Dish raises the stakes for Sprint: is a bidding war coming soon?

Dish Network Market Cap (as of 19/04/13): $17.68bn

Sprint Nextel Corporation Market Cap (as of 19/04/13): $21.61bn

Softbank Market Cap (as of 19/04/13): $52.37bn

Deal size: $25.5bn ($17.3bn cash and $8.2bn stock)

On Monday the 15th of April the US satellite television operator Dish Network has come forward with an unsolicited $25.5bn cash and stock bid for the mobile company Sprint Nextel, an offer equivalent to 7$ per share. It is composed of $17.3bn in cash and $8.2bn in stock, representing an overall 13% premium on what was previously offered by the Japanese Softbank in October in what was until now considered a done deal. Additionally, Sprint shareholders would be entitled to 32% of the combined entity’s equity as opposed to 30% under the agreement with Softbank. On announcement, Softbank shares fell 6.8%, Sprint rose 13% and Dish fell by 2%.

The new offer, apart from being simply juicier, should attract Sprint shareholders due to greater synergies and strategic value added that could turn it into a serious competitor to the quasi-duopoly run by AT&T and Verizon Wireless in the US mobile market, especially now that T-Mobile is about to receive shareholders approval on its merger with MetroPCS. The deal would enable Dish to extend its offer to mobiles by integrating telephone, internet and video services into a very attractive bundle that would increase both companies’ customer retention. Dish would also supply Sprint with an increasingly scarce resource that it has in abundance, namely spectrum. Joining forces with Sprint would be the best option available to Mr. Ergen’s company with respect to the utilization of the spectrum it has amassed. Alternatively, the satellite operator could sell it for $8bn (at best) or decide to embark on a huge infrastructure investment in order to set up its own LTE network, an extremely risky move with uncertain results. A merger between the two American companies would benefit from $37bn in estimated synergies, $11bn of which would come from cost savings related to the fact that both companies are  American, and therefore those are not savings that would be attainable by the Japanese company.

The previously accepted offer of $20.1bn made in October and supposed to be fully closed by the 1st of July  had the undeniable merits of improving the health of Sprint and giving accessibility to cheaper financing, however was not as strong in terms of operational benefits. In spite of this, let us not forget that in case Dish’ bid turns out successful, Sprint will be overleveraged, burdened by a $3.1bn convertible held by Softbank itself (resulting in a 16% equity stake upon conversion and approximately $1bn in consideration) as well as a $600mln breakup fee (that would be paid by Dish). After all, it seems like there will be quite a consolatory prize for Softbank in the transaction.

All in all, Dish has a greater strategic need of this acquisition while Softbank has definitely deeper pockets. Merging with the former could turn Sprint into a third power within the US mobile arena, while a completion of the deal with Softbank would for sure prove beneficial to its financial health but it is uncertain how it will improve its long term outlook. There are interesting weeks ahead.

Dish has been advised by Barclays. Deutsche Bank, the Raine Group and Mizuho Securities are advising SoftBank while Citigroup, Rothschild and UBS are advising Sprint Nextel.