Sprint, Softbank, Clearwire Merger Clears Hurdle, but Challenges Loom

 
 
By Wayne Rash  |  Posted 2013-07-08
 
 
 
Hurdle

Sprint, Softbank, Clearwire Merger Clears Hurdle, but Challenges Loom


Clearwire's minority shareholders have approved the final step in the merger between Sprint Nextel and Softbank, Japan's third-largest mobile carrier. The merger is expected to close Wednesday, July 10, after the markets in the U.S. shut down for the day.

The agreement finishes what had turned out to be the diciest part of the complicated merger between the U.S.-based Sprint and the Japan-based Softbank. However, the merged companies face financial and technological challenges going forward.

They must find the resources to build out a vast nationwide Long Term Evolution (LTE) network. The companies must also find ways to attract customers in the face of fierce price competition and do it all with financial resources that are more limited than either company had originally anticipated.

The merger was more complex and more expensive than first expected because of the late entry by Dish Networks, which made a last-minute bid to acquire both Sprint and Clearwire in separate transactions. Dish eventually withdrew after Sprint raised its offer for Clearwire to $5 per share.

While Sprint already held a majority of Clearwire's stock, the merger required that a majority of shareholders not affiliated with Sprint approve the action. Approximately 95 percent of the outstanding shares of Clearwire stock were voted in favor of the merger. The companies expect to close the deal between Sprint and Clearwire on July 9, the day before Sprint and Softbank close their deal.

The Clearwire shareholder approval follows the approval July 5 by the Federal Communications Commission of the entire merger by issuing a declaratory ruling, including the issues regarding foreign ownership of a U.S. telecommunications company, as well as the transfer of the wireless licenses.

When the companies finalize their merger, Sprint will become the third major U.S. wireless carrier with a substantial foreign ownership, leaving only AT&T completely in American hands. T-Mobile is a subsidiary of German telecom giant Deutsche Telekom while 45 percent of Verizon Wireless is owned by U.K.-based Vodafone. Slightly over half of Verizon Wireless is owned by Verizon Communications in the U.S.

The move by Softbank to acquire Sprint along with Clearwire gives the combined company what may be the largest spectrum holdings of any wireless company in the U.S. Clearwire already had vast holdings suitable for 4G data communications, and when added with what Sprint already had, it puts Sprint into a very powerful position in the wireless market.

The merger with Softbank also solves Sprint's long-running financial woes along with Clearwire's impending bankruptcy. Despite their respective spectrum holdings, both companies were struggling, and Clearwire in particular needed an infusion of cash to stay afloat. Earlier this year, Clearwire's management had sent a letter to stockholders asking for approval of the Sprint buyout as potentially the only way to avoid liquidating the company.

Sprint, Softbank, Clearwire Merger Clears Hurdle, but Challenges Loom


The Softbank-Sprint merger was in doubt since April, when Dish Networks attempted a last-minute takeover of Sprint and Clearwire in separate deals. Dish Networks chairman Charles Ergen made the takeover of Sprint a corporate priority, and in the process tried to throw every conceivable roadblock, ranging from national security concerns to lawsuits, in the way.

Ultimately, the effort by Dish to take over Sprint and Clearwire failed when Sprint, with Softbank's backing, raised its offer for Clearwire shares to a price higher than Dish wanted to pay. This accomplished two things. First, it cleared the obstacles from Softbank's path, and second, it made Clearwire's shareholders a lot more money than originally planned.

However, the higher price also hurt Softbank's finances, causing Standard & Poor's to reduce the company's credit rating to junk status from the investment grade it had once enjoyed. While there are no signs that Softbank is anywhere near default on its obligations, the higher cost of credit will complicate the growth of the newly merged company after the immediate dust clears.

So what's next? Once the dust settles, the newly combined Softbank and Sprint will be able to start building out a massive LTE footprint in the U.S. This will enable Sprint to continue to offer its uncapped data plans if the company chooses to do so. It also means that the company will have a valuable edge in competition with the other three nationwide wireless carriers.

But having a lot of spectrum and becoming more competitive aren't the same thing. The spectrum is a valuable resource, but as the other three carriers have found out, building out a nationwide LTE footprint isn't fast or easy. While Verizon Wireless has essentially completed the build-out of its first generation LTE infrastructure, the company has yet to begin its higher-speed Advanced LTE build-out. AT&T and T-Mobile are already fielding networks that are substantially faster than Verizon's, and they still have a long way to go.

Sprint, by contrast, has barely started. While it has taken baby steps in the world of LTE, both Sprint and Clearwire are burdened by a legacy WiMax network that ultimately will go nowhere. Unfortunately, Sprint must expend resources on that legacy network at least for a while. Unlike the situation with AT&T and T-Mobile, which can sell devices that support both their legacy Evolved High Speed Packet Access (HSPA+) 4G network and LTE, Sprint's devices don't do that. This means that there will be two sorts of 4G devices for at least a few years.

Still, despite the financial challenges that await Softbank and Sprint and the technology challenges that are already there, Sprint is poised to make a huge move in the wireless business. AT&T and Verizon will have some real competition if all goes well. And as we know, competition is good for everyone concerned.

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