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.”
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