Though not always pretty, mergers are an essential thread in the overall fabric of the business world, as they give companies the ability to consolidate, focus on efficiency, and plenty more. From an investment standpoint, however, there are other ways to take advantage, and we’ll focus on a few specific situations here.
Step right up folks, don’t be shy; hop on the merger merry-go-round
Sprint Nextel Corporation (NYSE:S) has been in the news a lot recently since it has become the subject of multiple competing take over bids, and that hasn’t stopped many from wondering if the stock is a buy at these levels. Softbank, a Japanese company, and DISH Network Corp. (NASDAQ:DISH) are now both vying to take over Sprint. The situation with Sprint is complex due to the various corporate interests involved. Softbank initially made an offer in October of last year to purchase a 70% interest in Sprint Nextel Corporation (NYSE:S) for $20.1 billion, which would have included a capital infusion of $8 billion. Prior to the Softbank offer, Sprint owned a significant interest in Clearwire Corporation (NASDAQ:CLWR).
The Sprint drama
Based upon the proposed $8.1 billion capital infusion, Sprint Nextel Corporation (NYSE:S) made an offer of approximately $2.1 billion to purchase the remaining outstanding interest in Clearwire. Clearwire Corporation (NASDAQ:CLWR) rejected this proposal, even though the per share price offered by Sprint was above the market price at that time. Sprint then had to seek approval from Softbank to sweeten the deal to take over Clearwire.
Softbank subsequently capped any bid for Clearwire at $4.3 billion, which was below the amount sought by Clearwire Corporation (NASDAQ:CLWR) stockholders DISH Network Corp. (NASDAQ:DISH) hen stepped it to make an offer to buy Clearwire for $5.15 billion, or $3.30 per share, even though Clearwire was already deep in negotiations with Sprint Nextel Corporation (NYSE:S). This put Sprint’s merger with Softbank at risk, because the additional customers and spectrum offered by a Sprint acquisition of Clearwire was one of the motivating factors behind the proposed Sprint acquisition by Softbank.
DISH Network Corp. (NASDAQ:DISH) then recently made a competing bid of $25 billion to acquire Sprint. Dish further requested that the FCC hold off on its review of the Sprint/Softbank merger. Sprint has formed a committee to look at the alternative Dish proposal, but has also requested that the FCC continue its review of the Sprint/Softbank merger. Thus, it is unclear how the competing bids for Sprint Nextel Corporation (NYSE:S) and Clearwire will play out. Also, it is difficult to determine whether the FCC or Justice Department will throw up additional obstacles for the proposed mergers. There appears to be a lot of political maneuvering between the parties, as Sprint has accused Dish of trying to muddle the Sprint/Softbank merger.
How healthy is Sprint financially?
Sprint recently released its first quarter earnings, which had some good news and some bad news. The good news was that the company had narrowed its loss to $643 million, or 21 cents a share, compared with a loss of $863 million, or 29 cents a share, a year earlier. Revenue rose slightly to $8.79 billion, an increase of .6%. The bad news is the Company reported it lost 560,000 contract customers during the quarter. However, Sprint Nextel Corporation (NYSE:S) did see continued strong demand for iPhones selling 1.5 million during the quarter, while that number was down from 2.2 million iPhones in the prior quarter.
How has Mr. Market been treating these players?
Let’s take a look at the stock prices for the three domestic players in this merger merry-go-round, as well as a potential alternative investment in the telecommunications sector.
Sprint’s stock price has performed very well over the past 12 months by rising over 199%, and is up 25.04% YTD. Sprint’s price jumped over 13% after the competing DISH Network Corp. (NASDAQ:DISH) offer was announced. The stock is trading well above its 50 and 200 day SMAs. The stock has traded fairly flat since that announcement however. Clearwire’s stock price has also increased 15.22% since beginning of the year. Clearwire Corporation (NASDAQ:CLWR) is currently trading slightly above the 50 day SMA, but appears to be hitting resistance at around $3.40. The stock hit a 52-week low of $.82 in July of 2012.
Dish’s stock price is up around 3.78% in the past week since the Sprint proposal was announced. The stock is up 7.86% YTD. It hit a high of $40.34 on April 22nd, but has drifted downwards since then. The stock is trading well above the 50-day and 200 day SMAs.
None of the stocks has a very high short interest, which is interesting. Both DISH Network Corp. (NASDAQ:DISH) and Softbank are not going to be able to acquire Sprint, thus there will likely be a loser in the end. On the other hand, Dish may only want the additional spectrum, which Clearwire Corporation (NASDAQ:CLWR) represents, and the Sprint offer may only be a smokescreen to muddle any acquisition of Clearwire by Sprint.
Another member of the merger merry-go-round
Sprint and Clearwire are not the only companies undergoing consolidation in the telecommunications sector. MetroPCS Communications Inc (NYSE:PCS) is a wireless broadband mobile communications company that offers voice services, data services, custom calling features and advanced handsets. MetroPCS Communications Inc (NYSE:PCS) shareholders recently approved a merger by T-Mobile, after T-Mobile improved its offer. Large PCS shareholder John Paulson, who held 38 million shares during Q4 of 2012, disapproved of T-Mobile’s first offer, but then backed off when the better offer was made by T-Mobile; Read more about Paulson’s initial concerns with the merger.MetroPCS Communications Inc (NYSE:PCS) stockholders are going to receive $4.06 per share in the deal. The deal is expected to close on April 30th, and has already received regulatory approval.
Final thoughts
At this point in time, it is difficult to ascertain how the competing bids for Clearwire and Sprint will play out. Sprint and Clearwire are trading fairly close to the per share bid offer prices on the table. Thus, there may not be a lot of further upside for either of those stocks, unless the bids are upped. Due to the competition between Softbank and Dish, an increased offer is certainly not out of the question. However, another major source for uncertainty is what the government’s position on these mergers will be. Softbank may have hurdles to jump through as a foreign company, but it is not a given that Sprint would just accept the higher offer amount from DISH Network Corp. (NASDAQ:DISH). Investors will have to wait and see how this fascinating story plays out.
Disclosure: none
