Sprint, Softbank Deal a Consumer Win

Updated to include analyst comments throughout

NEW YORK ( TheStreet) -- A year ago AT&T ( T) was preparing an antitrust defense for its proposed takeover of T-Mobile USA. Now, after regulators blocked the deal, AT&T is likely bracing to protect its position in the U.S. wireless industry after a string of October merger activity that has T-Mobile partnering with MetroPCS ( PCS) and Japanese telecom Softbank investing billions in new capital for a controlling stake in Sprint ( S), the industry's third player.

Sunday's announcement of a $8 billion equity capital infusion into Sprint at $5.25 a share by Softbank -- and a tender offer for 70% of company's existing shares at $7.30 -- revitalizes the company's finances. It also energizes Sprint's competitiveness as an alternative national carrier to industry stalwarts AT&T and Verizon ( VZ).

Sprint's takeover and the planned merger of MetroPCS and T-Mobile earlier in October are likely to add financial and network strength to the industry's number three and four players, both of which undercut AT&T and Verizon on pricing and unlimited smartphone data plans.

At this time last year, industry watchers were bracing for a telecom sector 'duopoly' between AT&T and Verizon, as virtually every other carrier struggled to stay afloat in the highly capital intensive business of building national networks to handle smartphone data loads.

In the wake of Sprint and MetroPCS's M&A, anticompetitive talk is all but eviscerated and the prospect that unlimited data plans can challenge top tier players is far more credible.

With new financial support, Overland Park, Kan-based Sprint has billions more to complete its plan to build a 4G national wireless network, called Network Vision. Once Network Vision is finished, Sprint, which is a distant third in the U.S. wireless market to the 30%-plus market shares held by AT&T and Verizon, expects its unlimited Apple ( AAPL) iPhone data plans will help pull cell phone customers from larger carriers.

To start 2012, speculation on Sprint centered less on whether subscribers would join and more on handicapping the company's eventual bankruptcy, as it plowed billions into a network revamp and a contract to carry the iPhone.

Succeeding on Network Vision became all the more crucial for Sprint in the wake of MetroPCS's merger with T-Mobile because it faced a new challenge to a fleeting industry position.

In that tie-up, T-Mobile is poised to add millions of wireless users and a cashflow positive business to its national 4G network, putting the carrier on track to gain on its position as a low cost, unlimited data alternative. Meanwhile, the merged business would be in closer running for Sprint's third spot in the wireless market.

Now, after Sprint finally courted a deep-pocketed partner, the U.S. wireless industry looks poised for a renaissance, with cost-competitive and unlimited data carriers in a position to challenge industry leaders.

" Combining with a larger partner, one which carries a low level of leverage will provide Sprint with capital that the company needs to better compete with its larger rivals -- AT&T and Verizon," writes Thomas Seitz, an analyst at Jefferies, in a note released on Monday.

Already, Sprint is on track to go from worst to first as a stock performer in the fast-moving sector, as readily available debt financing had some analysts back tracking from bankruptcy speculation.

After October's telecom sector reshuffle, both Sprint and T-Mobile are in an even better position to invest in their 4G networks as an onslaught of data burdens existing capacity. The prospect of better coverage is likely to make both carriers a stronger alternative to AT&T and Verizon, who've been gaining market share in the past 12 months.

Prior to the terms of Sunday's deal by Softbank for Sprint, the biggest question was whether the Japanese telecom could provide the carrier with added financial support.

The $8 billion equity infusion unequivocally gives Sprint a revamped financial profile as it tries to succeed on large investments such as Network Vision, its partnership with Clearwire ( CLWR) and its carriage of the iPhone.

The terms of the deal, which converts $8 billion in debt to equity at $5.25 a share, " removes any doubt of the company's ability to fund the business and compete aggressively," writes Mike McCormack, an analyst at Nomura Securities, in a note.

For telecom investors and consumers, a restart in the land grab for wireless supremacy marks a sudden and stark shift in the industry in a year's time.

Outside of sector-wide M&A, the biggest intrigue of telecom stocks was the near 5% dividend yields on AT&T and Verizon's shares. The stability of those yields seemed strong, given that few expected Sprint and T-Mobile would be able to stem subscriber losses over the long term, or complete national 4G networks as independent carriers. Moody's highlighted AT&T and Verizon as the only telecoms able to earn back their cost of capital, in a late 2011 analysis.

As investors weighed the dividend yields and stability of AT&T and Verizon, others watching the wireless market saw an industry moving into a duopoly state that would hit the pocketbooks of consumers.

That was the logic when antitrust officials at the U.S. Department of Justice challenged AT&T's proposed $39 billion deal for T-Mobile a year ago. The company eventually pulled the merger effort last December, paying a multi-billion dollar breakup fee.

For consumers the tension was palpable, and some braced for an era where carriers would hold the financial strings on smartphone data usage.

Prior to the DoJ's decision to block AT&T's takeout of T-Mobile, both carriers scrapped unlimited data plans. Last July, when Verizon pulled its unlimited data plan to match AT&T, subscribers rushed to stores in an effort to grandfather into all-you-can-eat data plans.

Months later, in the wake of tiered data pricing on AT&T and Verizon contracts for Apple iPhone and Google ( GOOG) Android powered devices, Sprint outlined what could be seen as its last stand in wireless, joining AT&T and Verizon in offering the iPhone. Sprint's proposal - while not advertised on marketing billboards - was to offer iPhones with unlimited data plans that would be priced to reflect its weak national network.

The proposition to new subscribers would be a usable and cheap iPhone in the short-run and a promise to improve its network in coming years. Even with the $15 billion plan, few users jumped on. Investors also lacked confidence, pushing Sprint's shares to $2 to start the year, as bond investors priced in a 50% probability of bankruptcy.

Now, with bankruptcy off the table and Sprint's stock up to near $6, the telecom is all but assured of ending the year as the top telecom stock, after ending 2011 as the industry's worst performer. More importantly, the viability of unlimited smarthphone data plans and an unlimited iPhone now appear more viable in the wake of Sunday's deal.

For investors and consumers alike, the turnaround tells a similar story. Watch out doupolists and monopolists: the telecom sector is poised for a resurgence of competition.

For more on the wireless industry, see why AT&T is still hungry for more spectrum and how a tower deal twists industry consolidation.

-- Written by Antoine Gara in New York

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