Softbank's deal for Sprint a win for consumers

A combination of Softbank and Sprint will have revenue equal to AT&T and behind only China Mobile and Verizon worldwide.

By TheStreet Staff Oct 15, 2012 7:09PM logoMasayoshi Son, Softbank's chairman and chief executive, shakes hands with Dan Hesse of Sprint Nextel in Tokyo on Oct. 15 © Kiyoshi Ota/Bloomberg via Getty ImagesBy Antoine Gara


A year ago AT&T (T) was preparing an antitrust defense of its proposed takeover of T-Mobile USA. Now, after regulators blocked the deal, AT&T is bracing to protect its position in the U.S. wireless industry from new competition.

T-Mobile agreed this month to partner with MetroPCS (PCS) while Japan's Softbank on Sunday announced that it was  investing billions for a controlling stake in Sprint Nextel (S), the U.S. mobile industry's No. 3 player.


Softbank's $8 billion infusion into Sprint revitalizes the U.S. company's finances. It also energizes Sprint's competitiveness as an alternative national carrier to industry stalwarts AT&T and Verizon Communications (VZ).


The Sprint takeover and the planned merger of MetroPCS and T-Mobile would, if approved by regulators, add financial and network strength to the industry's peripheral players in the United States. .


At this time last year, industry watchers were bracing for a telecom sector 'duopoly' between AT&T and Verizon, as virtually every other carrier struggled to stay afloat in the capital-intensive business of building national networks to handle smartphone data loads.

Striking a blow


By striking a blow against the duopoly, the deals proposed this month would substantially increase the competitive landscape. Both of the new players should be able to undercut AT&T and Verizon on pricing, and could hasten the day when all carriers compete to offer unlimited data plans.


With new financial support, Overland Park, Kan.-based Sprint has billions more to complete its plan to build a 4G national wireless network, called Network Vision. Once Network Vision is finished, Sprint expects its unlimited Apple (AAPL) iPhone data plans will help pull cell phone customers from larger carriers.


To start 2012, speculation on Sprint centered less on whether subscribers would join and more on handicapping the company's eventual bankruptcy as it plowed billions into a network revamp and a contract to carry the iPhone.


Succeeding on Network Vision became all the more crucial for Sprint in the wake of MetroPCS's tie-up with T-Mobile because it faced a new challenge to a fleeting industry position.


In that tie-up, T-Mobile is poised to add millions of wireless users and a cash-flow-positive business to its national 4G network, putting the carrier on track to gain on its position as a low cost, unlimited data alternative. Meanwhile, the merged business would be in closer running for Sprint's third spot in the wireless market.


Now, after Sprint finally courted a deep-pocketed partner, the U.S. wireless industry looks poised for a renaissance, with cost-competitive and unlimited data carriers in a position to challenge industry leaders.

"(Combining) with a larger partner, one which carries a low level of leverage, will provide Sprint with capital that the company needs to better compete with its larger rivals," Thomas Seitz, an analyst at Jefferies, wrote Monday in a note to clients.

A fight for customers


After October's telecom sector reshuffle, both Sprint and T-Mobile are in an even better position to invest in their 4G networks as an onslaught of data burdens existing capacity. The prospect of better coverage is likely to make both carriers a stronger alternative to AT&T and Verizon, who've been gaining market share in the past 12 months.


The terms of the deal, which converts $8 billion in debt to equity at $5.25 a share, "(removes) any doubt of the company's ability to fund the business and compete aggressively," writes Mike McCormack, an analyst at Nomura Securities.


For telecom investors and consumers, a restart in the land grab for wireless supremacy marks a sudden and stark shift in the industry in a year's time.


Outside of sector-wide M&A, the biggest intrigue of telecom stocks was the near 5% dividend yields on AT&T and Verizon's shares. The stability of those yields seemed strong, given that few expected Sprint and T-Mobile would be able to stem subscriber losses or complete national 4G networks as independent carriers. Moody's last year highlighted AT&T and Verizon as the only telecoms able to earn back their cost of capital.


As investors weighed the dividend yields and stability of AT&T and Verizon, others watching the wireless market saw an industry moving into a duopoly state that would hit the pocketbooks of consumers.


That was the logic when antitrust officials at the Justice Department challenged AT&T's proposed $39 billion deal for T-Mobile a year ago. The company eventually pulled the plug on the merger.


For consumers the tension was palpable, and some braced for an era where carriers would hold the financial strings on smartphone data usage. Prior to the DoJ's decision to block AT&T's takeout of T-Mobile, both carriers scrapped unlimited data plans. Last July, when Verizon pulled its unlimited data plan to match AT&T, subscribers rushed to stores in an effort to grandfather into all-you-can-eat data plans.


Months later, in the wake of tiered data pricing on AT&T and Verizon contracts for Apple iPhone and Google (GOOG) Android devices, Sprint outlined what could be seen as its last stand in wireless, joining AT&T and Verizon in offering the iPhone. Sprint's proposal, while not advertised on marketing billboards, was to offer iPhones with unlimited data plans that would be priced to reflect its weak national network.


The proposition to new subscribers would be a usable and cheap iPhone in the short-run and a promise to improve its network in coming years. Even with the $15 billion plan, few users jumped on. Investors also lacked confidence, pushing Sprint's shares to $2 to start the year, as bond investors priced in a 50% probability of bankruptcy.


Now, with bankruptcy off the table and Sprint's stock up to near $6, the telecom is all but assured of ending the year as the top-performing stock in the telecom sector after ending 2011 as the industry's worst performer. 


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