News that Japanese mobile provider powerhouse Softbank is pursuing a buyout of Sprint (NYS: S) rocked the American company's stock, sending it higher 14% on the day, to $5.76. This information provided a nice, sharp, happy jolt for the latter's shareholders, and there's a good chance there will be more gains to come, now that the company is a takeover story.
A profitable potential partner
The potential entry of Softbank is a tantalizing possibility. It's a proven success in its home market, regularly netting high profits relative to its industry and, for the most part, growing its top line. Its most recent quarter was a good one, with net coming in at 91 billion yen ($1.2 billion) on revenues of 767 billion yen ($9.8 billion). That's a margin of 12%, about double the same figure for Verizon (NYS: VZ) , and keeping pace with AT&T (NYS: T) .
Sprint could use a big, profitable partner. Among the big three U.S. carriers, it's the runt of the litter at number three, far outnumbered by its two muscular brothers. At the end of their most recent respective quarters, Verizon had 94 million, AT&T 105 million, and Sprint, 49 million.
Third place is a tough position; Sprint's been fishing on the budget end of the market by providing competitive offerings, like unlimited data, and pay-as-you go iPhone plans. This is costly, and makes it hard to earn a buck, though. The company is consistently unprofitable, and 2011 top line came in around 15% lower than that of the previous four years previous, while both Verizon and AT&T have shown growth over that time. Sprint also has not managed to shave its long-term debt levels over the years; at the end of its most recent quarter, this stood at nearly $21 billion, against $6.8 billion in cash.
For Softbank, the real value of a Sprint buyout might very well be the asset package it comes along with. The American company owns around 48% of Clearwire (NAS: CLWR) , its go-to partner in crime for wireless broadband. Like Sprint, though, Clearwire is also deeply in the red, and it's leveraged to an even scarier degree. Clearwire currently trades at less than $2.25, and this is after a boost from the buyout news. Assuming Softbank plays its cards right, it could buy enough shares to gain a controlling majority and merge the two complimentary firms.
A more remote, though intriguing, possibility is a play for budget provider MetroPCS (NYS: PCS) . T-Mobile recently agreed to buy the firm (following a failed attempt earlier this year by Sprint). A new bid would likely have to come fast and high in order to have any chance of breaking up the newlyweds. Although Sprint is well covered on the low end, MetroPCS would be a good fit, and Softbank might be eager to spend the cash required to boost the size of its American asset as much as possible.
Opening the wallet
Softbank likes buying things, so it's realistic to think it'll go after at least one of those complimentary assets. It's obviously willing to spend handsomely; according to various sources, it's bidding for at least 70% to 75% of Sprint in a purchase that could total nearly $13 billion or even more.
This raises the question, however, of whether it can make a good return on its investment. No matter how much the Japanese firm might bulk up Sprint with related assets, the core company's difficulties -- not to mention those of Clearwire -- aren't going to melt away anytime soon. And the mobile space is hotly competitive, with the incumbents fighting hard to retain and poach customers. On top of all that, Sprint still lags behind its rivals in rolling out the next-gen, smartphone-juicing LTE network; it's available in only a handful of cities compared to the extensive coverage of Verizon, and the catching-up levels of AT&T and MetroPCS.
There's also the distant possibility that the Feds could get sticky about the buyout. Remember how the T-Mobile USA acquisition by AT&T went? Softbank/Sprint is a buyout by a foreign company rather than a merger of two big domestics. Even though it probably has little chance of being struck down, like AT&T's attempt, it's nevertheless likely to be scrutinized for some time by the government for antitrust issues.
Regardless of where this goes, it's an interesting play by Softbank, and it's got a good chance of involving more than just Sprint. Could we see a beefed-up number three competing in a more cutthroat market in the near future? Investors in Sprint, Clearwire, and maybe even MetroPCS should watch closely as this takeover story unfolds.
The article Sprint Should Sprint Higher, Thanks to Softbank originally appeared on Fool.com.
Eric Volkman 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.