SoftBank's Audacious CEO Has Hard Choices to Make on Sprint
Masayoshi Son, Softbank CEO, just negotiated himself into a corner.
(Bloomberg) -- Masayoshi Son, celebrated Japanese dealmaker, just negotiated himself into a corner.
Son’s SoftBank Group Corp. ended talks Saturday to combine its Sprint Corp. with T-Mobile US Inc., a merger that would have united the third- and fourth-largest wireless operators in the U.S. In the end, the 60-year-old billionaire balked at the idea of giving up control over the company he sees as central to his vision of the future.
The harsh reality for Son now is that Sprint can’t make it on its own. The Overland Park, Kansas-based company hasn’t had a profitable year in a decade and carries a debt load of $38 billion. About half of that is coming due in the next four years, just as Sprint will have to invest billions in next-generation wireless technology to compete with larger rivals.
It’s a dilemma that will test the Japanese billionaire’s dealmaking skills -- and willpower. He needs to pull off a longshot transaction with another partner to get Sprint back on solid ground -- or dig into his own corporate pocketbook to pay for its liabilities, along with network investments that analysts project at about $25 billion through 2021.
“At this point, maybe Masa has to give up on strategic options and simply invest in the United States to make Sprint’s network and brand competitive,” said Walt Piecyk, an analyst with BTIG LLC.
Sprint and T-Mobile jointly announced the decision to end talks on Saturday, without going into detail about what went wrong. Son had begun to have second thoughts about the sale after a meeting with his board a week earlier, according to people familiar with the matter. Then over dinner Friday night in Tokyo, Son and Tim Hoettges, chief executive officer of T-Mobile parent Deutsche Telekom AG, made a last-ditch effort to resolve how to share control of the combined company -- but couldn’t reach a solution, people familiar with the matter said.
Ultimately, Son saw giving up full control of Sprint as antithetical to his view of technology’s future. He’s invested billions in the past two years on the idea that smartphones, cars, roads, appliances and humans themselves will be connected through the internet, generating invaluable data to be analyzed with artificial intelligence and machine learning. He sees a realization of the singularity, where people live with technology integrated in their bodies, sooner than most people think. Wireless and satellite services are central to bringing that all together.
SoftBank is scheduled to report earnings Monday in Tokyo and will inevitably face questions about its plans for Sprint. Sprint will hold an investor day soon so CEO Marcelo Claure can detail its strategy for going forward alone in the U.S., the people said, asking not to be identified discussing private information.
SoftBank shares fell 2.6 percent in Tokyo trading. They had climbed more than 30 percent this year before today.
Over the weekend Claure took to Twitter to defend the decision to move on from T-Mobile. He wrote a series of 10 tweets on the topic including: “Excited about @Sprint’s future as a standalone. I’m confident this is right decision for our shareholders, customers & employees.”
One clue to what the future holds is an agreement announced Sunday that allows cable operator Altice USA to sell wireless service using Sprint’s network. Under the deal, Sprint will use Altice’s broadband infrastructure to strengthen its nationwide network.
The logic of a Sprint combination with T-Mobile had been that it would bring together Sprint’s spectrum and T-Mobile’s subscriber base to create a stronger third player in the U.S. wireless market. The merged companies would have been able to save billions on investments in next generation 5G high-speed technology.
Unlimited Promotion
T-Mobile and Sprint have relied on heavy phone discounts and incentives such as unlimited data service to take on larger rivals AT&T Inc. and Verizon Communications Inc. As merger talks stalled, shares of all four companies fell amid prospects the industry would return to the intense price wars that have put pressure on profits.
Son has already scraped up almost every penny from Sprint’s coffers. The company used its airwaves as collateral to refinance debt and turned to handset sale and leaseback transactions to fund customer acquisition. There’s little left to mortgage.
“These creative debt structures are probably not going to be sufficient when you are looking at an accelerated network build for 5G,” said Kirk Boodry, an analyst at New Street Research.
Son will struggle to find a better-suited partner. SoftBank previously reached out to John Malone’s Charter Communications Inc. about a combination, but Charter, more than three times bigger than Sprint, was cool to the idea, people familiar with the matter said in July. Charter declined to comment. There’s little interest in reviving those plans, people familiar with the matter said.
Airwave Licenses
Sprint has the most airwave licenses among the top four U.S. wireless carriers. The largest supply of this spectrum is in the 2.5-gigahertz band, which represents an abundance of largely untapped network capacity. That airwave portfolio may make it cheaper for Sprint to roll out faster 5G services than competitors, according to Masahiko Ishino, an analyst at Tokai Tokyo Securities.
Even with an airwave advantage, Sprint has not spent enough on network improvements to deliver on a promise made in 2015 by Claure, who said he would have the best or second-best quality network by 2017. After slashing capital spending in half to buy time for M&A options, the company will need to spend additional billions to build out the network, Piecyk said.
Sprint spent less than $2.5 billion in its network over the prior 12 months compared to the $6.0 billion T-Mobile spent, Piecyk said. To catch up, “Sprint would need to more than double its capital investment, which the company would not be able to fund from operating cash flow.”
Debt Load
Sprint has $19 billion of bond and loan principal payments due over the next four years. The company may produce less than $500 million of free cash flow for fiscal 2017 while capital expenditures related to its wireless network may total about $3.75 billion, according to Bloomberg Intelligence analyst Stephen Flynn.
SoftBank’s investors have not anticipated providing the U.S. company with financial support. Sprint’s debt is non-recourse to the parent, meaning the Japanese company will not owe anything to its U.S. unit’s creditors. And SoftBank, which already carries one of the heaviest debt loads in Japan with 14.9 trillion yen ($131 billion) in long-term debt, has shown little interest in offering financial support.
“Sprint’s earnings are improving as planned and the company could conceivably go it alone,” Son said at an earnings briefing in August. “But, in order for the company to grow further, we are considering multiple consolidation options.”
On Sunday, SoftBank said it intends to increase its stake in Sprint through share purchases on the open market. The increased holding won’t top 85 percent, the company said.
Son, who previously has said he spent almost every evening on the phone dealing with Sprint’s turnaround, is turning his attention to new endeavors. SoftBank last year bought chipmaker ARM Holdings Plc for $32 billion in the largest deal of his career and is in the process of creating a $100 billion technology fund. SoftBank Vision Fund already raised more than $93 billion in total commitments from the Public Investment Fund of Saudi Arabia, Apple Inc. and other large institutional backers, while SoftBank itself is contributing $28 billion.
“I don’t think it will get to a state where three years out you are still having these discussions and Masa is still worrying about Sprint rather than thinking about all the tech investments that excite him,” said Atul Goyal, an analyst at Jefferies Group.
--With assistance from Alex Sherman
To contact the reporters on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net, Scott Moritz in New York at smoritz6@bloomberg.net.
To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Peter Elstrom, Bruce Rule
©2017 Bloomberg L.P.