The megadeal was announced late yesterday in simultaneous releases by the two companies. It is the largest ever acquisition by a Japanese company.
“Softbank and Sprint Nextel today announced that they have entered into a series of definitive agreements under which Softbank will invest approximately US$20.1 billion in Sprint, consisting of approximately US$12.1 billion to be paid to Sprint shareholders and US$8 billion of new capital to be used, amongst other purposes, to strengthen Sprint's balance sheet.
The companies expect the closing of the transaction to occur in mid-2013. As a result of the transaction Softbank will own approximately 70% of the fully-diluted shares of New Sprint, which will own 100% of the shares of Sprint.”
So most of the money will go as a cash payment to Sprint’s long-suffering shareholders, and less than half will be reinvested in the business. Sprint shares rose 14%, little wonder given its poor performance in recent years. Sprint has not turned a profit in any quarter for the last five years and is US$15 billion in debt.
Japanese investors were initially sceptical, but are warming to the deal. Softbank shares fell 6% on the news, on top of 17% they lost last Friday after widespread rumours of something happening. But they rebounded yesterday, gaining back half the losses, after investors and analysts digested the consequences of the massive deal. But the deal will be financed by debt – with Softbank already carrying $10 billion in debt, leading some analysts to question the financial viability of the deal.
The transaction is being funded mostly by loans from four major Japanese banks, including the local subsidiary of Deutsche Bank. There is concern among many analysts about the amount of additional debt being taken on. The BBC reports ratings agency Standard & Poor's as warning the deal "may undermine Softbank's financial risk profile". Softbank's greatly increase debt has led S&P to give it a negative CreditWatch rating.
Whatever the financial implications, the deal is huge. Softbank says it will enable it to establish an operating base as one of the largest mobile Internet companies in the world. “The combined subscriber base will be one of the largest between the USA and Japan, and the combined mobile telecom service revenue will rank third amongst global operators.”
It also enables Softbank to leverage its expertise in smart phones (it had the only Japanese distributorship for the iPhone until a year ago) and mobile networks. It should also enhance Sprint's competitiveness in the USA, by providing it with US$8 billion of new capital for “its mobile network, strategic investments, and balance sheet as part of its continued efforts to fortify its operating base towards future growth.”
Who is Softbank? Read more ...
Sprint CEO Dan Hesse will stay in his job, for now at least. He is lucky, given his company’s dismal performance in recent years. The Kansas based company’s origins go back a century, but it became a major player in the US telecoms scene only in the last 20 years. A proposed US$129 billion merger deal with MCI was knocked back by the US Department of Justice in 1999. It merged with rival Nextel in 2004.
Sprint has a very high profile in the USA, but has lost money for years. It is regarded by many as yesterday’s company. The massive cash injection from Softbank, not to mention Softbank’s undoubted entrepreneurial expertise, should give it a new lease of life. It needs one.
Softbank was founded in 1981 by Masayoshi Son, a Korean-Japanese educated in America. He started the company after experiencing the early days of the PC boom in Silicon Valley (he attended University of California, Berkeley).
In its early years Softbank distributed US PC software in Japan. Its approach to software distribution, and the products it introduced to the country, greatly influenced the course of the early Japanese PC industry, which initially was very inward-looking. It also entered the IT magazine field, publishing a number of successful titles. By the late 1980s some in Japan (most notably his own publications) were calling Son “the Japanese Bill Gates”. He was a good friend of both Gates and Steve Jobs. Maybe he is Japan’s Bill Gates – he is now the second richest man in the country.
By the 1990s Softbank was a major player in the Japanese IT scene. It brought Yahoo! To Japan in 1996 and listed on the Tokyo Stock Exchange in 1998. It subsequently moved into telecommunications, making a number of acquisitions, including Vodafone Japan in 2006, which it turned from an also-ran into a major mobile player. It has a market capitalisation exceeding $40 billion.
What does the deal mean? For a start, if people outside of Japan hadn’t heard of Softbank before, they will now. It ensures Sprint’s survival (assuming the whole operation doesn’t collapse under its debt), but more importantly it makes Softbank a major global telecommunications player.
It is a major gamble for Softbank, but Masayoshi-san has a long track record of playing and winning. And of rebounding when he loses – he once lost more than anyone in history. He is one smart cookie. The Wall Street Journal calls the deal “bravado” and an “ego trip”. There may be a bit more to it than that.