Maravedis Cloud4G -Lead Wireless Broadband to the Personal Cloud
Copyright, Colleen Brennan, CPC
The merger between Sprint and T-Mobile depends on the agreement between the parent companies, Softbank and Deutsche Telekom on a total package that goes beyond the exchange ratio between the two stocks. What is more important to Softbank is that the company keeps a stake-hold in the US mobile operations forged by the merger of the two US network operators.
Mergers between large companies are often more complicated than the news can encompass. In the case of international mobile communications companies, further the complications have developed as the aspirations of companies have grown to encompass the converged areas involved that can impact multiple companies within their congolmerates and that is deeply entwined with their long-term growth plans.
During the course of bailing out Sprints finances, Sprint entered into loans agreements that are secured by network and spectrum assets and by securitization of cash-flows generated by device sales and leases. These agreements, as spelled out in Sprint's SEC disclosure documents, provided about $11 billion in loans in exchange for about $13 billion in core network and spectrum assets. Sprint also transfered the funding requirements for device lease fincancing obligations which amount to about $4.5B. Softban had set up a holding company, Network LeaseCo subsidiary, to facilitate the arrangement. These 'creative finacing' arrangments has reduced Sprint's capital requirements which has allowed it to fund operations and pay of maturing unsecured junk bond debt with the new asset and cash-flow secured loans. The rate of growth and debt service cost of Sprint's debt has been reduced by $1.5-$2 billion per year. However, the net debt level has increased over the past four years from around $31B to $34B. The loans agreements include a survivability clause in the event of default: if Sprint is unable to repay Softbank, a significant portion of the company's key spectrum and network assets will be subject to being taken over by the parent company.
Softbank recently invested in LendLease Towers, a network facilities company headqurtered in Australia that has to take control of about 8,000 of Sprint's base station site locations, primarily in metro areas. These will, in turn, be leased back to Sprint. The details of the operation are limited. However, it is common for the tower companies to build out their own fiber optic networks and base station locations. We view this as an additional move for Softbank to invest into the US market while distancing itself from the financial difficulties of Sprint.
The impact of Softbank's various creative financing efforts with respect to Sprint has been to set up a pool of assets and cash-flows that are held away from Sprint. Sprint is no longer responsible for device lease funding, about 1/3 of network assets due to these transfers.
How Will Softbank be Compensated for the Asset Pool Held Outside of Sprint?
The creative financing measures have as estimated capital value of about $15 billion. In addition to the valuation, the business agreements commit Sprint to have Softbank subsidaries, including BrightStar, handle device supply chains for supply, refurbishment and resale of devices. These arrangements entitle Softbank to compensation for the bail out of Sprint's maturing debt and ongoing capital requirements.
Softbank's Board of Directors, BOD, was reported to not agree with the merger due to insufficeint degree of governance that Softbank will recieve. We thiunk that the 'governance' sought can directly attributed to the involvement of the special assignment subsidiaries set up to handle Sprint's asset and cash-flow pool the underwrite the new loan and cash-flow financings.
The public facing view of the merger is simplified into it being a stock-swap arrangement alone: Softbank is reported to want a ratio of 8:! while Deutsche Telekom insists on a ratio of 9:1. It is hardly that simple. We believe that the negotiations are hung on how much Softbank can continue to participate in the merged company by continuing involvement of the special entities including Brightstar, LendLease Towers, and Spectrum-Network LeaseCo.
Copyright, Colleen Brennan, CPC
To get the various parts to fit will take some whittling down of both side's degree of governance in exchange for a workable vision for achieving greater multi-operation synergies.
We think that Softbank will have to back down on some of their involvement in the new company. Sprint's stock price has been elevated by the creative finance efforts, thus yielding Softbank a return from what would otherwise have been a very negative ROI. In essence, Deutsche Telekom/T-Mobile would concede a higher valuation by agreeing to the current stock price as fair value in the exchange of stock. Deutsche Telekom/T-Mobile should be bargaining hard because that can be essential to long-term success. However, they should recognize that there is an alignment of goals in allowing Softbank with continued involvement. The merger exposes synergies that go beyond the US operations of Sprint and T-Mobile: This includes the ability to leverage the equipment and device supply chains of Softbank's Brightstar and Softbank Mobile Japan, and the potential to leverage Softbank's financial strengths to build out other parts of the ecosystem including a separate network facilities operation that may leverage CapEx requirements of the merged company.
That wireless revenue growth has slowed in the developed markets of the world is hardly news. This has been well anticipated and has mostly occurred along the lines of projections of eight plus years ago. The slowing was inevitable because the saturation of mobile devices was unable to continue beyond practical limits defined by local economics. Growth accelerated through 2012 beyond many projections, helped by lower price points of SmartPhones. Multiple-device attach (MDA) rate and data tiers then became the frontline for growth. That growth has scaled back to single digits in the more mature markets but has gained momentum in emerging markets including China, buoyed by rising prosperity and a shift to consumerism.
Europe has hopes for modest growth of higher data rate plans. Coming off of a period of fierce competition that drove down revenue, the industry has whittled down weaker players to a point that recent gains in revenue should continue. Europe and some parts of Asia have led the US market in convergence between fixed broadband and wireless and wireless broadband ICT segments.
The USA has pursued Federal government policy that is among the world's most aggressive in freeing up spectrum for use by converged mobile networks. Capacity is encumbered by cost and local regulation of access to smallcell deployments as well as a less dense and higher cost deployment of fiber optic and other gigabit capacity interconnect. Spectrum availability has grown to a point at which it exceeds that available to operators
Yet America lags much of the world in wired and wireless mobile broadband data rates (speed) despite being near the highest in subscription cost. It is clear that availability of large amounts of spectrum is only part of what it takes to shift the US market into a more competitive worldwide position.