Sprint's shotgun marriage to Softbank

The telecom giant has been stuck in a weak third place behind AT&T and Verizon Wireless. Will this new deal gain it some ground?

By Jonathan Berr Oct 15, 2012 11:45AM
Pair of wedding rings copyright Fancy, AlamyWhen Daniel Hesse was named as the CEO of Sprint (S) in 2007, he promised to "lead Sprint to the forefront of the wireless industry." The company has fallen well short of that lofty goal and has been left with little choice but to sell a 70% stake in itself to Japan's Softbank.

Sprint, whose shares are rising on news of the deal, has been gun-shy ever since its disastrous 2005 acquisition of Nextel, which lead to a $30 billion write-down. That deal fell apart because the wireless industry changed from being voice-based to data-based, according to independent telecommunications analyst Jeff Kagan. 

The company has been mired in third place behind larger rivals AT&T (T) and Verizon Wireless (VZ) and has had little hope of gaining traction, which is why the Softbank deal is so critical. 

That's especially the case in the wake of the planned merger between Deutsche Telekom's T-Mobile USA and MetroPCS (PCS), the fourth- and fifth-largest players. Sprint reportedly tried to merge with both companies.

"They are in a weak third position," Kagan said in an interview, adding that the Softbank deal "is going to give Sprint breathing room."

Under Softbank's control, Sprint, which will retain its current management team, will be able to spend the billions needed to bring its network up to the 4G speeds of AT&T and Verizon. The caveat is that the larger rivals are going to spend big bucks on their own networks as competition in the U.S. wireless market intensifies. Of course, all that will depend on whether U.S. regulators go along with having a U.S. communications company taken over by a Japanese one, which has never happened.

"Customers should not expect to see any changes for at least a year or two," Kagan said. "This is going to allow Sprint to maybe come up to AT&T and Verizon speeds."
 
Before Hesse joined Sprint, it was "crashing and burning," according to Kagan, who added that the company has since stabilized. He has been paid well for his efforts. In 2011, Hesse earned $11.9 million in total compensation, a 31% increase over the previous year. According to Sprint's latest proxy filing, Hesse may be eligible for a payment of about $16 million if there is a "change in control" of the company.  Sprint Spokesman Bill White points out in an email to MSN that "Dan will not be eligible for a CIC (Change In Control) payment once the SoftBank deal closes unless he was involuntarily terminated without cause or resigns with good reason within eighteen months of the deal closing."   The transaction is expected to close by mid-2013. As Bloomberg News noted, under Hesse's leadership 7.7 million contract customers left Sprint because difficulties in integrating the Nextel network hurt service. 

Combining Softbank and Sprint would create the world's third-largest mobile phone company by revenue, with 96 million users. Investors in Japan don't seem enthused about the deal, which is expected to close in 2013, and have sent shares of Softbank falling in Tokyo. Softbank, though, sees far better growth potential in the U.S. than in its home market.

This marriage is risky for both companies. Whether it is fruitful remains to be seen.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr. This post has been updated to add a comment from Sprint.



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