Report: Worries about Chinese vendors weigh on Sprint/Softbank deal

The U.S. government wants to be able to review Sprint Nextel's (NYSE:S) network equipment purchases as a condition of Japanese operator Softbank's proposed $20.1 billion purchase of 70 percent of Sprint, according to the Wall Street Journal. The action is likely an attempt by the government to block Sprint from buying equipment from Chinese vendors Huawei and ZTE.

The Journal report, citing unnamed sources familiar with the matter, said while negotiations are ongoing, U.S. regulators are expected to require that Sprint and Softbank let the government know when they plan buy core network gear and play ball if any national-security or public-safety concerns come up.

Sprint spokesman Scott Sloat declined to comment as did Softbank, according to the Journal.

The government is prohibited by trade rules from specifically baring Sprint from buying network equipment from Huawei and ZTE, the report said. However, it is clear that the government is bringing pressure on Sprint not to use the vendors. "You have to find a way to say, 'Don't buy from the Chinese,' without saying, 'Don't buy from the Chinese,' " one source who has spoken with Sprint told the Journal.

Huawei and ZTE were reportedly excluded from bidding on Sprint's Network Vision network modernization project because of national-security concerns. Softbank uses gear from Huawei in Japan.

A government report last year also found the two companies pose a security risk because their equipment could be used for espionage. The report, from the House Permanent Select Committee on Intelligence, recommended the U.S. block acquisitions and mergers involving the two firms and also recommends that the U.S. government and U.S. companies avoid using equipment from the two Chinese companies. Huawei and ZTE vigorously denied the charges, which they said were unfounded and motivated by politics. They said they are not connected to the Chinese government or military and that operators around the world, including in Western Europe, use their network gear.

"The adoption of such a policy would seem little more than a market-distorting political or protectionist exercise," Huawei spokesman William Plummer told the Journal, referring to a potential review of Sprint's network gear purchases.

"It's a pity that U.S. carriers cannot use our equipment," ZTE spokesman David Dai Shu told the WSJ. "We realize that the situation is complicated, but we are trying to prove that ZTE's equipment is safe and poses no threat to U.S. security."

Outgoing FCC Chairman Julius Genachowski said earlier this month that the FCC's review of the deal, as well as Sprint's bid to take control of Clearwire (NASDAQ:CLWR), is on track. Genachowski said that the review is on a schedule "consistent with" the agency's nonbinding 180-day "shot clock" for evaluating deals, which runs through May 29.

In a related note, Congress quietly put in a new cyber-espionage review process for U.S. government technology purchases into the bill to keep the government funded, which President Obama signed into law this week, according to Reuters. The provision bars NASA and the Justice and Commerce Departments from buying IT systems unless they are approved by federal law enforcement officials. The assessment must include "any risk associated with such system being produced, manufactured or assembled by one or more entities that are owned, directed or subsidized" by China, the report said. Cyber security and cyberattacks have become a major point of contention in recent months between the U.S. and Chinese governments.

For more:
- see this WSJ article (sub. req.)
- see this Reuters article
- see this The Verge article

Related Articles:
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Sprint, Softbank and Clearwire press cases for deals to FCC's Genachowski
Clearwire execs stand to rake in millions if Sprint deal goes through
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