Will SoftBank-backed Sprint look to M&A?

Contact: Ben Kolada, Thejeswi Venkatesh

After churning through the rumor mill for the past half-week, official word came Monday that Japanese telco SoftBank is making a significant investment in Sprint, the third-largest mobile carrier in the US. SoftBank is acquiring 70% of Sprint in exchange for approximately $20bn, of which $12bn will be distributed to shareholders in exchange for 55% of the existing company. The remaining $8bn will be used for network expansion, primarily related to deploying 4G LTE. Beyond those efforts, the new Sprint could look to use some of its newfound cash to expand via M&A.

In announcing the deal, Sprint noted that this investment comes at a prime time. The company is continuing to execute on a multiyear turnaround. After Dan Hesse took the helm in December 2007, he spent the next three years focused on reversing Sprint’s customer attrition and improving its beleaguered brand. (Of course, some of those difficulties stemmed from its acquisition of Nextel in 2004. However, regarding customer service, those issues have largely been resolved, as the table below shows.) SoftBank’s move comes during Sprint’s investment phase, where it is now focused on building out its network and improving operational efficiency.

Now, with a stronger balance sheet, we wonder if SoftBank-backed Sprint will look to M&A for accelerated expansion. SoftBank has already shown a willingness to consolidate telecom assets in its home Japanese market. Earlier this month, it announced that it would buy Japanese wholesale broadband provider eAccess for $1.84bn. And in 2006, it picked up Vodafone K.K., the Japanese mobile unit of Vodafone Group, for about $16bn.

Although Sprint has struggled with M&A in the past, it could be spurred to move once more, as there are only a finite amount of targets left in the US and one was recently removed from reach. Earlier this month, T-Mobile announced that it was acquiring MetroPCS, which had long been rumored as a Sprint acquisition target. After MetroPCS, the next most likely candidate for Sprint to buy is Leap Wireless, which, including its cash and debt, is valued at about $3.2bn.

Wireless service provider satisfaction rating by company – ranking of customers who say they are very satisfied with their current wireless provider

Rank October 2006 September 2012
1 Verizon – 45% Verizon – 48%
2 T-Mobile – 33% Sprint – 32%
3 Cingular (now known as AT&T) – 30% T-Mobile – 28%
4 Sprint – 25% AT&T – 21%

Source: ChangeWave Research

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

AT&T does Sprint a favor

Contact: Ben Kolada

If the rumors that Sprint was eyeing T-Mobile USA were actually true, then AT&T did its competitor a big favor by taking in the divested business. From our view, T-Mobile would have been a bigger bite, both financially and operationally, than Sprint could have swallowed. The transaction would likely have introduced a whole new set of tricky integration problems just at a time when Sprint is (finally) emerging from the set of problems it took on when it did its last big deal, the $39bn purchase of Nextel in late 2004. (Sprint shares have lost 80% of their value since that ill-fated acquisition.)

Sprint is already the only national carrier managing three different networks (CDMA, iDEN and WiMax), and the addition of T-Mobile would have added a fourth, bringing additional cost and complexity to the carrier’s operations. And while Sprint is moving back into the black, T-Mobile’s financial performance wouldn’t necessarily have helped that effort. (Don’t forget that the Deutsche Telekom subsidiary has long been a laggard, in terms of margins and subscriber growth, and is being divested for less than it was acquired.) While Sprint is adding subscribers and is finally growing revenue (2010 marked the first time in four years that it grew its top line), subscriber and revenue growth at T-Mobile have been flat.

Instead of T-Mobile, several of the remaining cellular properties in the US would fit better, both technologically and financially, with Sprint. While Sprint’s share price plummeted on AT&T’s news, stocks of regional cellular carriers such as MetroPCS and Leap Wireless soared on buyout speculation. Like Sprint, both are CDMA network operators, and both would provide Sprint with growing revenue and subscriber bases. And both companies are still within Sprint’s price range.

Even with M&A speculation inflating their valuations, MetroPCS and Leap currently sport $5.5bn and $1.1bn market caps, respectively. A cash-and-stock deal similar to AT&T’s T-Mobile acquisition could actually put both under Sprint’s ownership, since Sprint is sitting on $5.5bn in cash and short-term investments. And Sprint actually seems the most likely acquirer for these companies, even though Verizon is widely speculated to react to AT&T’s announcement with a deal of its own. Given the scrutiny that AT&T’s pending purchase of T-Mobile is expected to receive, we doubt that Verizon, currently the nation’s largest cellular carrier, could make a deal without regulators saying they’ve had enough.