Softbank & Sprint Do a Deal

Posted by Sam Churchill on

Sprint and Softbank have reached a deal under which Softbank will pay $20 billion for a 70 percent stake in the wireless telecom operator, reports CNBC. Sprint held a webcast at 4:00 a.m. ET to announce the partnership.

Sprint says SoftBank will own approximately 70% and Sprint equity holders will own approximately 30% of the shares of New Sprint on a fully-diluted basis. Softbank has a document (pdf) explaining how the partnership would work.

While certain details are still being worked out, the boards of both companies have agreed in principle to the deal. The transaction calls for Softbank to buy $8 billion worth of shares directly from Sprint at a price of $5.25 each and tender for another $12 billion worth of the shares from existing holders at a price of $7.30 a share, a large premium to Sprint’s current price. Given the deal’s structure, it will not require a shareholder vote.

Combined, Sprint and Softbank will be the world’s third-largest carrier by sales with around $32 billion in annual mobile revenue. The companies will have around 96 million subscribers (compared to Verizon’s 111 million and AT&T’s 105 million).

Softbank CEO Masayoshi Son refused to rule out the possibility of forging deeper ties in the US market via a purchase of MetroPCS. Son described the deal as a “compelling market opportunity” for both players, talking up the “commonalities between the US and Japan.”

While a Sprint purchase of Clearwire was not announced, Sprint is reportedly working on that deal. Sprint needs to insure the governance for Clearwire is in its control prior to closing the Softbank transaction.

In 2010 SoftBank purchased Willcom’s 2.6 GHz spectrum and is implementing TD-LTE. Softbank is the Japan’s 3rd largest mobile operator with a market share of 23 percent, and a strong focus on data services.

A TD-LTE distributed base station consists of a remote Baseband Unit (BBU) with the advantages of modular design, small size, high integration, low power consumption and easy deployment.

The deal is huge for Softbank, the fastest-growing Japanese mobile-phone provider. They boosted their earnings by more than sevenfold over the past four years as the first carrier in Japan to offer Apple’s iPhone. That helped it close the gap with larger NTT DoCoMo (GSM) and KDDI (CDMA).

China Mobile, the world’s largest phone company, will use essentially the same technology (Time Division LTE-Advanced) as Clearwire and Softbank.

The combined market power of Sprint and Softbank could create a combined 100 million subscriber base — creating significant leverage and buying power for the nascent TD-LTE market.

The Softbank network gives us an idea of what Clearwire will be able to deliver, but also the challenges it could face. Ten microcells would have 10 times the capacity of one macrocell. That’s good for urban “hot zones”, not so good for suburban coverage. The average cost of 700 MHz spectrum was $1.28 a MHz pop but 2.6 GHz costs about $.25 MHz pop. You need at least ten times the microcells ($20K each) vs one macrocell ($200K each) for similar coverage.

But all the money in the world won’t change the fact that Verizon and AT&T each have 20 MHz in the 700 Mhz band, and Sprint doesn’t.

The LTE coverage and penetration enabled by 700 MHz macrocells gives the 1st and 2nd largest carriers in the United States a long term advantage. However, low frequencies rapidly run out of capacity. That will happen to AT&T in a couple of years. While, AT&T and Sprint will likely buy 600 MHz spectrum in 2014, the chips, phones and macrocells won’t be ready in time for AT&T.

Sprint must expand its 10 MHz 1.9 GHz spectrum footprint to be competitive and the adjoining MSS spectrum from Dish would be a pretty good fit. Verizon can expand into the AWS band as can T-Mobile. AT&T is stuck. They have few options.

Sprint might be better off acquiring the nationwide 40MHz footprint enabled by Dish’s 2.1 GHz spectrum rather than raise the stakes for MetroPCS. Sprint could then shut out AT&T. That would force the 2nd largest carrier into buying Sprint/Softbank spectrum at 2.6 GHz for a premium.

Legislators, however, want to pick the winners and losers. Ericsson, Alcatel-Lucent and Nokia Siemens would be potential beneficiaries of Congressional bets.

In their zeal to protect “national security”, Congress may kill the Chinese export market for the iPhone and dissolve a purported Intel/ZTE partnership for cloud basestations before it happens. India, the second largest mobile market in the world, will likely get their TD-LTE from China, not from any United States venture, if isolationist legislation is passed.

A comparison of LTE fees by Wireless Intelligence, a unit of the GSM Association, found Verizon Wireless charges $7.50 for each gigabyte of data downloaded over its LTE network. That is three times the European average of $2.50 and more than 10 times what consumers pay in Sweden, where a gigabyte costs as little as 63 cents.

A takeover of Sprint would require approval from U.S. regulators, including the Justice Department and the Federal Communications Commission, says CNBC. Given the importance of the industry to U.S. national security, any deal would also likely warrant a review by the inter-agency Committee on Foreign Investment in the United States, according to one Washington-based attorney who advises on mergers and acquisitions. The attorney said Japan’s status as a close U.S. ally would help Softbank.

Related Dailywireless articles include; Sprint & Softbank Discuss Merger, Japan & Korea: More LTE than USA , Intelligence Committee: Huawei & ZTE Security Threats , Dish Planning Internet-based TV Service?, Clearwire: On the Hot Zone , Japan and S Korea Report Big LTE Growth, SK Telecom Introduces Voice over LTE

Posted by Sam Churchill on Sunday, October 14th, 2012 at 5:09 pm .

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