Softbank-Sprint tie-up gets bad signal from market

October 12, 2012

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By John Foley

Softbank chief executive Masayoshi Son has received a strong signal from investors. They wiped $6.2 billion in value off the Japanese telecoms operator’s market value on Oct. 12 after it confirmed it was in talks with U.S. rival Sprint Nextel. That’s three times more than U.S. investors added to Sprint’s worth the previous day. No wonder: a takeover would be a financial stretch for Softbank, and could preclude other deals closer to home.

The 17 percent fall in Softbank’s shares may be mostly shock. Softbank has spent the last five years paying down debt it took on when buying Vodafone’s Japanese mobile business in 2006: net debt has fallen from five times ebitda after that deal to 1.5 times at the end of 2011. The plan, until now, was to be debt-free by 2015. A recent all-stock $2.2 billion deal with e-Access suggested the company was being prudent with its balance sheet.

Besides, it’s not as if Son lacks other options. Despite losing its de facto monopoly over selling iPhones in Japan last year, Softbank recently secured access to prized 900MHz spectrum, and retains promising investments like its 32 percent stake in Alibaba. The Chinese group’s successful Taobao unit may one day make for a mega-sized IPO.

A bid for Sprint isn’t impossible. Say Softbank bought two-thirds of Sprint at a 30 percent premium to the pre-talks price, or $13 billion. Compare that to its share of the $3 billion in operating profit analysts expect Sprint to make in 2015, taxed at 30%, and that’s still an attractive 12 percent return, before financing costs. That’s before the synergies that would come from group buying of handsets – or closer collaboration with Sprint’s 50-percent owned subsidiary Clearwire, which runs a similar technology to Softbank’s.

But loading up on debt now might preclude more logical deals. Softbank owns 40 percent of listed subsidiary Yahoo Japan, the crown jewel of its growing internet business. Buying out the rest would cost $12.6 billion at market prices, and make a lot more sense. Son, who once threatened to set himself on fire in protest at Japan’s ministerial bureaucracy, is known for his chutzpah. In this case, what shareholders would prefer is discipline.

 

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