Analysis: A Softbank buyout would give Sprint cash, improve TD-LTE ecosystem

Sprint Nextel (NYSE:S) confirmed it is talking with Japanese operator Softbank on Softbank making a "substantial investment" in Sprint,  and the motivations for the potential deal are starting to come into focus. Principally, Sprint would get cash and a stronger balance sheet from Softbank, and Softbank would potentially enhance the TD-LTE ecosystem at 2.5 GHz via Sprint's relationship with Clearwire (NASDAQ:CLWR).

The status of the talks and the structure of the potential deal are still unknown. However, according to a new Wall Street Journal report, the value of the deal could exceed $12.8 billion and Softbank would own around 70 percent of Sprint, but Sprint would remain a publicly traded company. According to the report, which cited unnamed sources, the deal could help Sprint pay down debt, strengthen its balance sheet and allow it to consider buying other carriers.

The deal would not necessarily be about Softbank getting greater economies of scale for 3G CDMA equipment by acquiring Sprint's 56.4 million customers, as some had speculated. Softbank uses W-CDMA technology that is incompatible with Sprint's CDMA network.

Instead, according to analysts, Softbank may be looking to boost the 2.5/2.6 GHz TD-LTE ecosystem. Clearwire is using that spectrum and technology for its LTE buildout, and plans to launch LTE service next year. Sprint has said its LTE devices will be able to run on its FDD-LTE network as well as Clearwire's TD-LTE network, and Sprint will offload excess traffic onto Clearwire's network. "That's where maybe there's some global scale benefits to be had," said Strategy Analytics analyst Susan Welsh de Grimaldo. "But definitely not on the 3G side."

"Softbank, China Mobile and Clearwire have been the largest proponents of TD-LTE since they joined with Bharti and Vodafone to form the Global TD-LTE Initiative in February of 2011," wrote BTIG analyst Walter Piecyk. "All three operators are in the process of building TD-LTE technology on 2.5/2.6 GHz spectrum. Yet investors have remained skeptical about both TD-LTE and the 2.5/2.6 GHz spectrum. Even today on CNBC, former Verizon Wireless CEO Dennis Strigl laughed off the suggestion that Softbank's interest in Sprint would include Clearwire. That skeptical view is shared by many and ironically, or perhaps appropriately, could have been one of the deal motivators for Softbank, which like Clearwire is investing in its own 2.5/2.6 GHz, TD-LTE network in Japan."

According to the Journal, control of Clearwire may be a key sticking point in the deal negotiations, since Softbank would want access to Clearwire's spectrum. However, Sprint may try to resolve those concerns by acquiring Clearwire, the report added. Sprint remains Clearwire's largest shareholder but has in the past ruled out buying the company, which has gross debt of $4.5 billion.

Piecyk wrote that a Sprint acquisition of Clearwire "would likely involve a stock for stock deal between Sprint and Clearwire in which Clearwire would then get an additional lift from the Softbank deal that followed. "

CCS insight analyst John Jackson said he was skeptical that Softbank would spend close $13 billion simply to create economies of scale for the TD-LTE market. "There may be some procurement economics to be gained by combining those two spectrum positions," he said. "But this is a lot of money to lay out to create those economies."

Jackson said Sprint may be looking at the deal as a way to bolster itself against a combined T-Mobile USA and MetroPCS (NYSE:PCS). That new company will focus heavily on disruptive, low-cost LTE services, Jackson said, so money from Softbank could be used on both building out Clearwire's LTE network and marketing Sprint's LTE services. "Sprit may be looking for a port in a perceived storm," he said.

The Journal article said a Softbank-owned Sprint could consider a bid to break up T-Mobile's deal with MetroPCS or wait for the deal to close and try to buy the combined entity. According to a separate Bloomberg report, which also cited unnamed sources, Sprint's board is holding off on making an offer on MetroPCS in order to determine how the deal was negotiated.

For more:
- see this WSJ article (sub. req.)
- see this separate WSJ article (sub. req.)
- see this BTIG blog post (reg. req.)
- see this Bloomberg article

Related Articles:
Sprint confirms Softbank in talks to take control
T-Mobile's Ray: Network issues complicate potential Sprint/MetroPCS deal
Sprint bid for MetroPCS faces range of complications
Sprint, Leap left on the outside of T-Mobile/MetroPCS deal
Deutsche Telekom's T-Mobile USA to merge with MetroPCS

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