What will an $8 billion check from Softbank buy Sprint?
- 15 October, 2012 22:35
If US$8 billion shows up in Sprint Nextel's wallet as planned in Softbank's proposed takeover, the No. 3 U.S. mobile operator may pay off debt, speed up its rollout of LTE, or even buy its network partner, Clearwire.
Softbank's $20.1 billion bid for 70 percent of Sprint includes a capital infusion of $8 billion, a healthy chunk of change that the carrier sorely needs as it battles both cellular giants AT&T and Verizon and an aggressively growing T-Mobile USA, industry analysts said on Monday. Announcing the deal, the companies said the money would go toward network enhancement, "strategic investment" and strengthening Sprint's balance sheet.
If regulators approve the deal, the cash will let Sprint service its debt and buy equipment for its emerging LTE network, Gartner analyst Phillip Redman said. "No one knew where it was going to get the money to do that," Redman said. Sprint has suffered years of losses and listed nearly $21 billion in long-term debt, financing and capital lease obligations at the end of the second quarter.
The sum equals about 18 months of capital spending by Sprint, which is hurriedly building out a new, flexible infrastructure called Network Vision that can host a variety of technologies and frequency bands. That buildout is key to Sprint's LTE network as well as enhancements to 3G, the phasing out of its aging iDEN network and future spectrum-hosting partnerships.
"It buys them the rest of Network Vision," said Roger Entner of Recon Analytics. That may mean Sprint can turn on LTE in new markets sooner, extend the reach of the network or ultimately boost its speed. "It gives Sprint a lot more flexibility," Entner said.
Sprint has just two paired blocks of 5MHz each for its LTE service, only half the spectrum that AT&T and Verizon have in most markets. "Five by five is a good start, but everybody knows this is just the nucleus of an LTE network." Entner said. Verizon already offers LTE in more than 400 markets and AT&T plans to reach 100 this year. T-Mobile won't turn on the new technology until next year but has a better spectrum position than Sprint and is looking to bulk up by merging with MetroPCS.
The key to more spectrum and higher speeds may be Clearwire, the WiMax carrier that has supplied Sprint's existing 4G network for years. Softbank and Sprint didn't say much about Clearwire on Monday, but analysts think they eventually will tap into that company's massive reserves of spectrum. Clearwire, which Sprint helped form through a joint venture in 2008, has well over 100MHz of frequencies in most markets. Some of those originally belonged to Sprint.
The match between Clearwire and the merged company, to be called New Sprint, looks even better in the light of Softbank's current business. In Japan, it operates an LTE network in the same band as Clearwire's, using the same type of technology, called TDD (time-division duplex) LTE. That's different from the system most LTE carriers use, so Softbank would have a lot to gain from running two such networks, Ovum analyst Daryl Schoolar said. It could give the company more clout with manufacturers to get smartphones built for the networks, plus more economy of scale to lower handset costs, he said.
There's probably enough money in that $8 billion pot for Sprint to buy Clearwire outright, Entner said. Clearwire is worth about $4.3 billion including its cash and debt, and Sprint already owns nearly half the company, he said. "The long-term plan for Sprint was always to buy out Clearwire," Entner said.
Even if it doesn't buy the company, Sprint will want to help Clearwire, Ovum's Schoolar said. "I would be surprised if they weren't using this money at least to make Clearwire stronger," he said. The two companies already plan to have Clearwire's future LTE network add capacity to Sprint's. With new technologies for smoothly shifting customers to the stronger of the two networks, they could bring much more of Clearwire's spectrum to bear, Schoolar said.
Entner believes a combined Sprint and Clearwire could use an emerging LTE technology called carrier aggregation to bundle spectrum from both networks, in different bands, into one very high-capacity system. That would make them much more competitive against AT&T and Verizon. "You're talking about a sleeping giant," he said.
However, Sprint may not even need its Softbank pot of gold to take control of Clearwire's spectrum.
"No need to buy out Clearwire," Gartner's Redman said. "It will fizzle out itself, Sprint will reclaim its spectrum and roll out LTE on its own. Clearwire was a mistake to begin with and a big factor in its financial problems."