Charlie Ergen’s move to snatch Sprint Nextel from the grasp of Japan’s Masayoshi Son has set the stage for a potential bidding war between strong-willed billionaires who have disrupted telecoms industries on two continents.
Investors in Mr Son’s SoftBank, however, are not keen to see the drama play out.
Shares in SoftBank fell as much as 10 per cent on Tuesday after Dish Network, Mr Ergen’s satellite TV operator, unveiled an unsolicited $25.5bn offer for Sprint, the third-largest US mobile phone provider with 46m subscribers. His bid trumped a $20.1bn offer for Sprint made by Mr Son last October.
Industry experts suggested that investors sold SoftBank stock, which closed down 6.8 per cent, not because they were worried the company would miss out on a lucrative acquisition opportunity. Rather, it was more likely that they feared Mr Son would come back with a more generous offer – one that could stretch SoftBank’s finances and possibly lead to a dilutive issue of new shares.
“The issue for Son is that he wants to build a global company; he promised to do that. This is probably the one shot he has of doing that and I don’t think he’s going to walk away,” Neil Juggins, Hong Kong-based telecoms analyst at JI Asia, an affiliate of Société Générale, told Reuters.
Mr Son is known as a savvy and opportunistic investor with a history of spotting underpriced assets – from Yahoo in the mid-1990s to Japan’s Aozora Bank and the Japanese operations of Vodafone, which it bought in 2006 and turned into what is now the core of SoftBank’s portfolio of businesses.
A bloodless calculation of the risks and rewards of pursuing Sprint might well convince Mr Son to let Dish scoop up his prize. SoftBank would receive a $600m break-up fee if Sprint were to abrogate their tentative deal, along with an even larger financing-related windfall.
To protect itself from currency swings, SoftBank locked in a forward exchange rate of Y82 to the US dollar when it agreed the deal six months ago. Since then, the yen’s value has plunged to nearly Y100 to the dollar, leaving SoftBank with a potential gain of $2bn should it decide simply to cash in the contracts and pocket the difference.
SoftBank is also sitting on a paper profit of $1bn from a $3.1bn convertible bond it purchased from Sprint last year. Sprint’s shares jumped to a four-and-a-half-year high after Dish disclosed its interest on Monday, and are trading almost $2 above the purchase price of $5.25 a share.
Mr Son’s desire to expand his empire could be stronger than the lure of one-time profits, however. When he entered the mobile business in 2006 he said he would make SoftBank, Japan’s third-biggest mobile provider, bigger than the domestic leader NTT DoCoMo within a decade, a goal he could fulfil by buying Sprint.
“Everybody laughed at me at the time,” he recalled when he announced the Sprint deal last year.
In a written response to Mr Ergen’s bid, SoftBank on Tuesday said its existing agreement offered “superior short- and long-term benefits to Dish’s highly conditional preliminary proposal”.
It did not elaborate, but a person close to the situation said its appeal to Sprint management and shareholders would focus on the vulnerability of Mr Ergen’s cash-and-share offer to swings in Dish’s share price, as well as what SoftBank argues is a lack of certainty about whether Dish can raise enough money to fund a deal.
Even so, Christopher Larsen, an analyst at Piper Jaffray & Co, said SoftBank would need to sweeten its bid by $2bn to match Dish’s offer.
Mr Son is drawing down most of SoftBank’s nearly Y800bn ($8.2bn) of cash reserves to fund what would be the biggest foreign acquisition by a Japanese company. Analysts said he would have little difficulty expanding the remaining portion of loans he has secured from Japanese banks if he decided to sweeten his offer, though some said a share issue – a particularly commonplace financing move for Japanese groups – might also be considered.
In the past, Mr Son has shown he is not afraid to borrow to make big bets. The Vodafone acquisition cost SoftBank $15bn, making it Japan’s largest leveraged buyout at the time. The debts that he took on to fund it have only recently been paid off.