While shareholders of Sprint Corp. (S) ended last week with euphoria with reports suggesting that Warren Buffett or John Malone could take a stake in the wireless carrier, the hangover may set in Monday as shares gave back some of those gains.
Shares of Sprint dropped 1.4% to $8.43 on Monday, after rallying 4.3% Friday on news of the talks.
Attracting funds from such esteemed investors could address some of Sprint's woes as it seeks to merge with T-Mobile USA Inc (TMUS) . However, they would not be a panacea and could actually raise concerns for the number four wireless carrier.
For starters, why would Sprint Chairman Masayoshi Son sell rather than invest himself? Son, who runs Japanese telecom and technology power Softbank Corp, is raising $100 billion through his Softbank Vision Fund, attracting such deep-pocketed investors as Apple Inc. (AAPL) , Qualcomm Corp. (QCOM) and the Kingdom of Saudi Arabia.
A $10 billion to $20 billion investment from Buffett, as reported, would represent 23% to 37% of Sprint's equity, BTIG LLC's Walt Piecyk noted in a Monday report, reducing Softbank's more than 80% position.
"The stock would gain some credibility, but Masa is undoubtedly one of the most respected, credible investors/operators of this era," Piecyk observed. "He just raised nearly $100 billion to invest as he sees fit from high profile companies like Apple and Qualcomm. Why does he need Buffett's money or credibility and, more importantly, why is he selling?"
Looking past the question of whether Buffett would actually make such an investment, the investment could help Sprint pay down some of its debt.
The carrier's balance sheet is an impediment to a T-Mobile USA merger, MoffettNathanson LLC analyst Craig Moffet suggested in a Monday note.
Sprint reported $35.8 billion in debt in May, which exceeds its market cap of $34.6 billion. When adjusting for capitalized leases and other items, Moffett writes, Sprint's comes to 6.1 times Ebitda, compared to a ratio of 4.0 for T-Mobile.
"[I]ndeed, it may well be that a T-Mobile deal would only be possible if Sprint's balance sheet were first completely restructured, either through bankruptcy or a massive injection of new equity," Moffet wrote.
A large equity investment could complicate a merger, however. The combined Sprint and T-Mobile would have an equity value of $87 billion, which Moffett suggests reflects the savings and other benefits from a merger with T-Mobile USA. But the merger could produce an "unwieldy combined equity valuation that couldn't be supported with current synergy estimates," leading to the stocks "falling rather than rising" if a deal were announced.
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