Though it leaked late last week, the deal for SoftBank to acquire a 70% stake in U.S. mobile carrier Sprint (click ticker for report: ) is official. The press release can be read here, but essentially, Sprint shareholders will receive $12.1 billion in cash and 30% ownership in a recapitalized Sprint. SoftBank will purchase $8 billion in new shares, giving the telecom provider additional financial flexibility. It may come as a shock to some, but the deal will not include any stake in Clearwire (CLWR) or require Sprint to acquire Clearwire—though the two are said to remain in talks.
Though rumors swirled about several different scenarios, including that SoftBank would acquire MetroPCS (PCS), Sprint, and Clearwire; it looks like the deal will only involve Sprint—for now. We like the deal for Sprint shareholders, as it values the company above our median fair value estimate. Additionally, we think much of the recent rally in shares of the carrier were due to diminishing fears of bankruptcy rather than incredibly strong fundamentals. CEO Dan Hesse’s decision to start selling iPhones (click ticker for report: ) has paid off in terms of ARPU (average revenue per user) and subscriber churn, but profitability still isn’t great, and the Sprint network needs to improve.
The deal with SoftBank could help solve both problems. For one, the deal provides Sprint with much-needed liquidity, while offering the possibility to refinance some of its expensive debt. Interest payments have been a significant drag on the company’s ability to generate cash, so lowering these obligations will benefit profitability. Further, the added liquidity gives the new Sprint room to acquire spectrum and improve its 4G LTE network. We suspect Clearwire, given the fact that Sprint already owns 49% of the company, will be a natural target. Though Clearwire’s spectrum quality has been questioned previously, there’s no doubting the company owns an abundance of it. Further, we don’t think Verizon (click ticker for report: ) would be willing to sell to a competitor. The press release specifically mentions SoftBank’s expertise in LTE network development and deployment, leading us to believe the firm would seek to fully own Clearwire, which is in the midst of developing and deploying its 4G LTE network.
Although we did not see this particular deal coming, it reinforces our overall thesis on the trend of consolidation within the space. The newly capitalized company will initially acquire spectrum, but we could also see it bid for smaller regional players, or even the merged Metro PCS/T-Mobile. Anti-trust issues will likely be less acute in this case than they were in the failed AT&T/T-Mobile merger.
We think the SoftBank-Sprint tie-up also signifies the importance of mobile Internet over just mobile-phone service going forward (since spectrum and LTE networks meaningfully impact data consumption). The news is more bullish for Apple and Google (click ticker for report: ) than even the mobile carriers, in our view, because as mobile carriers improve mobile networks, the smartphone experience is enhanced as well. More importantly, it doesn’t require an incremental investment from either firm (Google or Apple). We still believe Apple is poised to be the winner of the mobile revolution, and we think shares of Google are also a bargain, though more for the firm’s search dominance and cash-rich business model than its smartphone success.