Softbank and Sprint
Everybody wants to rule the world
Oct 15th 2012, 12:05 by H.T. | TOKYO
“I’M A man and every man wants to be number one.” So declared Masayoshi Son on October 15th after announcing Softbank’s 947 billion yen ($12.1 billion) takeover of Sprint, into which it will inject a further $8 billion of new capital to enable it to take part in the consolidation of the American mobile-phone industry.
The two-step deal, flagged on October 12th, aims to combine Japan’s third-biggest mobile-phone carrier with America’s number three, creating the world’s third-largest generator of mobile-phone revenue (below China Mobile and Verizon, above AT&T and Vodafone). It is Japan’s largest-ever overseas deal. And Mr Son, Softbank’s founder and chairman, is visibly delighted at the thought that with it, he will overtake Japan’s two biggest wireless incumbents that he started to seriously challenge just six years ago. Now he has the world in his sights.
The market is not so exuberant. Softbank’s shares have plummeted in the last two trading days on fears that it is biting off more than it can chew—and that new shares will have to be issued to acquire the 70% of Sprint that Softbank wants. Mr Son, in a compelling presentation, sought to lay to rest those fears by answering two questions: Will the investment pay off? And can Softbank repay the new debt?
In answer to the first question, he noted that Softbank has bought and rescued three ailing businesses in Japan (Japan Telecom, Vodafone Japan and Willcom); that Sprint’s turnaround has already started; and that it can generate synergies by combining Softbank and Sprint’s purchases of smartphones and network gear. He noted that Softbank has the fastest network in Japan and sells by far the most smartphones.
As for the balance-sheet question, Mr Son said the deal would be financed by debt and cash in hand, with no new equity issuance. He sought to convince the market that the acquisition would only increase net debt to 2.7 times earnings before interest, tax, depreciation and amortization—compared with a whopping 5.6 times when Softbank bought Vodafone Japan in 2006. It repaid that debt seven years ahead of schedule. The interest rate charged on debt used in the Vodafone acquisition was 4%. On debt financing the Sprint deal it will be 1.7%, he said, claiming that this time the banks asked him if he wanted to borrow even more.
Dan Hesse, Sprint’s chief executive, who physically towers over Mr Son (pictured above) but will now work for him, said the cash injection would strengthen Sprint’s balance-sheet, and help it take part in consolidation in America’s wireless market. Neither men would be drawn on whether Sprint would bid for MetroPCS, which is being acquired by T-Mobile USA, or buy the 51% Sprint doesn’t own in Clearwire, another American wireless operator with a high-speed network like Softbank’s.
The deal needs to be approved by Sprint’s shareholders and regulators. In aggregate, Sprint’s shareholders will get, in exchange for their shares, 30% of a new recapitalized company, and $12.1 billion in cash. Sprint will remain listed in America.
There are bound to be further questions from investors about why Mr Son believes he can replicate his mobile success in Japan in America. They will also ask whether he can fully revive the Sprint brand, and how much more money consolidation may require. But Mr Son is not the typical Japanese boss, and investors will underestimate him if they assume that because he is from Japan, Sprint is little more than a trophy purchase. He knows that the deal is a risk, but he believes it is a risk Softbank can afford.