by Anam Alpenia, Red Herring
Japan’s Softbank is purchasing 70 percent of Sprint for $20.1 billion to become the third largest company in the world in terms of revenues. Both companies agreed to the deal that would be the largest foreign acquisition ever by a Japanese company.
About $12.1 billion will be paid to Sprint shareholders, while the remaining $8 billion will be used to strengthen a newly corporate entity created by the deal, New Sprint. About 55 percent of Sprint’s current shareholders will receive $7.30 in cash, while the rest will own the remaining 30 percent of the company not owned by Softbank.
The deal still requires approval from US regulators, Sprint shareholders and financial backers of Softbank.
Softbank is said to be interested in the deal to bolster its segment of the smartphone market which has been struggling in Japan due to waning demand. Smartphone growth continues to grow in the US, while Japan’s has been waning, with handset shipments dropping 27 percent over the last five years, according to Bloomberg.
For its part, Sprint, which has been bleeding customers since 2007, will gain the financial leverage to expand its 4G network and fund acquisitions while paying off heavy debt. Sprint carries $21 billion in long term debt. As both Sprint and Softbank use the LGE network, Sprint gains the leverage of a significant bigger entity that should bolster its services. Sprint had launched a costly network restructuring that is scheduled to be completed in 2014.
News of the deal bolstered confidence of Sprint’s shareholders while simultaneously spooking shareholders of Softbank. Shares in Softbank dropped by a third in recent trading when rumors of the deal first surfaced. The company’s shares fell 5.3 percent on the day the two companies officially announced the deal, according to Bloomberg. Sprint bonds, on the other hand, gained 4.5 cents.
The third largest carrier in the US, Sprint has been struggling to gain customer traction in a market where its two competitors Verizon and AT&T both have about twice the subscriber rate of Sprint, according to the Washington Post. If the deal is approved, Sprint and Softbank will have 96 million customers, making it the third largest mobile operator in the world, topped China Mobile and Verizon.
“When we make a challenge, usually risk comes along with it,” said Masayoshi Son, President of Softbank, at a press conference explaining the agreement. “I know it’s not an easy path to go business-wise. However, without challenges [into new markets] we may face even bigger risks.”
Both companies face termination fees if the deal collapses. If the merger fails because Softbank does not attain financing, Softbank must pay a termination fee of $600 million. If Sprint accepts a better deal elsewhere, it faces a $600 million termination to Softbank. Sprint will also owe Softbank $75 million if shareholders fail to approve the deal.
All scenarios are on the table. Another carrier might outbid Softbank, while those that hold the company’s purse strings might be reluctant to take on a struggling company burdened by so much debt. People familiar with the matter told Bloomberg that Sprint may also seek bids from MetroPCS Communications.