Sprint, the No. 3 cellphone company in the U.S., is selling a controlling stake to Japan’s Softbank for $20.1 billion.
The deal, announced Monday, Oct 15, in Tokyo, positions Sprint Nextel Corp. as a stronger competitor to U.S. market leaders Verizon Wireless and AT&T, but it doesn’t solve all of the company’s underlying problems.
Sprint, which is based in Overland Park, Kan. has been limping along since 2005, when it bought Nextel. The merger quickly turned sour, saddling Sprint with the cost of running two incompatible networks while customers fled.
Softbank Corp., a holding company with investments in Internet and telecom businesses, made its own venture into the wireless world in 2005 with the acquisition of Vodafone Japan. It turned that business around, giving President Masayoshi Son the confidence that he can make Sprint a profitable company again after five straight years of losses.
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Sprint CEO Dan Hesse has laid the groundwork for a turnaround — the company’s reputation for customer service has improved during his tenure. But his efforts haven’t had an immediate impact on profitability. On its own, the company would have a hard road ahead, as it pays for both a network revamp and $15.5 billion in iPhones from Apple.
Under the deal, Sprint shareholders can turn in 55 percent of their shares to Softbank in exchange for $7.30 per share.
Softbank is paying $12.1 billion for the 55 percent stake. It’s buying an additional $8 billion worth of shares from the company, for a total stake of 70 percent. “This is a transformative transaction for Sprint that creates immediate value for our stockholders, while providing an opportunity to participate in the future growth of a stronger, better capitalized Sprint going forward,” Hesse said.
Analysts were more reserved in their judgment.
“While we believe it will take far more than capital for Sprint Nextel to effectively compete with Verizon Wireless and AT&T Mobility, we believe the deal announced today, without question, strengthens Sprint’s position in the long-run,” said Christopher King at Stifel Nicolaus.
The deal has been approved by the boards of both companies. It still needs approval from Sprint shareholders and U.S. regulators. Softbank said the transaction is expected to be completed by the middle of next year.
Analysts say buying a foreign cellphone company makes little sense in terms of operational synergies. There’s little opportunity to improve service by combining networks or saving money by combining operations.
But Son said the U.S. and Japanese markets have much in common now that smartphones are all-important in both countries, and the two companies could benefit and learn from each other. By joining forces, Sprint and Softbank will become one of the world’s top smartphone carriers, gaining greater bargaining power with the manufacturers of the gadgets and network equipment suppliers.
Softbank was the first carrier to offer the iPhone in Japan. The iPhone has been such a hit in there that it has shaped Softbank’s brand image and helped it lure customers away from its two bigger rivals.
Son likes to take chances in a culture that doesn’t always reward risk. A graduate of the University of California, Berkeley, he was only 16 when he ventured alone to the U.S.
“I am happy to be able to tell you today of my big comeback to the U.S.,” he said. “This is going to be an even bigger challenge.”