Softbank Knows It Needs More Than Sprint, but It Had Better Act Fast

Softbank and Dish Networks look like two companies quickly moving toward one, but T-Mobile might serve as a curveball.

Sep 1, 2014 at 10:00AM

Ever since Softbank (NASDAQOTH:SFTBY) became the majority owner of Sprint (NYSE:S), merger and acquisition activity has been up, with buyouts of Clearwire and an attempted merger with T-Mobile. Clearly, Softbank knows it needs more than just Sprint to be relevant in the U.S., and after the failed acquisition of T-Mobile, Softbank appears to have something big in mind. Softbank needs to act fast, though!

Softbank and Sprint set their targets
Recently, news of Softbank's plan to sell nearly $4 billion in five-year bonds became public. While Softbank says the goal is to pay off existing debt and finance future investments, the fact that the company already has roughly $19 billion in cash on its balance sheet could be an indication that Softbank wants to attempt another large acquisition of sorts, perhaps a company to strengthen Sprint's competitive landscape.

Specifically, Sprint has lost over 600,000 subscribers during the first six months of 2014. Meanwhile, T-Mobile has gained more than three million; Verizon and AT&T have also gained in the first half of 2014. Nonetheless, Sprint is experimenting with lower-cost plans, but the problem is, Sprint has a hard enough time making debt payments with its current operations. Therefore, lowering its average revenue per user will make matters worse if new customers are not attracted quickly, meaning there's a lot of risk surrounding Sprint right now.

With that said, there have been a lot of rumors in recent months regarding where Softbank might want to invest, companies it could acquire to bolster Sprint's competitive position. Some have speculated the music and entertainment industries as potential targets, but if you're Softbank CEO and billionaire Masayoshi Son, Dish Networks (NASDAQ:DISH) is the real prize, an asset that could make a difference. 

Ergen really wants it
Importantly, Dish Networks Chairman Charlie Ergen has been wanting a telecom presence for the better part of two years. Ergen tried relentlessly to block Softbank's purchase of Sprint, then he tried to acquire Clearwire before losing the bidding war to Sprint.

Ergen's acquisition attempts began after Dish's airwaves were cleared for cell phone service back in 2012. As a result, Dish then gained spectrum that's valued north of $12 billion, but without a mobile presence, that spectrum is essentially useless. Notably, spectrum is used to improve the flow of data, so more spectrum equals more reliable data speeds.

As a result, it seems reasonable that Dish Networks would welcome a bid by Softbank, strengthening Sprint's network with additional spectrum, giving Dish the telecom presence it seeks, and allowing both companies to compete with AT&T following its purchase of DirecTV (NASDAQ:DTV). Not to mention, with Dish and Sprint being smaller than their noted peers, Softbank is unlikely to face too much regulatory backlash.

Albeit, Dish Network's market capitalization of nearly $30 billion would make it a very pricey acquisition, not including its $13.5 billion debt position. However, Softbank is an acquisitive company, completing more than $50 billion worth of deals over the last five years. Therefore, it makes sense that Softbank could make a run at Dish, and it would definitely explain its desire to raise money so soon after the T-Mobile buyout fell apart.

Options galore
With that said, there's a lot of excitement surrounding Dish Networks right now, as the failed acquisition attempt of T-Mobile has put it in a good situation to finally gain a wireless business regardless if it's purchased by Softbank. Furthermore, with T-Mobile having five consecutive quarters of at least 1.5 million net new customers, Dish might prefer T-Mobile over a very troubled Sprint. In fact, Charlie Ergen recently said, "The Sprint announcement probably increased some optionality that we had," after the T-Mobile deal fell apart, signaling potential action involving Dish and one of the two carriers.

Hence, it shouldn't take long for Dish Networks to find itself in the news, because after years of trying, the company could get the asset it has wanted for so long. The big question is whether it's Sprint or T-Mobile. Therefore, if Softbank doesn't hurry, it might find itself in a situation where it's facing two very large wireless providers who also own the Nos. 2 and 3 satellite businesses in the U.S.

As for T-Mobile, it continues to benefit from the combined $6 billion in cash and spectrum it received from AT&T after their deal fell apart, which has given T-Mobile an exceptional amount of operational flexibility over the last year. In other words, T-Mobile doesn't need Dish like Sprint does.

Foolish Thoughts
Hence, if Sprint thinks competing against AT&T, Verizon, and T-Mobile is hard now, it could get worse if DirecTV and Dish are added to the mix. However, if Softbank can acquire Dish, Sprint would gain an asset that only one of its competitors own, which could reignite excitement among consumers and attract new subscribers to its stores. The next few months should be very exciting with Dish Networks being added to the mix.

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Brian Nichols owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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