Japanese firms, fueled by a strong yen and low interest rates, have spent $75bn this year on foreign deals with no evidence of a slowing down. Now Japanese mobile operator SoftBank has agreed to pay $20.1 billion for a 70 percent stake in Sprint, marking the company's largest overseas acquisition to date.
“This transaction provides an excellent opportunity for SoftBank to leverage its expertise in smartphones and next-generation high speed networks, including LTE, to drive the mobile internet revolution in one of the world’s largest markets," stated SoftBank's billionaire founder and chief, Masayoshi Son, in a joint press release.
"As we have proven in Japan, we have achieved a v-shaped earnings recovery in the acquired mobile business and grown dramatically by introducing differentiated products to an incumbent-led market. Our track record of innovation, combined with Sprint’s strong brand and local leadership, provides a constructive beginning toward creating a more competitive American wireless market.”
The deal provides access to the US market still showing growth while SoftBank's home market is stagnant, while giving the Japanese brand an immediate cash infusion, positioning it to better compete in the highly lucrative smartphone market.
CNBC's David Faber, who was all over the deal on his Twitter feed this morning, also commented that "The purchase is a huge one for Softbank, which is essentially making a $20 billion gamble that its success in developing LTE wireless services in its home market of Japan can be translated to the U.S. Sprint, while the third largest wireless provider in the U.S., significantly trails the two market leaders and AT&T."
While calls for consolidation in the telecom industry by U.S. analysts have been strident, Japan as the catalyst came as a surprise, as the Guardian notes: "There is always a risk when you face a big challenge," said Son. "It could be safe if you do nothing and our challenge in the US is not going to be easy at all. We must enter a new market, one with a different culture, and we must start again from zero after all we have built. But not taking this challenge will be a bigger risk."
The new company will have 96 million users and combines Sprint’s net debt of about $15bn and SoftBank’s of about $10bn, causing S&P's warning in the Guardian that the deal "may undermine Softbank's financial risk profile" and pressure its free operating cash flow for at least the next few years.
Similar skepticism met Son’s purchase of Vodafone's Japan unit for $15.5bn in a 2006 deal that successfully catapulted them into the mobile carrier business, despite substantial debt from the leveraged buyout.
Sprint will use some of the deal proceeds to purchase the remaining parts of Clearwire and position it, along with Softbank, in a stronger position against Apple’s KDDI domestically and market leader NTT Docomo, soon to offer Apple's iPhone. There's also speculation that with Sprint in hand, Softbank may come after US carrier MetroPCS, which is about to merge with T-Mobile USA.
"There couldn't be a better time for this infusion of cash," stated Hesse, who will remain at the helm after the merger, noting that the funds could be used to grow the business "both internally and externally," and that Sprint's board wants to "learn from Masa."
SoftBank's investments include Alibaba, Zynga and Yahoo Japan, and while the Sprint acquisition increases its reach and size, the risks are equally portentous. “While it would gain scale for procuring handsets and telecommunication equipment, SoftBank would be taking on a heavily indebted carrier in a market dominated by bigger competitors, and operating in a country where it has no experience,” notes the WSJ.
Sprint didn't post anything on its website (other than the press release) or Facebook page to inform customers about the deal, while SoftBank received more than 4,000 likes on Facebook after posting the news and the photograph above this morning.
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