Investors fear that Sprint Corp (NYSE:S) parent SoftBank Group Corp’s (OTCMKTS:SFTBF) $32 billion bid for ARM Holdings plc (ADR) (NASDAQ:ARMH) means the company’s commitment to the aging wireless carrier is waning, and that sent shares tumbling in early trading.
There certainly is reason for concern. Sprint is a money pit and investors thought SoftBank was selling assets like its stake in Alibaba Group Holding Ltd (NYSE:BABA) in order to help dig the carrier out from $33 billion in debt.
Little did they know that SoftBank was building a war chest to go hunting for a big acquisition.
SoftBank can argue that S stock would eventually benefit from an ARM acquisition because of the chip-maker’s central role in mobile gadgets, but the market is worried about the here and now.
Sprint needs resources and plenty of them. It has cut spending on its network to a six-year low. More alarmingly, Sprint is using phones and spectrum as collateral in loans arranged by its parent company.
Anyone holding S stock has to be at least a little bit worried that an acquisition of ARM would suck dollars and attention away from the mobile carrier.
Sprint Stock Is Set for More Pain
It’s also possible that SoftBank could put S back on the auction block — as it did last year — and actually get rid of it this time. Indeed, it may have no choice if a bidding war breaks out for ARM. But the parent would have to be an even more motivated seller.
The possibility of sale would ordinarily be a tailwind for shares, but Sprint is a special case. It’s not clear who would want it, and even if a suitor were to emerge, regulatory issues remain a stumbling block.
But a discounted Sprint sale could be profitable for SoftBank provided it finds a deal partner. The company’s acquisition of the carrier was valued at $22 billion in 2013. Today, Sprint has an enterprise value — or a theoretical sale price — of over $51 billion.
That gives SoftBank ample room to cut the price and still come out ahead — at the expense of Sprint shareholders.
Either way, SoftBank’s ambitions for ARM are not good news for holders of Sprint stock. Even if the ARM deal ultimately fails, it shows that the wireless carrier is not SoftBank’s top priority.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.