Shares of Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) are surging as merger talks between the two companies take a step up. Sprint’ parent company Softbank has made a basic agreement to go ahead with the combination proposal and acquire the fourth largest U.S. telecom provider.
Softbank has been keen on expanding in the US telecom market from the time it made a proposal to acquire Sprint. After acquiring majority stake in the Kansas carrier, it wishes to increase its footprint further and improve competitive strength through combination with T-Mobile. It’s therefore been working for months to pave way for the same.
Getting on to the Details
The two companies are still in the process of ironing out the deal structure. More importantly, they are still awaiting clearance from the Federal Communications Commission (FCC) for the combination. Both Sprint and T-Mobile together would have close to 100 million U.S. subscribers. This would help the combined entity come closer to bigger rivals AT&T (NYSE:T) and Verizon (NYSE:VZ) in terms of subscriber base.
- Warning! GuruFocus has detected 6 Warning Signs with S. Click here to check it out.
- S 15-Year Financial Data
- The intrinsic value of S
- Peter Lynch Chart of S
Softbank ideally desires to purchase half the shares of T-Mobile through Sprint. The Japanese wireless provider expects T-Mobile parent Deutsche Telekom, which has a stake of 67% in the Bellevue, Washington based carrier, to sell it share. Softbank would clear the transaction by partially paying in cash and the remaining through stock swaps. The estimated transaction cost is calculated to cross Y1.7 trillion.
Eight financial institutions are involved in creating credit lines for the deal. Three of the banks are based out of Japan, while other foreign banks providing assistance include J.P. Morgan Chase & Co. and Deutsche Bank. Sprint’s balance sheet is already debt burden and the company has been incurring huge interest cost year after year. So to keep finance cost at the minimum, Softbank would first raise funds using bridge loans, followed by corporate bonds issued by Sprint, and then finally assume long term borrowings.
Softbank too has a huge interest-bearing debt of more than Y9 trillion, yet raising loans in not a tough task for the telecom major. Banks have tremendous confidence in the company’s repayment ability – thanks to its solid domestic wireless operations.
The Key Concern
While all this indicates that financing the transaction wouldn’t be a difficult task for the company, this does not mean that the merger proposition is free of road bumps. The deal observation is subject to the agreement of the U.S. regulators, the FCC and the Department of Justice (DoJ). The watch dogs are required to screen the proposed deal and ascertain its effect on the joint entities and the industry at large. The entire process until approval might take as long as one to two years.
This could cost Sprint a lot, as the company is in no position to wait for such a long period. The purpose of join forces with another carrier to emerge as a stronger entity will get defeated if the process takes such time to win a go-ahead from the regulators. Deutsche Telekom is also worried about T-Mobile’s competitive position if it is restrained from making capital investments during the screening period. And if the proposal falls through, it would be an even bigger loss. In case this happens and the combination is not carried out, Deutsche Telekom wants Softbank to make compensation for the lost opportunity during the screening period.
The two sides are still working on the deal before they can officially make it public. There are several pros and cons that Sprint together with Softbank needs to weigh. The overall effect, if Sprint wins the deal and the two merge, would be positive for its future outlook and add competitive edge. But if somehow the deal is not passed, then it might be a big blow to the Kansas wireless provider. Not only would it mean paying a considerable compensation to T-Mobile, but losing out on time as well. All eyes remain glued until there are further updates on the deal.