 |
|
Roger Entner |
On Oct. 15, not unexpectedly, Softbank announced it would purchase a 70 percent stake in Sprint Nextel. Existing shareholders will retain 30 percent of the New Sprint and receive $12.1 billion. In addition, Softbank will provide the New Sprint with $8 billion of new capital. This acquisition values the company at $28.7 billion, which is still grossly undervalued considering the spectrum position that Sprint holds, both directly and indirectly.
After the close of the transaction, the New Sprint will have all the tools that it needs to transform the U.S. wireless industry. A good leadership team, new Japanese ideas to use to innovate the market, enough money to be flexible, and the option to buy Clearwire and become the spectrum and bandwidth powerhouse in the United States. In addition, Softbank has experience in how a smaller carrier can successfully compete and win against a larger carrier without asking for regulatory intervention. It could start with what Japanese consumers take for granted: that they get rewarded for loyalty to their carrier by having their rates lowered the longer they stay on as customers.
The Sprint acquisition by Softbank will allow the New Sprint to take over Clearwire. On Oct. 15, Clearwire's market cap was about $4 billion (of which Sprint owns already half). Even with a 50 percent premium, Sprint could buy Clearwire for $3 billion and build out Clearwire's TD-LTE network for the remaining $5 billion from Softbank. Since both companies are migrating to LTE Advanced, which allows carrier aggregation, Sprint could use the on average 150 MHz Clearwire spectrum as part of the downlink. Such a combined entity would have such a huge spectrum and bandwidth advantage that it could maintain its unlimited, lower-cost data offering several years longer than any other competitor in the market. Those competitors today possess or only hope to possess a fraction of Sprint's consolidated spectrum. The significance of this advantage cannot be underestimated.
More than 50 percent of wireless users already depend on high-speed wireless data today with their smartphones and wireless hotspots. This dependence will only increase as the business advantages and entertainment value of the devices become ever more powerful and convincing. The New Sprint will have a tremendous advantage in providing these services with spectrum holdings that are many times greater than their competitors. This will allow the New Sprint to provide unlimited data services at a lower cost and for longer than their competitors without having to buy new spectrum. While all the other carriers are feeling the spectrum crunch to a varying degree, the New Sprint sits pretty. But all of the new money, new owners, and enviable spectrum position will be for naught if the company does not execute well.
The New Sprint, along with the New T-Mobile USA, will be ideally positioned to benefit from the recovery of the U.S. economy. Over the last three years, more than 12 million additional households have received free wireless services paid for by the government, which has significantly impacted the performance of the prepaid carriers. As the economy improves, more Americans will become ineligible for government assistance because they will find new jobs and see their incomes improve. As they become better off, they become ineligible for government assistance and therefore government-paid wireless Lifeline services. As a result, these households will have to buy wireless services, which will be predominantly no-contract because they will have difficulty passing a credit check. This will be a boon to the New Sprint and New T-Mobile USA.
With this Softbank/Sprint transaction, four of the five largest U.S. service providers will be substantially owned by foreign companies. This makes AT&T Mobility the only large wireless operator that will make all of its decisions in the United States. The United States has had good experiences with foreign companies owning U.S. service providers, so this should pose no problem for the approval process. Also, Americans do not care who owns their wireless carrier as long as they receive good service. AT&T and Verizon Wireless grew equally quickly and Sprint and T-Mobile struggled equally hard, even though one was solely American-owned and the other was a partially or completely foreign-owned company. The lesson here: Execution matters.
The New Sprint, and its probable acquisition target Clearwire, should be a significant consideration as the FCC overhauls its approach to the spectrum screen. The current practice of counting only half of Clearwire's spectrum in the screen is peculiar at best. The New Sprint clearly has the means now to acquire the half of Clearwire it doesn't own and capitalize on the spectrum asset. The FCC's current practice to hold down AT&T and Verizon's spectrum ambitions is clearly going to be overtaken by real-world events. At the same time, the FCC is making progress on the few auctions for a relatively small portion of spectrum. As the FCC prepares for the new auctions, it should take the new realities into consideration, not only what is, but what will be and what could be. In the meantime, the industry is still waiting for a breakthrough on the 500 MHz block of spectrum that the current administration promised to make available.
Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.