A hefty cash infusion for Sprint from Warren Buffett or Liberty Broadband’s John Malone wouldn’t necessarily preclude a tie-up between the nation’s No. 4 wireless carrier and T-Mobile, according to analysts.
But a merger between the two smaller operators will still be a tough sell to federal regulators.
The Wall Street Journal reported late Friday that Sprint Chairman and SoftBank CEO Masayoshi Son last week met separately with both Buffett and Malone at an annual gathering of CEOs in Sun Valley, Idaho. While the negotiations are still “at an early stage and may not result in an agreement,” one scenario has Berkshire investing more than $10 billion in the company.
An investment of $10 billion to $20 billion would represent 23% to 37% of the carrier, assuming it was done with common equity at the current price, Walter Piecyk of BTIG Research noted.
The report cited unnamed “people familiar with the situation.” Shares of Sprint closed up 4% Friday as the news broke, but were down roughly 3% in early morning trading today.
“While we really cannot speculate (on) the outcome, we do believe SoftBank (Son) is working on several options for Sprint,” Jennifer Fritzsche of Wells Fargo Securities wrote this morning in a note to investors. “In our view, while Sprint admittedly has much debt, Sprint is in a position to handle the near-term maturities given the company’s current liquidity position. Recall, two months ago it called some debt because the SoftBank message to Sprint was it was sitting on too much cash, according to some of our contacts.”
Indeed, Sprint reportedly carriers roughly $41 billion in gross debt, much of which will come due over the next few years, and its cash-strapped position constrains its ability to aggressively roll out services nationwide on its prized 2.5 GHz airwaves. So SoftBank is wise to seek an arrangement that will enable it to solidify its finances and leverage its 2.5 GHz spectrum as the U.S. wireless industry prepares for the transition to 5G, Fritzsche wrote.
“In our view, SoftBank is doing exactly what it should be doing—have multiple conversations with multiple parties,” she opined. “With Qualcomm’s clear support of 2.5 GHz spectrum as part of the 5G standard, the role this spectrum will play in a 5G world is becoming more clear and not debatable in our opinion. So the timing seems indeed right to engage such discussions.”
Meanwhile, rumors of a merger between T-Mobile and Sprint have grown deafening in recent months, and a hefty investment in the carrier by Buffett and Malone may actually pave the way for a deal. But plenty of other hurdles remain, according to Craig Moffett of MoffettNathanson research, and the biggest of those is likely to be in gaining approval from federal regulators.
“Unless an equity infusion in Sprint can be done at well below the current market, diluting current equity holders, Warren Buffett and John Malone would effectively be underwriting all of the risk that the merger would be rejected (and the synergies therefore lost),” Moffett wrote. “So where does all this leave us? Well, we’re still not close to being ready to say a deal is impossible. But no one should be confused about whether it would be hard. Simultaneously solving the three-headed monster of relative valuation, total valuation and leverage, in a world where merger approval is highly uncertain, is a triple bank shot.”