Would You Buy Sprint Stock If Softbank is Investing?

The U.S. wireless market was suddenly sent roiling, at least for Sprint (S), when T-Mobile said it was planning to buy MetroPCS (PCS). A combined wireless services of the two companies would post immediate challenges for Sprint, but less so for larger carriers Verizon and AT&T (T). Likely responding out of some kind of reactionary pressure, Sprint declared that it would consider a potential purchase of MetroPCS as well. We said in the last post that this would be a tough and costly proposition for Sprint. So indeed, a couple of days later, Sprint came out again, saying that it is holding off the idea of counter bidding for MetroPCS. 

If we take a brief look at Sprint's balance sheet, we would realize that Sprint really doesn't have the financial resources to carry out a competitive bid against T-Mobile, or anyone else for the matter. Sprint currently has about $5 billion in cash and equivalents, while the market capitalization of MetroPCS is over $4 billion. Adding some premium on top of the market price, a Sprint purchase of MetroPCS would almost empty Sprint's cash reserve, leaving it with little going forward. What about financing with debt? Well, not feasible either. Sprint already has over $20 billion in long-term debt, nearly twice the amount its total equity of around $11 billion. Taking on more debt would be certainly a no no. Again, it's a tough situation for Sprint. Obviously, the company wishes that it could do something in terms of further expanding its network reach, which would help it not only defend against a potential alliance between T-Mobile and MetroPCS, but also catch up to its bigger rivals. 

So, retreating from its impulsive thought of directly bidding against T-Mobile for MetroPCS, Sprint now plans to team up with Softbank, the rich Japanese wireless carrier and Internet company, for needed financial support. But how good would such a deal be for current and potential Sprint investors? Details of a potential deal have not been reported, But in all likelihood, any deal with Softbank would have to involve new share issuance by Sprint, with the shares purchased exclusively by Softbank. This way, Softbank would gain certain control of Sprint, while Sprint would receive additional capital. A softbank's amassing existing Sprint shares on the open market or through a tender offer probably would give Softbank the same control, but wouldn't result in any capital injection for Sprint as a company. So such a deal maneuver is unlikely, given Sprint's urgent financing objective.

With new share issuance, one thing would be certain for existing investors: a current and likely near-term earnings dilution, which could have a negative impact on the stock price. In addition, depending on how much Softbank may pay for each share, compared to Sprint's current book value per share, the large capital injection may not have any immediate and direct benefit befallen on current shareholders. Some deal numbers that have appeared in some reports suggest that Softbank may purchase a majority stake at about the current book value without agreeing to any significant premium. Sprint now has almost 3 billion shares outstanding, and selling a majority stake means that Sprint must issue at least another 3 billion shares to Softbank, pushing out Sprint's current major shareholders in the process. While Sprint stock is trading at $5.73 as of 10/12, its book value is only a little more than $3. Thus,  betting on a Softbank deal, prospective outside investors buying on the open market would unfortunately lose out to Softbank, which has the right to purchase shares at a negotiated lower equity value. 

With Softbank's involvement, Sprint may be better off in the long run and become a legitimate contender to Verizon and AT&T. But since there wouldn't be anything to gain for shareholders and investors at the deal outset, the one-day jump in the stock price after reports of a potential deal really showed a misunderstanding of the nature of the deal. It'd be wise that investors try not to sprint ahead with the two deal parties at this point.