Why Sprint's Softbank Deal Is Good for Yahoo!

NEW YORK ( TheStreet) -- SoftBank (SFTBY:OTC) just dropped $20 billion to buy control of Sprint Nextel ( S).

One of the implications of this deal, some observers have concluded, is that SoftBank will now no longer be able to do a deal to buy back Yahoo!'s ( YHOO) stake in Yahoo! Japan, which SoftBank also controls.

Not so fast. There are several ways the Sprint deal could be good for Yahoo! shareholders.

SoftBank is not using any of its cash to buy Sprint. SoftBank is financing the deal through a large loan of the same amount from several large Japanese banks.

SoftBank's stock is currently worth $32 billion. It's up nearly 600% in the last 10 years. Part of that is growth, but part of that is appreciation in the yen. The yen is worth 33% more today than it was a decade ago, relative to the dollar.

Japan has an inflated currency, and Softbank is embracing that -- even after SoftBank's stock has dropped 20% since Thursday on news of this deal.

My point: This Sprint deal isn't draining their cash or their already strong stock price.

SoftBank and its subsidiary, Yahoo! Japan, still have lots of cash to do a deal with Yahoo!. Softbank has about $10 billion in cash at the moment. Yahoo! Japan has another $3 billion.

But why should SoftBank or Yahoo! Japan use any of their cash when the Japanese banks are hungrily looking for new loans to give out to good corporate clients? Just as they did for Sprint, the Japanese banks might be happy to provide the cash to finance the buyout of Yahoo!'s stake.

How much cash would they need? Yahoo! Japan is currently worth $20 billion. Yahoo! has a 35% stake of that worth, ostensibly $7.2 billion.

Yahoo! and SoftBank haven't been able to come to agreement around price. SoftBank has argued to Yahoo! that there is no buyer for the 35% stake.

Therefore, Yahoo! must agree to a discount. Yahoo! has argued that this is not a block sale. It's actually SoftBank reducing Yahoo! Japan's share count by 35%.

What do you think happens to Yahoo! Japan's stock price and earnings per share as soon as they close a deal with Yahoo and retire those shares? They shoot up significantly.

Therefore, Yahoo! would like a premium to the "market price" of its shares, which it feels are already unfairly depressed.

So, the two sides will likely continue to argue over that for a while. In the meantime, Yahoo! Japan's revenue, gross profit and cash levels keep going up.

One structure that had been reported as being discussed between Yahoo! and SoftBank (as of about last May/June) was the idea of structuring the deal as a cash-rich split.

In this scenario, let's say Yahoo!'s stake was worth $6 billion at the time. The two sides would agree that SoftBank would give Yahoo $3 billion in cash and $1.5 billion in "other assets" (which could be ones SoftBank owns or if it went out and bought Hulu or Foursquare or whatever). Neither side would pay taxes since it would be a swap of assets. It's a perfectly legitimate structure.

SoftBank would say it should be at a discount to the "market price" because Yahoo! doesn't have to pay taxes. However, Yahoo! can argue that neither does SoftBank pay taxes and founder Masayoshi Son is still going to see Yahoo! Japan's stock and EPS explode after the deal closes.

With SoftBank now a big player in the U.S. wireless market, there might even be a way for Yahoo! and SoftBank to partner more closely on some mobile offerings that could benefit both sides moving forward.

The bottom line is that you should ignore those who say SoftBank buying Sprint is bad for Yahoo!. If anything, it's a net positive.

At the time of publication, the author had a position in YHOO.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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