SoftBank Buy Makes New Sprint a Much Stronger Competitor, Hesse Says

Sprint CEO Dan Hesse will remain in place at the top executive of a new company, New Sprint, which will retain its headquarters in Overland Park, Kan. An AT&T veteran, he has been at the helm of Sprint since 2007 and has appeared in numerous commercials as the public face of the carrier. SoftBank CEO and founder Masayoshi Son expects to be “very active” in the management of New Sprint, he said. The deal gives Sprint $8 billion in capital it needs to compete and a strengthened balance sheet, Son emphasized. SoftBank will also work with the American carrier on its competitive strategy, he said. “I am a man and I think every man wants to be number one, not number two or number three,” he said. “I want to be number one eventually.”

The deal doesn’t have any immediate implications for Sprint’s partnership with Clearwire, Hesse said. Speculation surfaced in analyst and media reports last week that SoftBank might make a play for that company as well, with its extensive spectrum holdings. “There are no elements in this agreement ... that require either party, SoftBank or Sprint, to enter into any new agreements with Clearwire or with anyone else,” Hesse said. Clearwire stock, which had surged amid that speculation, rose another 16 percent Monday to close at $2.69. MetroPCS, which has fallen in the last few days since shortly after DT agreed to combine T-Mobile with that carrier (CD Oct 4 p1), closed down a further 4.6 percent at $11.33

Hesse said Softbank’s investment is to come in two phases, with $3.1 billion to be available to Sprint immediately, while the rest will flow to the company after the deal is completed. “We will use those proceeds in whatever ways we think will maximize shareholder value,” he said. “It could be internal investments, external investments. It could possibly be to retire debt and reduce our interest expenses.” The capital infusion makes Sprint a “much, much stronger company,” with a debt position similar to Verizon and AT&T, Hesse said.

To compete “you have to have money for that,” Son said. “With this money you'll be able to buy tools or weapons for the battle.” SoftBank has “unique know how” in regard to smartphones that could have uses in the U.S. market, he said. Both companies already offer the Apple iPhone at the top of their handset lineups. Son said his company and Sprint had been in talks for several months prior to the announcement. Son noted he has known Hesse for years, since before he moved to Sprint. Asked who “proposed,” Son replied: “Always, I am the proposer.” Hesse confirmed Son’s version of events.

"It could be safe if you do nothing, and our challenge in the U.S. is not going to be easy at all,” Son said. “We must enter a new market, one with a different culture, and we must start again from zero after all we have built.” Son noted that the investment is one of the biggest Japanese investments ever in a U.S. company. “And it’s going to pay off,” he said. “I am confident about that. Why are we confident? Sprint itself is already making progress. [Sprint’s] recovery is already in progress.” Son asked, “If you don’t buy now, when?”

A Sprint news release (http://xrl.us/bnucc9) said the deal: “Enables Sprint to benefit from SoftBank’s global leadership in LTE network development and deployment. Improves operating scale,” and “Creates opportunities for collaborative innovation in consumer services and applications.” A presentation to investors (http://xrl.us/bnucc7) stressed SoftBank’s “smartphone strategy,” its “LTE strategy” and its “proven track record of turnarounds."

Some of the biggest opponents of the failed AT&T/T-Mobile deal and the Verizon/cable transactions expressed general support for SoftBank’s takeover of Sprint. FCC sources say the transaction likely faces an easy glide path to approval. Eight years ago, when Sprint and Nextel unveiled their merger, it was largely welcomed by the FCC on the grounds it would make the new company a more formidable competitor.

"SoftBank’s strategic investment in Sprint is a welcome move,” said Carri Bennet, general counsel of the Rural Telecommunications Group. “Just as in Japan (where it took over a lagging 3rd-place Vodafone and made it relevant again) SoftBank is poised to preserve Sprint as a fierce competitor to the Twin Bells.” The deal will be positive for consumers, as long as Sprint “deepens its commitment to its wholesaling and competitive pricing strategies,” Free Press Policy Director Matt Wood said. “Sprint offers consumers a competitive alternative to Verizon and AT&T’s overpriced wireless services,” he said. “Sprint and its partner Clearwire also facilitate the important low-priced and free offerings of many other small wireless competitors, including mobile virtual network operators like FreedomPop and Credo Mobile."

If Softbank’s deal clears regulatory hurdles in the U.S., Sprint would become the third company out of the “Big Four” top U.S. carriers to be wholly or partially owned by a foreign company -- AT&T would be the only one still wholly U.S. owned. U.K.-based Vodafone Group owns 45 percent of Verizon Wireless, while Deutsche Telekom owns T-Mobile USA. TracFone Wireless, the fifth-largest wireless carrier in the U.S., is owned by Mexico-based América Móvil. Softbank’s deal shows the impact globalization has on the U.S. wireless industry, said Recon Analytics analyst Roger Entner, who has clients in the wireless industry. The U.S. has had a generally positive experience with the foreign investment in T-Mobile and Verizon Wireless, he said. Since Japan is a U.S. ally, regulators are unlikely to take issue with the deal, he said. “There’s no reason why a Japanese company should not be allowed to own an American company,” he said. “Now if this was a Chinese company or a Russian company, it would be very different."There are no clear regulatory problems -- like antitrust issues -- that could derail government approval of the Softbank deal, another regulatory analyst said. While the foreign investment aspect could raise concerns, particularly in Congress, Deutsche Telekom and Vodafone have set a positive precedent with their acquisitions, the analyst said. The issue will likely come up in U.S. regulatory review, the analyst said, but added that it was unlikely to be problematic from the perspective of clearing the deal.

The Softbank deal is not likely to spur further major foreign acquisitions of U.S. carriers, Entner said. “How can it get more concentrated in foreign hands?” The only possible exception would be T-Mobile, Entner said. Deutsche Telekom said Oct. 3 that MetroPCS would join with T-Mobile, with MetroPCS shareholders retaining 26 percent ownership of the combined company (CD Oct 4 p1). “They have said in front of Congress that they want to exit this country,” Entner said of DT. “So we'll see how long the new T-Mobile is actually going to be 74 percent foreign-owned. Who knows?"

"Verizon Wireless and AT&T Mobility, as industry-leaders, are now faced with the potential of competing with a stronger, more well-financed competitor, and an owner that has done an admirable job in Japan in taking market share from competitors in recent years,” Stifel Nicolaus said in a research report. “However, we continue to believe Verizon and AT&T will maintain their market-share leading positions for the foreseeable future.” Pivotal Research Group said it’s skeptical on the fundamental rationale and potential synergies for Softbank-Sprint. But the deal gives Sprint “a much stronger balance sheet and capital to make further acquisitions and gain scale to more effectively compete with the two larger carriers” AT&T and Verizon, the firm said.

The deal should make Sprint a more formidable competitor, Informa Telecoms & Media’s Mike Roberts said by email. “If Softbank and Sprint can pull this off it could transform Sprint into a company that has the scale and financial resources to compete head-to-head with Verizon Wireless and AT&T, which dominate the US mobile market with 33 percent and 31 percent market share, respectively, compared to Sprint with 17 percent and T-Mobile with 10 percent,” he said. “While the deal would not directly increase Sprint’s market share in the US, it would make it part of a group with some 90 million subscribers in Japan and the US, compared to Sprint’s 56 million subscribers in 2Q12. That in turn means Sprint will have the scale and financial firepower to compete more aggressively with Verizon Wireless and AT&T.”