Sprint’s new reality could be an opportunity

Sprint Nextel Corp. signage is displayed on the facade of a store in San Francisco, California, U.S., on Thursday, June 13, 2013. SoftBank Corp. and its takeover target Sprint Nextel Corp. told regulators that rival suitor Dish Network Corp.'s complaint of a broken pledge requiring fresh regulatory scrutiny of the deal is "nonsensical." Photographer: David Paul Morris/Bloomberg

Steve’s breakdown: Sprint got some bad news this morning from their parent company, SoftBank. In a sentence, they will not have funds available from SoftBank to help with their turn-around.

A renegotiation of their agency relations will most likely happen. This could spark an agency review.

OVERLAND PARK, KS: SoftBank is planning to fund its purchase of ARM with cash and loans, reducing the company’s ability to provide money directly to Sprint for its turnaround efforts. The shares fell as much as 8 percent to $4.60, the biggest intraday drop since March 10, and were trading at $4.64 at 10:24 a.m. in New York.

SoftBank Chief Executive Officer Masayoshi Son said he was able to acquire ARM because Sprint is becoming self-sufficient, and doesn’t need further cash infusions.

“I have much more confidence in Sprint right now,” Son said during a conference call Monday. Even though his initial hopes of merging Sprint with T-Mobile US Inc. were dashed by U.S. regulators, the company can now stand on its own, he said.

“Sprint was a big problem in the past,” he added, noting that the Overland Park, Kansas-based company is expected to post positive earnings before interest and tax this year and should be generating adjusted free cash flow by the end of 2016 or early next year.

Buried under $33 billion in debt, Sprint has struggled to make investments to compete with larger rivals such as AT&T Inc. and Verizon Communications Inc. The company has slashed network spending to the lowest level since 2010 and is putting up phones, equipment and airwaves as collateral in loan deals brokered by SoftBank, which controls 83 percent of the company.

Sprint stock had been rallying on optimism that Son’s commitment to the U.S. carrier remains deep. The shares have climbed almost 30 percent since former SoftBank heir apparent Nikesh Arora stepped down last month, leaving Son to run the company for longer than originally planned.

“Sprint’s stock has moved up materially, partly on the back of SoftBank raising significant cash from various asset sales,” said Kevin Roe, an analyst with Roe Equity Research LLC. “The market viewed the improved SoftBank liquidity as greater funding insurance to cover Sprint’s losses. Today’s ARM acquisition severely challenges that

view as SoftBank will have to not only depart with the cash they have raised through asset sales but also raise significant new debt.”

In ARM, SoftBank would secure a slice of virtually every mobile computing gadget on the planet and future connected devices in the home. The company will gain control of a cash-generating mobile industry leader that gets royalties every time clients such as Apple Inc., Samsung Electronics Co. or Qualcomm Inc. adopt its designs, which are considered power-saving and efficient. The deal is the biggest takeover of a British company since the country last month decided to leave the European Union and comes after the pound plummeted against the Japanese yen.

“SoftBank’s Sprint strategy is to buy the company more time until a hoped-for M&A transaction puts their investment on more solid ground,” Roe said.

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