Why SoftBank is ready to exit from Sprint

SoftBank Group Chairman and CEO Masayoshi SonJapanese telecom major SoftBank Group is getting ready to exit from Sprint by merging the troubled mobile venture with rival operator T-Mobile US.

Reuters today reported that SoftBank is expected to approach T-Mobile parent Deutsche Telekom, a telecom giant in Germany, for negotiations when an ongoing auction of spectrum ends in April and a ban on talks between rivals is lifted.
Sprint cost reduction
A potential deal could bolster SoftBank’s shift towards what billionaire founder Masayoshi Son calls the “Berkshire Hathaway of the tech industry,” or a company with cutting-edge tech investments as the telecoms services markets mature.

Ajit Pai, the new chairman of communication regulator FCC, is unlikely to oppose the planned merger between T-Mobile and Sprint if the alliance does not reduce competition.

Why SoftBank wants to exit?

SoftBank chairman and CEO Masayoshi Son recently said during an analyst call “the money that we spent for the acquisition of Sprint was ¥1.9 trillion. Sprint’s value is over ¥3 trillion now. We have increased the value of Sprint by 58 percent compared to what we have spent in the acquisition, so we have made more than ¥1 trillion.”

Sprint CEO Marcelo Claure, who joined the telecom operator in 2014, has played an important role in reviving the telecom subsidiary of SoftBank.
Sprint EBITDASprint has resurfaced as a stronger competitor within the postpaid phone market, exemplified by the carrier outperforming Verizon and AT&T in postpaid phone net additions for the fourth consecutive quarter, said Technology Business Review in a research note.

Sprint’s success in unlimited market is now followed by Verizon. Verizon, the bigger rival of Sprint, last week introduced unlimited plan after a gap of more than 6 years.

“Unlimited data will be the centerpiece of Sprint’s postpaid strategy in 2017, and the company will continue to offer aggressive pricing promotions and may also begin to tuck taxes and fees into its rate plans to widen its pricing advantage over T-Mobile One programs,” said Steve Vachon, research analyst at TBR.
Sprint revenue growth
The main concern of SoftBank chairman Masayoshi Son is the profit margin of Sprint. Though profit margins are improving, Sprint continues to report net loss. Sprint lacks a connected device strategy, which resulted in a net loss of 30,000 postpaid tablet customers, while postpaid phone churn elevated in the latest quarter.

Telecom research reports indicate that Sprint continues to experience double-digit wireline revenue declines, which the company seeks to remedy by focusing on strategic data services such as Ethernet and SD-WAN. Sprint lacks the scale to contend with larger competitors such as AT&T and Verizon within these markets.
Sprint strategySprint announced several new investments that will sustain revenue growth but may conflict with restructuring initiatives that have been a key initiative at Sprint since Marcelo Claure became CEO in 2014.

Sprint is also expected to increase Capex (capital expenditure) in fiscal 2017 to support its Next-Generation Network densification deployments, which may interfere in the carrier addressing its debt obligations and meeting its goal to improve free cash flow.

“The proceeds of the possible sale of all or a portion of its equity stake in Sprint to a third party could improve SoftBank’s credit rating and allow it to dedicate more of its financial resources to growth businesses,” analysts at SMBC Nikko Securities said in a research note.

While SoftBank’s mobile business in Japan remains a cashcow to fund investments, Sprint is facing challenges to grow on its own as it lacks the scale to challenge larger rivals such as AT&T, Verizon and T-Mobile.

Son told reporters earlier this month that he was focused exclusively on an acquisition of T-mobile three years ago, but that Sprint’s return to profits has opened various new possibilities for SoftBank in an upcoming industry realignment.

Son’s previous attempt to merge third ranked T-Mobile and fourth ranked Sprint fell through amid opposition from U.S. antitrust regulators.

Baburajan K
[email protected]