U.S. stocks are in the red this morning, with the S&P 500 (^GSPC 0.87%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI 0.67%) down 0.88% and 0.77%, respectively, at 10:05 a.m. EDT.
SoftBank's final offer
Internet entrepreneur Masayoshi Son and his Japanese telecom group SoftBank appear to have finally bagged their prey with an improved offer for Sprint Nextel (S), the U.S.'s third-largest wireless carrier. Does the offer make sense for shareholders?
Softbank's new cash-and-share offer of $21.6 billion is $1.5 billion higher than its previous bid. Better yet, SoftBank lifted the cash component by $4.5 billion. Altogether, the offer values Sprint at $7.65 per share compared to $7.30 previously. Shares are currently trading at $7.33, up 0.3% so far today.
Assessing Sprint Nextel's valuation on the basis of a traditional price-to-earnings multiple isn't possible: The company has not earned an annual profit since 2006 (though it has been free-cash-flow positive throughout that period). However, according to data from S&P Capital IQ, Sprint's enterprise-value-to-EBITDA ratio is at the top of the range in a group of 11 comparable companies -- including SoftBank itself. (Enterprise value is equal to the company's market capitalization plus its net debt. EBITDA -- earnings before interest, taxes, depreciation, and amortization is a measure of cashflow.)
|
Enterprise Value to TTM EBITDA |
Enterprise Value to NTM EBITDA | |
|---|---|---|
|
Sprint Nextel |
8.6 |
6.6 |
|
SoftBank |
7.6 |
-- |
|
Group of 11 comparable companies*, high value |
9 |
6.6 |
|
Group of 11 comparable companies, median value |
6.3 |
6 |
*Includes Sprint Nextel. Source: S&P Capital IQ.
Long-term shareholders of Sprint have had an extremely volatile ride over the past five years, with shares suffering two substantial peak-to-trough declines (40%-plus and 50%-plus) after the market's March 2009 low:
However, the last 12 months have been good to shareholders: The shares have rallied 146%. Investors now have the opportunity to realize those gains through SoftBank's offer, which looks fair. Sprint's second-largest shareholder, hedge fund Paulson & Co., shares that assessment, supporting SoftBank's "improved financial terms."
It's time for investors to sell and move on.
