Analysts: Softbank's deal with Sprint benefits U.S. wireless market
Softbank's proposed $20.1 billion deal to acquire 70 percent of Sprint Nextel (NYSE:S) will allow Sprint to better compete against Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) and will benefit the wider U.S. wireless market, analysts said.
The deal will give Sprint $8 billion in new capital and may spark for further industry consolidation, though Sprint and Softbank pointedly noted that the transaction does not require Sprint to take control of Clearwire (NASDAQ:CLWR). Sprint holds a 48 percent stake in that company.
Sprint CEO Dan Hesse, who will remain CEO of the newly recapitalized carrier, said the deal will be a boon for Sprint and the wider industry. "This is pro-competitive and pro-consumer in the U.S. because it creates a stronger No. 3 ... it competes with the duopoly of AT&T and Verizon," he said at a meeting with investors, according to Reuters. "When you look at what Softbank has accomplished in Japan with the No. 3 carrier, it's something we can learn from."
Above all, analysts said, the deal was a major win for Sprint, which Hesse has said could start turning a profit in 2014 following seven years of losses. BTIG analyst Walter Piecyk said before the deal became official that the cash infusion "could put Sprint in a much stronger position to compete with AT&T and Verizon and feed off a continual exodus of customers from T-Mobile and MetroPCS."
Sprint is in the middle of its multibillion-dollar Network Vision network upgrade. As part of that project, Sprint is deploying LTE, improving its CDMA network and shutting down its iDEN network. Although the Softbank deal will not help Sprint catch up with Verizon and AT&T in the race to deploy LTE, it could give Sprint the financial firepower to compete with them on more even footing in the years ahead.
Some analysts think that the deal will lead to more consolidation. "Some investors are concerned that Softbank's influence will bring deflationary pricing to the U.S. wireless market," wrote Credit Suisse analyst Jonathan Chaplin. "We believe this is unlikely--Softbank is likely attracted to the current trends of stable prices, declining competition and improving margins and returns. These trends will likely be helped further by the wave of consolidation that we expect to follow. Carriers that Sprint will likely stand to benefit the most; however, AT&T and Verizon should also benefit from an improved industry structure."
Other analysts see the deal as fostering a new era of competitiveness to the U.S. market. "It is a good day for the U.S. wireless industry and for consumer choice," said Mark Lowenstein, analyst and founder of mobile consultancy Mobile Ecosystem. "We went from what was becoming a duopoly to a market with potentially four strong, well-capitalized competitors with differentiated value propositions. The U.S. wireless market has become way more interesting."
However, once again Cricket provider Leap Wireless (NASDAQ:LEAP) has been left out in the cold. The company indicated last week that it will look to strike LTE roaming deals with other carriers to fill in the gaps in its coverage as it focuses on building out LTE to the parts of its network where it will generate a strong return.
"Leap is in an even tougher spot as many of the companies that our peers listed as potential buyers are now tied up in other transactions," Piecyk wrote. "Leap's CFO should be commended for putting an additional $100 million on its balance sheet, but its debt leverage is higher than what we estimated, MetroPCS was just purchased, it continues to burn cash and it has material financial commitments to Sprint, tower companies and Apple (NASDAQ:AAPL)."
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