A lot of analysts have been warning readers about Sprint Corp (NYSE:S) even while the stock has risen over the last year.
Seen solely through fundamentals, Sprint looks like an investment that could blow up in your face, as our Will Ashworth noted recently. The company doesn’t make money, and hasn’t for years. It has fallen from number three to number four in the U.S. mobile race. It was loaded with debt upon its 2013 takeover by Softbank Group Corp (OTCMKTS:SFTBF). All its operating cash flow goes out the door in the form of capital expenditure.
But the shares keep going up. You could have gotten this stock for about $3 per share a year ago, while it opened for trade Feb. 28 at $8.92. And today’s buyers are going in with big expectations.
What they are expecting is a take-out.
Sprint Change of Heart
Apparently, Softbank CEO Masayoshi Son is willing to cede control in order to win a merger with T-Mobile US Inc (NASDAQ:TMUS), which is 65% owned by Deutsche Telekom.
The two companies are reportedly in preliminary discussions over a merger although they can’t begin informal negotiations until after the latest U.S. spectrum auction concludes in April. It’s like those NFL trades that get lined up months in advance of when they can happen.
Sprint tried to buy T-Mobile a few years ago, and was shut down by U.S. regulators. At the time, Sprint was worth $36 billion and TMUS, as the target, was worth $30 billion. Now, thanks to the efforts of TMUS CEO John Legere, TMUS is worth $50 billion and Sprint is still worth $36 billion.
Obviously Legere, a formerly buttoned-down MIT graduate who grew out his hair, started wearing t-shirts and portrays himself on TV as a consumer advocate, happy to discuss everything wrong with his industry, is the right marketing man to be running the merged entity.
Besides, Son has a shiny new toy to play with and a shiny new strategy.
Son’s New Play
The new toy is Fortress Investment Group LLC (NYSE:FIG), an alternative asset manager Son has just spent $3.3 billion to buy following the retirement of co-founder Michael Novogratz, who got the firm’s assets caught in Brazil’s downdraft.
Son also has a new strategy, built around Softbank’s acquisition last year of ARM Research for $32 billion. He is raising up to $100 billion, much of it Arab money, with the aim of becoming the world’s biggest technology investor. He also let his former heir-apparent, Nikesh Arora, walk.
Son, who once planned to retire at age 60, later this year, has gotten a new spring in his step, with new plans and a new outlook, investing other people’s money and not just his own company’s stake in Alibaba Group Holding Ltd (NASDAQ:BABA), which he had been selling to raise capital. You might say there’s a new Son in the investment sky.
The Bottom Line
We recently wrote here that Sprint needs a big deal to save itself. T-Mobile could be that big deal, and the new Administration is unlikely to oppose it.
Son-san, meanwhile, sees himself as now having bigger fish to fry. His one-time dream of a global mobile network now seems small compared to the ambitions $100 billion, his own investment house and control over the leading designer of microprocessors bring.
With control over Sprint no longer an issue, the way is clear to a T-Mobile deal. You’ll have to wait a few months for talks to officially commence before you know how much you’re going to make, but it now appears that patience will be rewarded.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.
