been stagnant for years. Softbankhas been an exception in racking up strong profit despite such stagnation,largely due to the popularity of the iPhone.
The deal is the largest foreign acquisition ever by aJapanese company, and illustrates how the strong yen, which is usually seen asa negative for export-reliant Japan Inc., has boosted the overseas purchasingpower of Japanese corporations as a stagnant domestic market pushes them tolook abroad for growth.
Before Monday's deal, the biggest overseas acquisition by aJapanese company was Japan Tobacco Inc.'s purchase of Gallaher Group of GreatBritain in 2007 for about $19 billion.
The combination of Softbank and Sprint will tie withAT&T for world's No. 3 mobile company by revenue after China Mobile andVerizon, according to Softbank.
The deal leaves three of the four national U.S. wirelesscompanies with complete or substantial foreign ownership. Vodafone Group PLC ofBritain owns 45 percent of No. 1 Verizon Wireless, and Deutsche Telekom AG ofGermany owns T-Mobile USA outright.