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Softbank, Sprint Nextel: Japanese Mobile Operator Announces $20 Billion Deal To Acquire 70 Percent Of U.S. Telecom

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Tokyo-based mobile phone company Softbank Corp. has reached a deal to acquire 70 percent of U.S. wireless carrier Sprint Nextel for $20.1 billion in the largest ever foreign acquisition by a Japanese company.  (AP Photo)
Tokyo-based mobile phone company Softbank Corp. has reached a deal to acquire 70 percent of U.S. wireless carrier Sprint Nextel for $20.1 billion in the largest ever foreign acquisition by a Japanese company. (AP Photo)

NEW YORK (AP) — Sprint dug a hole for itself when it bought Nextel in 2005 in one of the worst deals in telecom history. Now, a deep-pocketed friend from overseas could help the company climb out of its hole and reinvigorate its fight against AT&T and Verizon Wireless.

Japan's Softbank Corp. has agreed to buy a controlling stake in Sprint Nextel Corp. for $20.1 billion, money that will be divided by the company and its shareholders.

Announced Monday in Tokyo, the deal positions Sprint as a stronger competitor to its two biggest rivals, AT&T and Verizon.

The agreement, however, doesn't solve all of Sprint's underlying problems. Sprint, which is based in Overland Park, Kan., has been limping along since it purchased Nextel. The merger quickly turned sour, saddling Sprint with the cost of running two incompatible networks while customers fled.

Sprint has more than 56 million subscribers, compared to AT&T's 105.2 million and Verizon Wireless' 94.2 million. No. 4 U.S. carrier T-Mobile has over 33 million U.S. customers.

Softbank Corp., a holding company with investments in Internet and telecom businesses, made its own venture into the wireless world in 2005, with the acquisition of Vodafone Japan. It turned that business around, giving President Masayoshi Son the confidence that he can make Sprint a profitable company again after five straight years of losses.

Sprint CEO Dan Hesse has laid the groundwork for a turnaround but his efforts haven't had an immediate impact on profitability. In particular, the company's reputation for customer service has improved during his 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 American Customer Satisfaction Index this spring.

Hesse has also coaxed Sprint subscribers to pay more, helping the company stem its financial losses. But the highest-paying customers keep leaving for the larger, faster networks of AT&T and Verizon. On its own, the company would have a hard road ahead, as it pays for a network revamp and fulfills a commitment to buy $15.5 billion in iPhones from Apple.

Under the deal, Sprint shareholders can turn in 55 percent of their shares to Softbank in exchange for $7.30 per share. Sprint shares fell 4 cents Monday to close at $5.69, suggesting that investors mostly felt comfortable with the valuation they pegged for the company last week, when they sent the stock up 14 percent based on reports of talks between Softbank and Sprint.

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 total stake 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 that creates immediate value for our stockholders, while providing an opportunity to participate in the future growth of a stronger, better capitalized Sprint going forward," 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 capital for Sprint Nextel to effectively compete with Verizon Wireless and AT&T Mobility, we believe the deal announced today, without question, strengthens Sprint's position in the long-run," said Christopher King at Stifel Nicolaus.

Kevin Smithen at Macquarie Capital said the deal doesn't improve Sprint's access to space on the airwaves, which is critical to improving its wireless data network, nor does it provide a path to improving its profitability. A merger with T-Mobile USA might still be needed to deal with those problems, he said.

T-Mobile USA has its own plan: two weeks ago, it struck a deal to buy MetroPCS Communications Inc., the No. 5 carrier in the U.S.

Moody's said Monday that it would consider upgrading Sprint's credit rating as a result of the deal. Standard & Poor's, another ratings firm, made a similar announcement last week. A higher credit rating would mean lower borrowing costs for Sprint.

Analysts also speculated that Softbank could buy out Clearwire Corp.'s shareholders and combine the company with Sprint. The Bellevue, Wash., company operates a wireless broadband network, but its network upgrades have been hamstrung by a lack of funds. Sprint already owns 48 percent of the company and resells access to its network as "Sprint 4G." The speculation sent Clearwire's stock up 16 percent on Monday. It has doubled since Wednesday.

Softbank shares fell 5.3 percent on the news, as Japanese investors worried that the company is making a huge gamble. The shares have fallen by a third over a week. Standard & Poor's had placed Softbank on "credit watch negative," meaning its credit rating could be downgraded.

The deal has been approved by the boards of both companies. It still needs approval from Sprint shareholders and U.S. regulators. Softbank said the transaction is expected to be completed by the middle of next year.

Analysts say buying a foreign cellphone company makes little sense in terms of operational synergies. There's little opportunity to improve service by combining networks or saving money by combining operations.

But Son said the U.S. and Japanese markets have much in common now that smartphones are all-important in both countries, and the two companies could benefit and learn from each other. By joining forces, Sprint and Softbank will become one of the world's top smartphone carriers, could negotiate better deals from the companies that make phones and network equipment.

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 brand image and helped it lure customers away from its two bigger rivals.

Son said Sprint and Softbank can work together to develop new technology for faster data networks. Softbank recently bought smaller Japanese 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 always reward risk. A graduate of the University of California, Berkeley, he was only 16 when he ventured alone to the U.S.

"I am happy to be able to tell you today of my big comeback to the U.S.," he said. "This is going to be an even bigger challenge."

Son has made no secret that he has been looking abroad for new growth as the Japanese mobile market has been stagnant for years. Softbank has 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 a Japanese company, and illustrates how the strong yen, which is usually seen as a negative for export-reliant Japan Inc., has boosted the overseas purchasing power of Japanese corporations as a stagnant domestic market pushes them to look abroad for growth.

Before Monday's deal, the biggest overseas acquisition by a Japanese company was Japan Tobacco Inc.'s purchase of Gallaher Group of Great Britain in 2007 for about $19 billion.

The combination of Softbank and Sprint will tie with AT&T for world's No. 3 mobile company by revenue after China Mobile and Verizon, according to Softbank.

The deal leaves three of the four national U.S. wireless companies with complete or substantial foreign ownership. Vodafone Group PLC of Britain owns 45 percent of No. 1 Verizon Wireless, and Deutsche Telekom AG of Germany owns T-Mobile USA outright.

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Associated Press Business Writer Yuri Kageyama contributed from Tokyo. Kageyama on Twitter: http://www.twitter.com/yurikageyama . Svensson on Twitter: http://www.twitter.com/petersvensson.

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