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Would a Sprint Deal with Buffett Only Benefit Buffett?

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Oct. 4 2017, Updated 7:41 a.m. ET

Boost toward network upgrade

Masayoshi Son, the head of SoftBank, reportedly contacted Warren Buffett and John Malone of Liberty Broadband (LBRDA) to invest in Sprint (S). SoftBank is the controlling shareholder of Sprint.

Buffett’s input may provide the cash infusion that Sprint needs to turn around its dwindling fortunes. The carrier has not turned a profit for years. Sprint could use investments from Buffett and Malone to accelerate its network upgrade now that major carriers are eyeing 5G (fifth-generation) networks to support growing mobile traffic demand.

Meanwhile, the rise of online video, mobile payments, and IoT (Internet of Things) is exerting significant pressure on existing mobile networks and fueling the race to upgrade.

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Support for Sprint’s debt

According to Barron’s (citing analyst Craig Moffett) of Moffett Nathanson, Buffett’s money could also make Sprint’s debt manageable—especially if it were to combine with T-Mobile (TMUS). Wells Fargo (WFC) believes that combining Sprint and T-Mobile would create the second-largest wireless carrier in the US (SPY) by market share.

While Buffett may bring the cash and reputational boost that Sprint needs to improve its prospects, Buffett’s support for Sprint could come at a steep cost to the carrier and its shareholders. To be sure, Buffett has shown a fondness for negotiating for preferred shares and warrants that allow him to buy shares of a company he supports at a discount.

The cost of a Buffett seal

According to the Wall Street Journal, Buffett received preferred shares carrying 9% coupon (QQQ) and warrants for supporting private-equity firm 3G with $8 billion to acquire Heinz in 2013. He walked away with a similar deal a year later after supporting Burger King with $3 billion to acquire Tim Hortons. Buffett’s investment in Goldman Sachs (GS) also allowed him to earn 10% annually and to buy shares of the investment bank at a discount.

But perhaps in the case of Sprint—a struggling wireless operator—Buffett’s seal of approval may come at a steeper cost.

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