Japan-Based Softbank Acquires 70% of Sprint Nextel (S) for $20.1 Billion

Shares of Sprint Nextel (S: Charts, News) hit a four-year high this week, after Tokyo-based telecom giant Softbank announced that it would acquire 70% of the struggling telecom provider for $20.1 billion. Softbank will spend $12.1 billion purchasing shares from existing stockholders for $7.30 per share - a 28% premium above current prices.

Softbank will also purchase an additional $8 billion in shares directly from the company to reach a total stake of 70%. However, those additional shares will dilute Sprint's existing shares. Daily Chart
Sprint Nextel, which is based in Overland Park, Kansas, has been lagging market leaders Verizon Wireless (VZ: Charts, News) and AT&T (T: Charts, News) for the past five years. Over those five years, Sprint has failed to produce a profit, despite the booming demand for smartphones popularized by Apple's (AAPL: Charts, News) seminal iPhone and the rise of Google's (GOOG: Charts, News) Android operating system. Investors had begun to doubt Sprint's ability to survive next year, as it struggles with massive upgrade costs for its network and $15.5 billion in iPhone subsidies. Although Sprint CEO Dan Hesse has made small steps in his planned long-term turnaround, such as improving customer service, the company's bottom line has failed to improve. Hesse was optimistic regarding the merger, stating, "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." Softbank, the third largest cellphone company in Japan, was originally an investment holding company which evolved into a leading cellphone provider after its 2005 acquisition and subsequent turnaround of Vodafone Japan. Softbank President Masayoshi Son expressed his confidence in improving Sprint's profits. Softbank's investors, however, were decidedly bearish, causing shares to slide 5.3% on the news. Some Japanese investors and analysts regard the Sprint deal as a "huge gamble." Standard & Poor's also placed Softbank on "credit watch negative," stating that the company's credit rating could be downgraded due to the size of the Sprint Nextel acquisition. U.S. analysts have warned that despite Softbank's vote of confidence, little has changed regarding Sprint's competitive position in the United States. Domestic competition still remains tight, as even Sprint's smaller competitor, T-Mobile USA, expanded its reach with its recent purchase of MetroPCS Communications, the fifth largest carrier in the United States. The newly merged Softbank and Sprint will tie with AT&T as the world's third largest mobile company, trailing only China Mobile and Verizon. With the Softbank acquisition, three of the four largest U.S. wireless companies are now majority-owned by foreign companies. Vodafone group in Britain owns 45% of Verizon Wireless, while Deutsche Telecom in Germany owns the entirety of T-Mobile. Analysts in both the United States and Japan have expressed concerns regarding the lack of operational synergies from merging Sprint Nextel and Softbank, as there are no direct opportunities to cut costs by combining networks or operations. Softbank has expressed that the merger will give both companies increased bargaining power with manufacturers, which may lead to lower overhead costs. Shares of Sprint Nextel are currently near the top of its 52-week range between $2.10 and $6.04. The stock does not pay a dividend. Other News About S Sprint's SoftBank Deal: Sorting Out The Winners and Losers Who wins and loses from Softbank's massive purchase? Japan's Softbank Snaps Up Sprint in $20 Billion Deal Sprint Nextel is saved from its crushing debt by Softbank. Other Stocks in the News Kindle Customers May Get Credit as Part of E-Book Publishers' Settlements Amazon customers may benefit from the retailers' legal troubles with e-book publishers. ACLU Sues Morgan Stanley Over Risky Mortgages Another financial giant gets sued. Copyright 2012 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. 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Published on Oct 16, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

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