Softbank’s investment in Sprint Nextel explained

Author: Ashley Lee | Published: 24 Oct 2012
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Softbank’s $20.1 billion investment in Sprint Nextel is the largest US inbound acquisition by a Japanese company. But what’s especially interesting is that the target remains a public company.

Softbank’s acquisition of a 70% stake in the US’s third-largest wireless operator signals the Japanese company’s intent to move into the US’s wireless space, long considered a duopoly. Moreover, the deal structure allowed the company to remain listed.

Morrison & Foerster Tokyo managing partner Kenneth Siegel, who advised Softbank, said that this represents one of the first times a major Japanese acquisition has remained public.

“Virtually all major Japanese acquisitions have been for significant minority stakes or full take-privates,” he said. “It’s unusual for a Japanese acquirer to leave the target public with a view that it will add value through strategic advice and capital support.”

Moreover, Siegel said that Softbank’s acquisition of Sprint represents an enormous commitment to expand globally based on its success in the Japanese market.

“Softbank has been successful given the duopoly of KDDI and NTT DoCoMo, and saw a similar market structure in the US but with dramatically better growth prospects,” he said.

But Siegel added that Softbank wanted to ensure that Sprint had a strong balance sheet from the announcement date. The company has significant debt and capital requirements going forward so there was an interest in identifying a structure to recapitalie the company on both a short-term and long-term basis, he said.

Ultimately the transaction required a complex structure with Softbank paying $12.1 billion to Sprint shareholders and injecting a further $8 billion in capital to strengthen Sprint’s balance sheet.

Softbank formed a US holding company with two subsidiaries: one named Starburst II (New Sprint) which is directly owned by the holding company, and one owned directly by New Sprint, named Starburst III.

Softbank, via New Sprint, invested $3.1 billion into newly-issued Sprint convertible bonds following the announcement. Before the merger, the bond will be converted into shares of Sprint that will represent 16.4% of outstanding Sprint common shares.

Following regulatory approval, SoftBank will invest $17 billion into New Sprint. This figure will be divided, with $4.9 billion being used to purchase newly-issued common shares of New Sprint, and $12.1 billion to purchase 55% of outstanding Sprint shares from Sprint stockholders. The remaining shares will be converted into shares of New Sprint.

Although foreign investment into sensitive sectors in the US has recently hit hurdles, this transaction seems relatively straightforward. Siegel noted that Federal Communication Commission (FCC) regulations require that any transfer of an FCC licence be in the public interest. Softbank must be able to demonstrate to the Commission that the transaction meets this standard.

Moreover Siegel said that a number of other major US telecommunications companies are owned or controlled by other investors from WTO countries, so an investment of this kind by a Japanese company shouldn’t cause concerns. A key example is Deutsche Telekom’s 2001 purchase of T-Mobile.

But media reports have noted that 10% of capital expenditure by Softbank goes to Huawei and ZTE for equipment. To counter national security concerns about these companies Sprint will not buy equipment from these manufacturers.

Siegel said that Japanese companies will be increasingly active on the global stage, and that this is the perfect environment for outbound M&A.

“Japanese companies will easily complete over $50 billion in M&A this year, and are going to be increasingly active on the global stage,” he said. “The companies are well capitalised, their currency is strong and the economy is stable enough for them to invest abroad based on a comfortable capital and business position domestically.”

Morrison & Foerster was lead counsel to SoftBank, with Mori Hamada & Matsumoto as Japanese counsel, Dow Lohnes as regulatory counsel, Potter Anderson Corroon as Delaware counsel, and Foulston & Siefkin as Kansas counsel. Skadden Arps Slate Meagher & Flom advised Sprint. Lawler Metzger Keeney & Logan acted as regulatory counsel and Polsinelli Shughart advised Sprint on Kansas law matters.

For more on inbound US investments see:

‘Cfius review needs greater transparency’ http://www.iflr.com/Article/3101686/Search/Results/Cfius-review-needs-greater-transparency-opinion.html?PageId=201716&Keywords=cfius&OrderType=0

‘US lawsuit reveals Cfius review defects’ http://www.iflr.com/Article/3091892/Search/Results/US-lawsuit-reveals-Cfius-review-defects-ChinaCo-fears.html?PageId=201716&Keywords=cfius&OrderType=0