Softbank’s Sprint bid a risky investment

Japanese carrier Softbank’s bid to acquire a 70 per cent stake in US operator Sprint is an audacious deal that could transform or hobble the companies depending on how it plays out. For Softbank it is a huge bet that it’s better to invest $20bn in the third-largest US mobile operator rather than its home market of Japan where it is the third-largest mobile operator behind NTT DoCoMo and KDDI.

While it’s true that Softbank’s investment could pay off by making Sprint significantly more competitive, it’s also true that there’s a huge risk that the deal will not go to plan and could weaken both companies at critical times. For example earlier this month Softbank announced plans to acquire rival eAccess for $2.3bn in a bid to become the second-largest mobile operator in Japan, and adding a huge international deal on top of that increases the risk that management will be so stretched that neither deal will go to plan.

Sprint is in the middle of implementing two huge bets that are costing billions – its network modernisation program and acquiring the iPhone – so this will be a third huge bet on top of those, which will make it hard to pull off and risks diverting attention from Network Vision and the iPhone. However the third bet does have the significant virtue of helping to pay for Sprint’s first two multi-billion dollar bets. In addition Softbank has expertise that will help Sprint as it deploys LTE as part of its Network Vision network modernisation, and with the iPhone, given Softbank was the first operator to launch the device in Japan.

On the other hand if Softbank and Sprint can pull this off it could transform Sprint into a company that has the scale and financial resources to compete head-to-head with Verizon Wireless and AT&T, which dominate the US mobile market with 33 per cent and 31 per cent market share, respectively, compared to Sprint with 17 per cent and T-Mobile with 10 per cent. While the deal would not directly increase Sprint’s market share in the US, it would make it part of a group with some 90 million subscribers in Japan and the US, compared to Sprint’s 56 million subscribers in 2Q12. That in turn means Sprint will have the scale and financial firepower to compete more aggressively with Verizon Wireless and AT&T, which had 105 million and 102 million subscribers respectively in 2Q12.

In particular the deal should give Sprint the financial strength to develop a better and more integrated strategy for Clearwire, possibly by moving from majority to full owner of the company. Clearwire has a valuable portfolio of 2.5GHz spectrum which has not been fully exploited due to a lack of investment, which can now change given Softbank will make $8bn in capital available to Sprint as part of the deal, in addition to $12bn which will go to Sprint’s shareholders. Clearwire also plans to move away from WiMAX and launch TD-LTE network year, a technology which Softbank launched in Japan earlier this year. Similar to Clearwire, Softbank is using 2.5GHz spectrum for TD-LTE which could generate momentum for the technology and economies of scale for equipment and devices.

Sprint could also use its new financial strength to move for MetroPCS, which it wanted to buy earlier this year, and which T-Mobile USA has recently announced plans to acquire. But this may be a step too far given Sprint has already made three huge bets that are all major challenges on their own, so probably can’t handle a fourth.

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