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5G networks

SoftBank awaits merger ruling with hopes to slash Sprint risk

Shares jump on FCC chief's endorsement but Justice Department still stands in way

The proposed merger between Sprint and T-Mobile US had won support recently from the Federal Communications Commission.   © Reuters

TOKYO/NEW YORK -- SoftBank Group looks one step closer to minimizing risks related to U.S. subsidiary Sprint, now that the chief U.S. telecommunications regulator issued a statement supporting the proposed $26 billion merger of the carrier with rival T-Mobile US.

Shares of SoftBank Group rose more than 3% during Tuesday trading in Tokyo after Federal Communications Commission Chairman Ajit Pai endorsed the transaction saying it would be "in the public interest." Sprint's stock price soared 19% on Wall Street on Monday.

But the merger still has one more hurdle to overcome. The U.S. Department of Justice is reviewing the proposed deal from an antitrust standpoint, and U.S. media reports have noted that the department has negative views on the integration.

Pai's support represents a crack in the regulatory wall SoftBank has faced in its yearslong quest to marry Sprint with T-Mobile. The FCC had been focused on maintaining competition among four major carriers in the industry. But what apparently enchanted Pai is a business plan submitted by the two telecoms that pledged to heavily invest in 5G communications.

"Two of the FCC's top priorities are closing the digital divide in rural America and advancing United States leadership in 5G, the next generation of wireless connectivity," said Pai. "The commitments made today by T-Mobile and Sprint would substantially advance each of these critical objectives."

As for SoftBank, the Japanese technology conglomerate is on its way to distancing itself from a subsidiary that holds interest-bearing debt that makes up roughly 30% of its liabilities groupwide. SoftBank currently owns roughly 84% of Sprint. After the planned merger, its stake would truncate to 27.4%, allowing the group to convert the new entity into an equity-method affiliate and remove it from SoftBank's own balance sheets.

CEO Masayoshi Son maintains SoftBank Group's net debt is only 4.4 trillion yen. "The parent company is under no obligation to repay the debt of subsidiaries," he said.

In a letter dated April 15, Sprint laid out a self-deprecating case detailing how it cannot survive as a standalone company. For one, Sprint's network lags behind that of rivals, and the churn rate of customers is nearly twice that of Verizon, AT&T and T-Mobile.

"Simply put, Sprint is not on a sustainable competitive path," the text reads.

Furthermore, the debt servicing is putting the squeeze on investment. Sprint reported a negative cash flow of $1.1 billion for the year ended March, a reversal of the $840 million positive cash flow a year earlier. Analysts expect the carrier to report a negative cash flow of about $1 billion for the current fiscal year. For the next two financial years, Sprint will face redemptions on $4.3 billion and $5.4 billion worth of debt.

The worst-case scenario for SoftBank is the prospect of the merger falling through, meaning the parent would have to hold a company with no growth strategy. Sprint could require funding support from SoftBank to stay afloat. If such a financial sinkhole were to lose asset value, SoftBank would have to book losses.

With the 5G era just around the corner in the U.S., rivals are wasting no time investing in infrastructure. If Sprint is forced to put investments on hold, it risks forfeiting any prospects for the future.

Moody's Japan rates SoftBank Group at a grade denoting speculative elements. But "if the T-Mobile merger becomes official, Sprint's stock price will rise, which will lead to SoftBank Group improving its creditworthiness," said Motoki Yanase, ratings analyst at Moody's Japan.

SoftBank has transformed into a tech holding company owning 27 trillion yen in equity. Sprint, acquired in 2013, occupies a tenth of the portfolio at 2.8 trillion yen.

Even if the merger does go through, the new entity would be restrained in its business practices. Sprint and T-Mobile conveyed to the FCC plans to freeze rates for three years after the merger. Additionally, the parties promised to build 5G networks to cover at least two-thirds of America's rural population, according to Pai, despite the low returns on investment.

The FCC chairman warns that the two companies will incur serious financial penalties if they fail to uphold their end of the deal. The consequences "could include total payments to the U.S. Treasury of billions of dollars," Pai said.

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