Sprint Owner Softbank Increases Debt for ARM Purchase; Are Further Sales Coming?
Bloomberg News
SoftBank's (SFTBY) $32 billion bid for the U.K.'s leading chip maker ARM Holdings (ARMH) comes at an interesting time for the Japanese telecoms giant.
The owner of Sprint (S) - Get Report has been on a selling spree to pay down the debt it incurred from buying the ailing wireless carrier. In the last two months, SoftBank has sold $10 billion worth of its investment in Alibaba (BABA) - Get Report and it sold games company Supercell, maker of "Clash of Clans", to a Chinese consortium for $8.6 billion.
But while management had been saying the sales were being used to pay down the debt, analysts in Japan believed it was building up a war chest to make a large acquisition.
The deal also comes in the midst of a management shakeup as president and COO Nikesh Arora prepares to step down. Arora was seen as the heir apparent to chairman and CEO Masayoshi Son, who was set to retire in the coming years. Son said last month that in fact he was not ready to retire, and would stay at the helm of the company.
SoftBank is taking a ¥1 trillion ($9.4 billion) loan to help finance the purchase of ARM holding - the balance will be funded with existing cash.
Further additions to the debt could make it difficult for SoftBank to engage in a bidding war, if one were to incur. By most accounts SoftBank has well over $80 billion in debt, with some figures ranging to over $100 billion.
ARM is an attractive target and the depreciated pound has made it more appealing. Apple (AAPL) - Get Report, who is the biggest user of ARM's technology, could be interested in making a bid, as could Intel (INTC) - Get Report and Samsung.
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But what could SoftBank sell if it needed to? There is Sprint. Son has said he is dedicated to Sprint and attempting to turn it around. However, the company attempted to sell the wireless carrier last year, but couldn't find any buyers. According to reports, Comcast (CMCSA) - Get Report and Altice were shopped as potential buyers.
SoftBank bought Sprint for $21.6 billion in 2013, and announced that it intended to merge the company with T-Mobile (TMUS) - Get Report to challenge Verizon (VZ) - Get Report and AT&T (T) - Get Report . However, the merger was shot down by U.S. government. Sprint has gone through aggressive cost cutting in attempts to turnaround the business.
It has also slashed prices and made compelling offers to appeal to consumers. And some of the turnaround efforts have come through. Fourth-quarter earnings were better than expected at the carrier, with earnings up 23%.
"The biggest priority for the SoftBank group as a whole is to improve Sprint's earnings and its competitiveness, and to clean up its balance sheet," Tetsuro Tsusaka, a Morgan Stanley analyst in Tokyo told the Financial Times last week. "For SoftBank, now is not the phase for big investment."
And then there is Yahoo! Japan. SoftBank owns 43% of Yahoo!'s (YHOO) Japanese venture. But reports have surfaced that the Japanese telecom is tiring of paying high fees to Yahoo! The Japanese arm has experienced more profits than its ailing American parent, bringing in ¥640 billion in revenue and ¥260 billion in operating profit for the fiscal year ended last March.
Bidding is underway for Yahoo!'s assets, with final bids expected in today, according to reports. Before the ARM announcement, it was expected that SoftBank would make a play for the 35.5% of Yahoo! Japan owned by Yahoo! This seems unlikely now.
In a turn of events, Arora used to work with Yahoo! CEO Marisa Mayer when the pair worked at Google (GOOGL) - Get Report .
Daiwa Bank's Toshiyasu Ohashi said a big acquisition by SoftBank would be hugely negative on the credit market.
But investors in ARM cheered the proposed acquisition. ARM's share price surged in early morning trading and was recently at 1,699.06, 42.9% up.
With markets closed in Japan for Marine Day today, we'll see how Softbank's investors see the acquisition tomorrow.