Softbank's Investment In Sprint Nextel: The Question of CASH

Sprint Nextel Corporation (NYSE:S) recently announced a sale of 70% of its enterprise to Japanese Carrier Network, Softbank Corp (TYO:9984), in a deal believed to be worth about $20.1 billion, with $8 billion set to be received in the form of cash, $3 billion upfront. However, there have been all sorts of questions regarding the cash, with some analysts unsure whether it is enough, while others, feel that Sprint Nextel shareholders may not be able to enjoy the full benefits of the advanced cash, due to lack of accelerated investment projects.

Softbank's Investment In Sprint Nextel: The Question of CASH

The deal will see Sprint boost its balance sheet, via the infusion of the $8 billion, with the remaining $12.1 billion issued in the form of shares of the new Sprint Nextel to Softbank Corp (TYO:9984), which would translate to about 55% ownership. Notwithstanding, the biggest challenge, is that of putting the $8 billion cash into effective use. However, Nomura Equity Research analysts feel that Sprint has a pool of opportunities, in which it can choose to put the $8 billion.

There is speculation that Sprint could be interested in acquiring the $1.5 billion valued Clearwire, as well as bidding for MetroPCS, whose $150 million termination fee with T-Mobile U.S is seen as a cheap huddle. In addition, the analysts note that Sprint could play a big part in the several spectrum auctions expected next year.

It is critical that Sprint Nextel Corporation (NYSE:S) invests, profitably, the cash added to the business to avoid dilution of equity. The transaction between Sprint Nextel Corporation (NYSE:S) and Softbank Corp (TYO:9984) is expected to soar the new sprint shares count by close to 50%.

The analysts note, “Stand-alone Sprint could achieve a 20% Wireless Service EBITDA margin in 2015, something today’s proposed deal does not negatively impact,”adding,” the absence of an accelerated growth plan, material cost savings, or funding another synergy-driven merger may limit the benefits of cash to current Sprint shareholders”.

Goldman Sachs Group, Inc. (NYSE:GS) equity analysts believe that there is a big question mark over Sprint Nextel’s $3 billion upfront cash infusion from the deal, as the wireless and telecommunications company has ample cash and minimal maturity risk in the near term. The analysts note that the company’s latest comments indicate that Sprint Nextel Corporation (NYSE:S) has not been able to consider a full range of strategic options besides the culminating balance sheet limitations.

Goldman Sachs analysts resolve that the upfront cash of $3 billion could end up being used for consolidation purposes in case anything surfaces before the deal is closed. This relates very well with Nomura’s viewpoint that the deal could face some hurdles from the shareholders before it can finally go through. It does bring in some level of justification, as to why the upfront payment has been proposed.

Nonetheless, the two sell side analysts do have different opinions with regard to the average price per share in the deal, as compared to the current market price and forecast 12-month price. Goldman Sachs estimates a revised 12-month price target of $6.00, as compared to Nomura’s 12-month target price of $7.00 per share. The estimated offer price per share by Nomura indicates that in Goldman Sachs’ case, Softbank is buying Sprint Nextel Corp. (NYSE:S) stock at a premium, while in, Nomura’s case, the Japanese carrier is buying at a discount.

However, if compared with the current market price of about $5.69 per share, it is evident that Softbank is buying at a premium, although, the current price does not factor the outcome of this transaction.


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