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Japanese Purchase of Sprint Is an Act of Desperation

October 18, 2012 | About:
For those who might have missed the news, a Japanese company is buying American mobile phone operator Sprint Nextel (S).

By buying Sprint, SoftBank will jump from being Japan’s third-largest mobile provider to being one of the largest providers in the world.

But Sprint?

Sprint is a mess. I recommended the company last year as a deep value play, as the company was priced so cheaply as to be worth more dead than alive. But I never — at any point — believed that Sprint was a quality company. It was a cigar butt with a few puffs left in it and nothing more.

What’s more, Sprint is in that unenviable position of being “stuck in the middle.” With only 16% of the U.S. market, Sprint lacks the scale of an AT&T (T) or Verizon (VZ), and its high debt load makes growth difficult to manage. Yet Sprint is too big and bloated to compete with smaller upstarts like MetroPCS (PCS) that appeal to cost-conscious consumers and pre-paid subscribers.

So why SoftBank’s interest?

The answer to that question is easy. They’re desperate for mobile subscribers anywhere they can get them, even at an also-ran like Sprint.

You see, Japan is dying. Literally. The Japanese population is actually shrinking, as deaths due to old age outpace new births, and aging. Roughly a quarter of the Japanese population is already over the age of 65.

How do you grow a mobile phone service when you have fewer consumers to sell to every year — and when the consumers you have are aging and using their phones less?

The answer, of course, is that you don’t. And the same is true of virtually all Japanese companies.

Readers might think back to the 1980s, when it seemed like Japanese corporations were taking over the world. They even owned — gasp! — the Pebble Beach golf course and Rockefeller Center. A severe stock market and real estate crash put the brakes on Japanese ambition, but demographic necessity suggests that Japanese companies will go on another binge of acquisitions, and soon.

In the 1980s, they bought trophy assets like Rockefeller Center. Today, they buy burned-out cigar butts like Sprint. How the mighty have fallen.

They’re buying more than Spint, however. $FILE/EY_JPN_OUTBOUND_FINAL.pdf">Ernst & Young reported that Japanese purchases of foreign assets were up 81% last year

This is a trend that I see having legs. Investing in it is a little trickier, however.

Anticipating what the Japanese will buy and getting in line before them is tricky; few investors would have seen the SoftBank deal coming unless they had already been intently studying the global telecom sector.

Japan is buying U.S. Treasuries — the country recently retook its place as America’s biggest creditor from China — but it’s hard to see much upside when the 10-year Treasury yields less than 2%.

After being chronically overpriced years into a secular bear market, Japanese blue chips are finally what I would consider cheap, or at least close to it. By the Financial Times’ estimates, Japanese shares trade for 13.3 times earnings, about on par with the U.S. Dow Industrials. But Japan’s largest companies tend to be heavily exposed to their slow-growth domestic market, making them a little less than exciting.

It’s hard to find much to like among large, liquid Japanese stocks. As I wrote recently, Sony (SNE) has trailed Apple (AAPL) as a consumer electronics company and seems to be a company without direction.

Toyota (TM) and Honda (HMC) are fine auto companies with a global reach — and Honda sports an attractive dividend of 3.1 percent — but both are too heavily exposed to Japan’s shrinking market to be worth owning. The story is much the same among Japan’s other large-cap titans.

Perhaps the best course of action would be to simply avoid Japanese equities and focus instead American and European firms with a more global reach.

Sizemore Capital has no position in any security mentioned.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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