Basic agreement between Japan's SoftBank and Germany's Deutsche Telekom starts merging process for Sprint and T-Mobile, aims to take over market from AT&T and Verizon Wireless.
SoftBank acquired Sprint in July 2013 for $21.6 billion while Deutsche Telekom owns 67 percent controlling interest in T-Mobile. It is estimated that the merger will cost SoftBank more than Y1.7 trillion (close to US$17 billion) as it plans to acquire over 50 percent of T-Mobile shares.
Eight financial institutions will be providing credit lines for SoftBank, including Japan's megabanks Sumitomo Mitsui, Mitsubishi UFJ and Mizuho, Deutsche Bank and J.P. Morgan Chase & Co. SoftBank is expectedto pay in cash as well as use stock swaps to finance the merger, turning to bridge loans for funding. The bridge loans will then be replaced with corporate bonds issued by Sprint and other forms of long-term borrowing.
Combined credit line will amount to around Y4 trillion (US$39 billion), but SoftBank already has over Y9 trillion (nearly US$89 billion) in debt with interest as of March 31, 2014. It seems banks are confident SoftBank will be able to pay its due given that it has a strong wireless business in its domestic market.
Before the merger could push through, the U.S. Department of Justice and Federal Communications Commission must approve the deal. The Department of Justice will be scrutinizing the agreement for antitrust issues, while the Federal Communications Commission analyzes the proposal with a communications policy standpoint.
If it does push through, the merger will allow Sprint and T-Mobile to combine its customer base which could rival the two leaders in the industry, AT&T and Verizon Wireless. Sprint is ranked third while T-Mobile is fourth in the market. Sprint is the only one of the four to experience a decrease in subscribers between January and March 2014, while T-Mobile enjoyed the biggest increase in the number of subscribers in the same period. As it has not aggressively invested in its wireless network, Sprint is still hindered by the perception that it offers poor coverage and what it does cover suffers from slow network speeds.
It can take up to two years for the merger to be approved by the US Department of Justice and the Federal Communications Commission. "Deutsche Telekom is concerned that T-Mobile's competitiveness will suffer if capital investment is put off during the screening period and the deal is not approved. It is asking SoftBank to compensate for the loss if this happens," writes NASDAQ.
