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Softbank Armors Sprint Nextel Corporation (S) to Fight Its Wireless Rivals

The three-way merger involving Softbank, Sprint Nextel Corporation (NYSE:S) and Clearwire Corporation (NASDAQ:CLWR) has finally been completed. The third largest U.S. carrier is now under the control of the Japanese telecom player, which owns a 78% stake in the carrier through its $21.6 billion cash-and-stock takeover. Softbank finally managed to clear all hurdles including its months of battle with satellite TV provider DISH Network Corp (NASDAQ:DISH), which also had its eyes on Sprint and made a counter offer of $25.5 billion.

Sprint Nextel Corporation (NYSE:S)Sprint dropped Nextel from its name which symbolizes the Nextel shutdown and is now officially known as Sprint Corporation post the Softbank deal. The company has been witnessing difficult times, burdened with huge debt since the costly Nextel acquisition, which turned out to be a complete failure. The shutdown of the iDEN network and the backing of Softbank are expected to turn things around for Sprint, making it well equipped to fight the wireless duopoly of Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T).

The turnaround plan – ‘network is a core focus’

As per the deal, Sprint Nextel Corporation (NYSE:S) shareholders shall receive $16.6 billion in cash. The company’s balance sheet would get a boost of $5 billion instead of $8 billion, as Softbank had to revise the deal to sweeten shareholder’s cash component by compromising on the capital infusion for Sprint Nextel Corporation (NYSE:S). The Japanese carrier had to raise its bid for Sprint Nextel Corporation (NYSE:S) to beat DISH Network Corp (NASDAQ:DISH)’s competing proposal.

Sprint Nextel Corporation (NYSE:S) has used the cash infusion to finance its Clearwire Corporation (NASDAQ:CLWR) acquisition. It shall put in the rest to roll out its Network Vision. The Kansas carrier has taken decent steps in minimizing the cost inefficiencies which came from running different networks jointly. The Clearwire acquisition has brought Sprint Nextel Corporation (NYSE:S)’s subscriber base up to 64.3 million, which is still way behind AT&T Inc. (NYSE:T), which has a 107.3 million customer base, and Verizon Communications Inc. (NYSE:VZ), which leads with 116.8 million subscribers. T MOBILE US INC (NYSE:TMUS) continues to hold the fourth position with 43 million subscribers post its MetroPCS acquisition.

Softbank’s primary focus is to build Sprint’s network and boost its speed. The immediate need is to expand the coverage of Sprint’s wireless network using the recently acquired Clearwire airwaves. Softbank plans a capital expenditure of $8 billion in the current year, which shall go down to $6 billion a year for the next four years. The telecom provider estimates that cost cutting measures would help in saving as much as $2 billion in the coming four years and $3 billion a year subsequently.

Softbank doesn’t want to shift its focus on the management set up. Sprint’s Chief Executive Dan Hesse shall continue to lead the company holding the same position. Masayoshi Son shall serve as the Chairman of the newly formed joint entity.

The Clearwire acquisition is the key to Sprint’s bigger plan. The spectrum rich Bellevue carrier will help Softbank build a fantastic 4G LTE network to threaten the dominance of Verizon and AT&T. Dish had made a competing bid for Clearwire as well, but ended its bidding battle with Sprint days after its $25.5 billion deal fell through.

Clearwire is the key to Sprint’s success

Sprint ultimately almost had to double its acquisition offer to $5 a share to buy the remaining share in the regional carrier and fend off Dish’s rival proposal. The reason why the carrier went to that aggressive level bidding for Clearwire is because of its massive spectrum holding which would give Sprint the flexibility to build a robust network. Clearwire owns 160 MHz of airwaves in the most prime 100 markets in the U.S. This would facilitate Sprint in strengthening its network in these top markets.

In addition, Clearwire runs on a similar network as Softbank in its home country, so Softbank carries expertise in running the TD-LTE network. The Japanese carrier is also better positioned to crack a better deal with equipment manufacturers and handset makers because of its bigger scale and wider operations. This will help Sprint experience better cost synergies by pulling down its cost of operations. The spectrum will play a key role for Sprint in offering unlimited data plans.

Sprint answers T-Mobile

Meanwhile, on Thursday, T-Mobile announced that the company would allow its customers to upgrade their phones every six months under its Jump (Just Upgrade My Phone) plan, compared to other carriers that let customers upgrade their handsets not before two years. Sprint did not take long to answer. The very next day Sprint announced an unlimited data service, claiming that ‘we are distinctly different in our market position’ from its rivals.

Both big and small carriers are trying hard to bolster their spectrum holding. Sprint Nextel Corporation (NYSE:S) did it by acquiring Clearwire, while T-Mobile went on to purchase MetroPCS. What about the two biggies?

AT&T leaps to augment its spectrum position

Wireless carriers are seeking to make an alliance with airwave rich partners to bolster their spectrum holding and improve their competitive position. The FCC incentive auction is not going to take place anytime soon and therefore it renders no immediate solution. Accordingly AT&T plans to buy Leap Wireless, a no contract carrier, in a takeover bid of $1.19 billion in cash which is $15 per share. The acquisition would enable the second largest U.S. carrier in bolstering its network by using the unused spectrum of Leap. The deal is subject to the Federal Communications Commission and the Department of Justice review. The Dallas carrier expects the deal to conclude in 6 to 9 months.

My takeaway

The Sprint-Softbank deal has worried the wireless biggies as well, particularly as it guarantees to offer unlimited data plans through its ‘Sprint Unlimited Guarantee’ scheme. The third largest carrier is pretty confident that this differentiated service would attract several subscribers and pose a tough challenge to both Verizon and AT&T. The biggies have long switched to tiered pricing data plans. Though T-Mobile offers unlimited data plans, it throttles the data speed down to 2G beyond a particular threshold. The wireless industry is going to see some big changes with increased competition and wider consumer choices. It would be interesting to see how Softbank moves along its plan to build a stronger Sprint.

The article Softbank Armors Sprint to Fight Its Wireless Rivals originally appeared on Fool.com and is written by Rajesh Marwah.

Rajesh Marwah has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Rajesh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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