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Softbank, Japan’s third-largest mobile carrier, and Sprint Nextel, the third-largest U.S. carrier, have agreed to a complex partial acquisition that could funnel some desperately needed cash into debt-laden Sprint, while also giving Softbank a fresh opportunity for growth. Currently Japan’s wireless market has reached saturation, so growth opportunities at home for Softbank are limited.
The $20.1 billion deal, which would give Softbank 70 percent of Sprint, has already been approved by the boards of both companies and is headed for regulatory review. In the U.S., at least, a major investment into Sprint by a Japanese company is likely to be looked upon favorably for a couple of reasons.
First, because Sprint is struggling to recover from its costly acquisition of Nextel, the company is not able to compete as actively as it should in the U.S. mobile market. Second, its partial acquisition of Clearwire has turned out to be a money pit as Sprint and Clearwire struggle to find the funding to implement LTE throughout Sprint’s network.
Sprint’s struggles are compounded by the fact that the company chose to head down the 4G road with WiMax, a standard that nobody else adopted. Then Sprint regrouped and headed down the LTE road where nationwide implementation is spotty at best.
Fortunately for Sprint and Softbank, hurdles to the deal should be relatively easy to clear. Sprint is remaining intact as a company, which means it won’t need to transfer its licenses to anyone. This means that the FCC is unlikely to be involved in the approval, except perhaps peripherally. The U.S. Justice Department will probably see the deal as strengthening competition since it will revitalize Sprint and keep it from sinking even further into its current sea of debt.
This is especially true now that Sprint is finding itself under attack from all sides. Verizon Wireless and AT&T are well-funded and aggressive, and are forcing Sprint to offer potentially money-losing strategies such as unlimited data. Meanwhile, T-Mobile, which is an arm of European telecom giant Deutsche Telekom, has agreed to merge with MetroPCS, which will make the combined company nearly as large as Sprint. With T-Mobile and MetroPCS both being major players in the prepaid and low-cost contract wireless market, the merged company would put even more pressure on Sprint and could easily force it into becoming the fourth largest carrier unless Sprint did something about its debt.
Now, with the Softbank investment, Sprint can effectively become debt-free, which in turn can free it up to become much more competitive, while at the same time giving it the cash to build out its LTE network and Clearwire’s LTE network. It’s also possible that Softbank’s bargaining power combined with Sprint’s would give Sprint access to a greater range of wireless devices at a lower cost than has been possible until now.
If the Softbank name sounds familiar, perhaps it’s because the company has been in and out of the U.S. technology and media scene for decades. In 1995 Softbank bought what was then the largest technology trade show in the U.S., Comdex, and in the process helped make owner Sheldon Adelson a multi-billionaire. Adelson went on to build his own convention center in Las Vegas to host shows like Comdex and has since become a global hotel and casino magnate.
A few months later, Softbank bought a company called Ziff Davis Media, which published PC Magazine and PC Week. The latter eventually morphed into eWEEK. Neither investment worked out particularly well for Softbank which ended up selling both properties to other companies.
But there’s a difference in the purchase of a major part of Sprint when compared with either Comdex or Ziff Davis. One of the reasons those two acquisitions failed was due to Softbank’s lack of experience in their respective markets. In the Sprint purchase, Softbank is buying into a company where the management will remain in place.
In addition, Softbank over the years has become Japan’s third largest wireless carrier. Unlike its competition, Softbank built its position from zero. Its competitors were already in existence as telecom companies long before cell phones arrived. Softbank President Masayoshi Son, known for being a risk taker, started without that boost, but managed to build his carrier into the No. 3 spot through acquisitions and aggressive tactics. Softbank made its name in Japan by offering the Apple iPhone and other smartphones in a market previously dominated by feature phones designed for the Japanese market.
While there has been some speculation in the Japanese press that Softbank would also set its sights on MetroPCS, it’s unclear whether it would be able to accomplish this. In addition to already having a deal in place with T-Mobile, it’s not clear that second acquisition such as that would get a positive reception by regulators. But regardless of what happens, a revitalized Sprint Nextel is certain to shake up the U.S. wireless industry.