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Soft sell

11 June 2013 By Peter Thal Larsen

SoftBank’s raised bid for Sprint Nextel is no knock-out blow. The Japanese group has tweaked its offer for a controlling stake in the U.S. telco to give the target’s shareholders more value. But Sprint shareholders would retain a stake in a Sprint that has more debt than first envisaged. That erodes SoftBank’s key advantage as it seeks to combat a rival bid from leveraged counterbidder Dish Network.

On the face of it, SoftBank’s improved bid looks hard for Sprint shareholders to resist. The Japanese group had originally offered to spend $12.1 billion buying existing Sprint shares at a price of $7.30 per share. Now it is proposing to spend $16.6 billion, upping its offer to $7.65 per share.

Yet while that offer looks tempting for Sprint shareholders who sell, it’s less attractive for those left behind. That’s because SoftBank’s plan also requires it to inject fresh capital into Sprint. But with more money going to Sprint’s existing shareholders, the amount of SoftBank cash going into the company itself is falling from $8 billion to $5 billion. Sprint shareholders get more cash, but are left with a 22 percent stake in a more indebted company than under the original plan, which left them with 30 percent stake of a less risky entity.

That matters to the dynamics of the auction. SoftBank has made lower leverage one of the main virtues of its bid. It has argued that a SoftBank-owned Sprint will have the financial capacity to make extra investments in its network. By contrast, a full merger with Dish would create a company with limited financial flexibility. Though Sprint is still less leveraged under SoftBank’s revised deal than under Dish’s plan, the difference is no longer quite as clear.

The revised plan makes sense for SoftBank, which is raising its overall offer by just $1.5 billion, or about 7 percent. Sprint shareholders, meanwhile, may decide the certainty of the extra cash outweighs the residual risks. Paulson & Co, which is Sprint’s second-largest shareholder, has switched its support from Dish to SoftBank. If others follow the hedge fund’s lead, SoftBank’s decision to cede the moral high ground on leverage will have been worthwhile.


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