The latest numbers on valuation and share allocation regarding the Softbank-Sprint deal suggest that in creating a new Softbank-controlled Sprint, the two parties are using a combination of new share issuance and acquiring some existing shares from current shareholders. As discussed in the last post, we knew that buying out current Sprint shareholders alone wouldn't inject any cash capital into Sprint, the company, which is urgently needed and one reason for the deal. We also knew that issuing large amount of new shares not only would dilute earnings, but might not be in the favor of current Sprint shareholders in terms of how much Softbank ended up paying for its share purchase. The latter in particular could easily provoke shareholder rejection.
The latest deal proposal calls for purchasing 55 percent of Sprint's existing shares by Softbank and converting the remaining 45 percent into 30 percent for current shareholders in the new Sprint in which Softbank would have 70 percent in majority control. Based on this information, we have crunched out the numbers for the amount of shares needed to be issued and the total amount of shares for the post-merger Sprint. Given that Sprint currently has 2.999 billion shares outstanding, Softbank first acquires 55 percent of it, which is: 1.65 billion shares (2.999 shares * 55 percent). After the share acquisition, current Sprint shareholders will hold only 1.35 billion shares (2.999-1.65 or 2.999*45 percent). Because the 1.35 billion shares held by current Sprint shareholders will represent only 30 percent of the new Sprint, we can easily calculate the total number of shares that have been proposed for Sprint after the deal: 1.35 billion shares/30 percent = 4.5 billion shares.
Out of the total shares, 1.35 billion shares are held by current Sprint shareholders, 1.65 billion shares are acquired by Softbank from Sprint shareholders, and the rest are shares newly issued to Softbank, which equals 1.5 billion shares (4.5-1.35-1.65). So Softbank will control a total number of 3.15 billion shares, the sum of 1.65 billion shares bought from current Sprint shareholders and 1.5 billion shares purchased from new issuance. This of course represents a 70 percent stake (3.15/4.5) for Softbank, leaving current shareholders with only 30 percent (1.35/4.5) in the new Sprint.
Combining existing share purchase with new share issuance also gives current shareholders a more favorable treatment concerning valuation, a necessary incentive to gain shareholders' approval. Sprint's current shareholders' equity stands at $9.277 billion in total or $3.08 per share ($9.277 billion / 2.999 billion shares). Equity book value for a recapitalized Sprint with a reported $8 billion cash infusion would be ($9.277 billion + $8 billion)/4.5 billion shares = $3.84 per share. Therefore, the Softbank investment results in a 76 cent increase in book value for original Sprint shareholders regarding the remaining shares they still hold. Potential Sprint investors purchasing on the market will also see a slightly lower price-to-book ratio, a relative reduction in their investment costs.
The deal also gives Softbank the right to purchase additional shares at $5.25 per share, which would further expand Softbank's controlling interest. Moreover, Sprint stock is currently trading at above $5.25, and thus, the share warrant is already exercisable for immediate gains. It seems too good a deal for Softbank. But the bottom line is that Sprint will become essentially a foreign subsidiary of the Softbank holding company. With minority shareholder base potentially shrinking further and Softbank holding steady to their stake, trading liquidity of Sprint shares may also be negatively affected. Therefore, for only a limited increase in book value out of the Softbank deal, but a sure earnings dilution and uncertain future earnings for the new Sprint, U.S. investors may want to think of it twice when deciding whether to join as junior partners.
The latest deal proposal calls for purchasing 55 percent of Sprint's existing shares by Softbank and converting the remaining 45 percent into 30 percent for current shareholders in the new Sprint in which Softbank would have 70 percent in majority control. Based on this information, we have crunched out the numbers for the amount of shares needed to be issued and the total amount of shares for the post-merger Sprint. Given that Sprint currently has 2.999 billion shares outstanding, Softbank first acquires 55 percent of it, which is: 1.65 billion shares (2.999 shares * 55 percent). After the share acquisition, current Sprint shareholders will hold only 1.35 billion shares (2.999-1.65 or 2.999*45 percent). Because the 1.35 billion shares held by current Sprint shareholders will represent only 30 percent of the new Sprint, we can easily calculate the total number of shares that have been proposed for Sprint after the deal: 1.35 billion shares/30 percent = 4.5 billion shares.
Out of the total shares, 1.35 billion shares are held by current Sprint shareholders, 1.65 billion shares are acquired by Softbank from Sprint shareholders, and the rest are shares newly issued to Softbank, which equals 1.5 billion shares (4.5-1.35-1.65). So Softbank will control a total number of 3.15 billion shares, the sum of 1.65 billion shares bought from current Sprint shareholders and 1.5 billion shares purchased from new issuance. This of course represents a 70 percent stake (3.15/4.5) for Softbank, leaving current shareholders with only 30 percent (1.35/4.5) in the new Sprint.
Combining existing share purchase with new share issuance also gives current shareholders a more favorable treatment concerning valuation, a necessary incentive to gain shareholders' approval. Sprint's current shareholders' equity stands at $9.277 billion in total or $3.08 per share ($9.277 billion / 2.999 billion shares). Equity book value for a recapitalized Sprint with a reported $8 billion cash infusion would be ($9.277 billion + $8 billion)/4.5 billion shares = $3.84 per share. Therefore, the Softbank investment results in a 76 cent increase in book value for original Sprint shareholders regarding the remaining shares they still hold. Potential Sprint investors purchasing on the market will also see a slightly lower price-to-book ratio, a relative reduction in their investment costs.
The deal also gives Softbank the right to purchase additional shares at $5.25 per share, which would further expand Softbank's controlling interest. Moreover, Sprint stock is currently trading at above $5.25, and thus, the share warrant is already exercisable for immediate gains. It seems too good a deal for Softbank. But the bottom line is that Sprint will become essentially a foreign subsidiary of the Softbank holding company. With minority shareholder base potentially shrinking further and Softbank holding steady to their stake, trading liquidity of Sprint shares may also be negatively affected. Therefore, for only a limited increase in book value out of the Softbank deal, but a sure earnings dilution and uncertain future earnings for the new Sprint, U.S. investors may want to think of it twice when deciding whether to join as junior partners.
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