What a week for Sprint Nextel (NYSE:S) and its shareholders. The announcement on Oct. 15 that cellular behemoth Softbank of Japan will acquire a 70% stake in Sprint, providing much-needed support to its balance sheet in the near term, lit a fire under investors. The nearly 12% jump in Sprint's share price since rumors of the acquisition surfaced a week ago increased the value of the No. 3 player in the U.S. wireless market to a cool $17 billion.
It's all good for Sprint shareholders, right? Unfortunately, as so often happens after this type of news hits the street, things have gotten out of hand. You need look no further than Clearwire (UNKNOWN:CLWR.DL) -- in which Sprint owns a controlling interest -- for an example of just how crazy it gets when investors trade on news rather than fundamentals.
The deal, in all its glory
Though the acquisition isn't expected to close until the summer of 2013, Sprint won't have to wait that long before benefiting from Softbank's ownership. According to the terms of the $20 billion deal, Sprint will receive a touch over $3 billion that will convert to "New Sprint" shares -- at $5.25 a share -- when the deal is consummated next year. The idea is to jack up Sprint's balance sheet now, so it can seek out and destroy new wireless markets, and pursue new "opportunities." In other words, investing in spectrum (wireless air space), exploring acquisitions, and any other strategic initiatives that present themselves.
Of the total $20.1 billion purchase price, $4.9 billion will be used by Sprint to buy new shares at a $5.25 a share strike price right before the deal closes. The remaining balance of $12.1 billion, after the initial $3.1 billion cash infusion and the aforementioned $4.9 billion, will be used to purchase about 55% of Sprint from existing shareholders. That works out to around $7.30 per share, with Sprint's existing 3 billion shares outstanding -- not bad.
There are two primary opportunities Softbank CEO Masayoshi Son sees with Sprint, particularly in the U.S. The first objective is to crank up Sprint's data download speeds, which, according to Son, are embarrassingly slow compared to Japan's wireless experience. Of course, that's going to take massive investments in spectrum and technology to make happen, but that's the plan.
Phase two of the grand plan is to use the experience Son says he and Softbank have in what he refers to as "duopoly" markets. Here in the states, that means going head-to-head with the likes of AT&T (NYSE:T) and Verizon (NYSE:VZ). Sounds great on paper, but Sprint has a long way to go to make a dent in Verizon's and AT&T's leadership positions. With well over a 100 million subscribers a piece, both Verizon and AT&T have nearly twice the customer base of Sprint. That's a big head start.
And their forward earnings multiples of 15.78 and 13.69, not to mention dividend yields of 4.63% and 5%, respectively, place Verizon and AT&T at the head of the wireless investment alternatives for long-term Fools. Sprint? There are serious considerations that need to be part of the investment equation if you have Sprint on your radar.
One consideration is the explosion in Clearwire share prices this past week. Up over 100% since news of the deal began circulating last week, Clearwire's stock price bonanza is a perfect example of what happens when momentum drives investment decisions.
The primary winners of Clearwire's run-up are Sprint, Intel, Comcast and Craig McCaw. Why? Because as the schedule 13-D filed with the SEC on Oct. 3 indicates (intriguing timing, isn't it?), nearly 87% of Clearwire is owned by this group of fine folks. Great news for them, since they've doubled their respective investments in a timely fashion, but that leaves a mere 13% float.
Not that you'd want to touch Clearwire with a 10-foot pole, unless day trading is a pastime you partake of, since Clearwire is years away from making a splash. But it is indicative of how crazy things can get trading based on acquisition news.
The equivalent of $7.30 a share for existing Sprint shareholders come mid-2013 has a nice ring to it, no doubt. At a 40% premium above what Sprint is paying (the $4.9 billion at $5.25 a share) just prior to the deal being closed, I definitely likes the sound of $7-plus a share. But approval by Sprint shareholders and regulators still must be secured, and the immediate cash infusion is a band aid, not a cure, given how much ground Sprint needs to make up.
The Softbank acquisition of Sprint makes for an interesting story (global consolidation always does). But for long-term investors, the best investment opportunities in the cellular market -- Verizon and AT&T -- haven't changed.
Consolidating markets, particularly in technology, is a continuing theme. As technologies improve, so do investment opportunities. Here are a few cutting-edge tech stocks worth a look. Check them out for free in our special free report, "3 Stocks To Own For The New Industrial Revolution."
Tim Brugger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.