A push for change
It all started in July 2013, when Japanese telecom major SoftBank (SFTBF) completed its $22.2 billion acquisition of 78% stake in Sprint (S), the third largest telecom operator in the U.S. Since then, Masayoshi Son, Chairman and CEO of SoftBank Corp. (SFTBF) and chairman of Sprint (S), has been pushing for more consolidation in the telecom sector in the U.S., saying the current trend for industry concentration in the telecom sector by the AT&T (T) and Verizon (VZ) duopoly is harming consumers through lower speeds, limited access, and higher costs.
About SoftBank (SFTBF)
Founded in 1981, SoftBank is a Japanese company whose major business segments include mobile communications, Sprint (S), fixed-line telecommunications, and Internet. Its major subsidiaries include Sprint (S), with a 80.23% stake, Yahoo Japan, with a 42.5% stake, and GungHo Entertainment, with a 58.5% stake. The company also holds a 36.7% stake in Chinese eCommerce portal Alibaba. SoftBank (SFTBF) clocked revenues and EBITDA of ~$70 billion and ~$23 billion, respectively, over the past 12 months.
About T-Mobile US Inc. (TMUS)
Based in Bellevue, Washington, T-Mobile US Inc. (TMUS) is a telecommunications services provider in the United States. Its coverage includes all major metropolitan areas and over 280 million people or 96% of Americans. The company’s telecom services include wireless voice, text, and data services. In terms of subscribers, it was ranked the third largest provider of prepaid plans and the fourth largest provider of post-paid plans among all telecom companies in the U.S.
T-Mobile US Inc. (TMUS), 67% owned by German telecom company Deutsche Telekom, clocked in revenues and adjusted EBITDA of $24.4 billion and $4.9 billion in 2013, including results (since May 2013) from its reverse merger with MetroPCS. The company generated 69% of its service revenues from branded postpaid customers, 26% from branded prepaid customers, and 5% from wholesale customers, roaming, and other services (according to company filings).
Initially, SoftBank (SFTBF) had acquired 78% of Sprint (S). The stake was increased to 80% in September 2013 through open market share purchases. Since then, Softbank (SFTBF) has spoken of acquiring T-Mobile, the fourth largest telecom services provider, through its subsidiary, Sprint (S). The deal, however, must be approved by regulators, the Federal Communications Commission (or FCC), and the U.S. Department of Justice.
Further, a potential deal between the two companies is likely to result in additional significant debt for the would-be acquirer (likely Sprint) and further impact its rating unless its parent, SoftBank (SFTBF), steps in with additional capital—which is something it has been loath to do in financing past deals. Sprint (S) currently has a below–investment-grade rating, and the company’s debt is included in high-yield bond ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).
Coincidentally, both SoftBank (SFTBF) and T-Mobile US Inc. (TMUS) were involved in M&A activity in 2013. To read about two major deals, please continue to Part 2 of this series.