Recently, DISH Network Corp. (NASDAQ:DISH) made an offer of as much as $7 per share, including $4.76 per share in cash and around $2.24 in stock, with a total transaction value of $25.5 billion for Sprint Nextel (NYSE:S), the third largest wireless carrier in the U.S. Previously, Sprint Nextel also received an offer to sell 70% of it for around $20 billion from the Japanese telecommunication company, SoftBank.
Sprint Nextel’s snapshot
Sprint Nextel, incorporated in 1938, is the provider of wireless and wireline voice and data transmission services to subscribers in all 50 states in the U.S., under several retail brands including Sprint, Boost Mobile, Virgin Mobile, and Assurance Wireless. The company is operating in two main business segments: Wireless and Wireline.
The majority of its revenue, $32.35 billion, or 91.5% of the total 2012 revenue, was generated from the Wireless segment, while the Wireline segment contributed only $3 billion in revenue.
In the past three years, Sprint Nextel Corporation (NYSE:S) has experienced a decent growth in both average retail subscribers and the average revenue per user (ARPU). Since 2010, the average number of retail subscribers has increased from 44.5 million to more than 47.7 million, while ARPU has risen from $48.06 to $49.92. The postpaid ARPU grew from $54.94 to $60.84, whereas the prepaid ARPU declined from $27.76 to $26.72.
SoftBank offer
SoftBank has offered to buy 70% of Sprint Nextel for $20.1 billion and the deal was expected to close in the middle of 2013. Mr. Masayoshi Son, the president and CEO of SoftBank, thought that he could take the experience in turning around the mobile business in Japan of SoftBank and apply them to Sprint Nextel.
In Japan, he has competed with his competitors with the strategy of consistent price cuts to take away their customers. He might use a similar strategy to compete with the other two big rivals, AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). At the same time, he will spend a lot of money to improve Sprint Nextel’s network.
Mr. Son expected that in the first year, there would be a negative impact on earnings, but the profits would come from the second year onward. Including Sprint Nextel Corporation (NYSE:S), SoftBank estimated that its operating profit for the fiscal year 2014 would reach around ¥700 ($7.7) billion.
DISH offer – more synergy but a lot of leverage
The synergies and growth opportunities were estimated to reach as much as $37 billion in net present value, including $11 billion in the cost savings at an expected annual run rate of $1.8 billion over the next three years. Charlie Ergen, Chairman of DISH, said that DISH’s proposal established a “significantly-enhanced strategic position and substantial synergies that are not attainable through the pending SoftBank proposal.”
Indeed, DISH Network Corp. (NASDAQ:DISH)’s offer is more superior to SoftBank’s offer. DISH’s cash offer of $4.76 per share is 18% higher than a $4.03 cash portion offer of SoftBank. Furthermore, Sprint Nextel Corporation (NYSE:S)’s shareholders will own 32% of the new company, leading to a 13% premium compared to the SoftBank’s offer.
Furthermore, the combined company would take advantage of opportunities for cross selling to 49 million Sprint retail subscribers (including Clearwire Corporation (NASDAQ:CLWR) retail subscribers) and 14 million DISH household customers. It would have a higher value proposition from bundling, lower acquisition cost, and lower churn with integrated experience. However, in terms of financial structure, the combined company would have around $35.3 billion in debt, not including the $9 billion debt financing that DISH would incur for the merger deal.
At $37 per share, DISH Network Corp. (NASDAQ:DISH) is worth around $16.9 billion on the market. The company is valued at 7.3 times EV/EBITDA. Sprint Nextel is trading at around $7 per share, with a total market cap of $21.5 billion. It is valued a bit cheaper at 5 times EV/EBITDA. SoftBank has the similar valuation to Sprint Nextel Corporation (NYSE:S). The company is trading at around $22 per share, with a total market cap of $48.6 billion. The market values SoftBank at around 5 times EV/EBITDA.
The market leader is more profitable and cheaper
At its current price, DISH is valued more expensively than the U.S. market leader, DIRECTV (NASDAQ:DTV). With 20.1 million subscribers in the U.S. and 15.5 million subscribers in the Latin American region, DIRECTV is considered the biggest DTH digital television service provider in the U.S.
DISH Network Corp. (NASDAQ:DISH) ranked second with 14 million subscribers. DIRECTV has witnessed rapid growth in the past ten years, generating growing cash flow, but the business has relied heavily on debt financing. Most of DIRECTV’s profit, around $4.15 billion, came from DIRECT U.S., while DIRECTV Latin America contributed only $955 million in operating profits in 2012.
DIRECTV (NASDAQ:DTV) seems to be more profitable with a higher operating margin at 17%, while the operating margin of DISH was lower at 13.9%. At the end of 2012, DIRECTV had a negative equity of $5.43 billion while employing as much as $17.2 million in long-term debt. At $56 per share, DIRECTV is worth around $32.1 billion on the market. It is valued at a cheaper valuation than DISH, at 6.6 times EV/EBITDA.
My Foolish take
In terms of synergies, DISH Network Corp. (NASDAQ:DISH) seems to be more superior. However, the combined company would create a debt-laden company, which could restrain the combined company from investing to expand the Sprint Nextel Corporation (NYSE:S) network to compete with AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). I personally think that investors should avoid all those three companies during this time, as their stock prices will be quite volatile and dependent on bidding news.
The article Large Buyout Offers in the Wireless Telecom Industry originally appeared on Fool.com and is written by Anh HOANG.
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