SoftBank Just Made A Mistake, But Sprint Should Survive It

I am usually among the most bullish authors on Sprint (S) stock – not hard at times like this, when almost everyone else is bearish – and so its unusual for me to write about why a bounce in Sprint stock shouldnt be believed. To be clear, I remain bullish on the company.

However, the recent bounce off of its lows is almost certainly artificial, and investors should be prepared to see further declines if the support is withdrawn, which seems possible. At the very least, it may slow its bounce from here as it has to earn further gains without a prop-up.

Nevertheless, I remain bullish on Sprint, and regard any potential dips or prolonged weakness as buying opportunities rather than cause for alarm.

Bullish Outlook

I have not backed off my bullish stance on Sprint. The case for me is much the same as it always was, Sprints unparalleled trove of spectrum, which is almost perfectly suited for 5G applications. I have bought additional Sprint shares on the dip to $6 and may consider adding further to my position if the stock remains depressed or even falls further.

However, Im not the only one. Sprints majority owner SoftBank (OTCPK:SFTBY) has acted in recent days to add to its equity position in the company, already over 80% before its most recent round of share purchases. SoftBank now owns 3.332 billion shares of Sprint, out of a total share float of 4 billion.

This is almost certainly being done for the sole purpose of propping up the stock price, not as part of a larger strategic shift or recommitment by CEO Masa Son. In fact, the strategic implications of these purchases is actually negative, though only mildly so, and not enough to cause me to abandon my thesis.

Merger’s Stock Impact

Sprint stock peaked at $9.65 at the beginning of the year. Ever since, Sprint stock has been falling, which many attributed to the gradually diminishing chances of a merger. There is no doubt that the failure to complete the deal with T-Mobile (TMUS) was a considerable shock to the market, and a decision that has been widely met with skepticism or outright ridicule. Bloomberg Gadfly was particularly disdainful, even before the final decision was made.

Bloombergs assessment struck me as a little harsh, even for those who are bearish on the stock, and therefore by extension pro-merger. Son appears to have made a real effort to get the deal back on track, if he could secure terms commensurate with the value he thought Sprint was bringing to the table with its spectrum. T-Mobile apparently wanted the deal a little more than they let on, too, just as Son had calculated they would. Both companies spent several days reviewing the terms of a new, improved offer T-Mobile had put together along with its German parent.

The ultimately unbridgeable problem was control. After spending several years trying to jettison it, Deutsche Telekom is now apparently so enamored of its US asset it is unwilling to let its ownership stake fall below the level required by German regulators to report T-Mobiles profit streams on its own balance sheet. Son also wanted to keep control of the new company, for reasons of long-term vision rather than reporting requirements. Neither would budge, and when a Sunday night meeting between Sprint management and T-Mobile executives failed to break the impasse, the merger was officially called off.

SoftBank Steps In

While I was actually hoping the merger would fall through, as I believed Sprint was selling low on its spectrum, I had no illusions it would not produce a further fall in the short term, at least briefly. One reader asked me if they were in trouble after buying into Sprint at $6.60. I told them that it would probably fall below that level in the near term but that I expected it to find a floor quickly.

It has indeed, but instead of a broad market consensus we really have just one company to thank for that. Immediately after pulling out, it was announced SoftBank would make further investments in Sprint. However, as written, the release seemed to suggest that this support will come in the form of share purchases on the open market, rather than the issuance of additional shares of Sprint stock for SoftBank to purchase.

In the last few days, this has been born out, as SoftBank has reported a series of open market transactions to purchase Sprint stock at prices ranging up from $5.70. This has acted to halt the decline in share price and even helped to reverse it somewhat.

Analyzing The Purchases

It is certainly unusual to call the purchase of a companys stock a negative for that company, but SoftBanks position with regard to Sprint is rather unique. As I said, Son likes control, but that is no issue here. SoftBank is the principal owner at over 80% and it has just terminated a potential merger, anticipation of which had led to a substantial run up in the stocks value.

With employee bonuses and general market sentiment about SoftBank itself both tied to Sprints share performance, its not entirely unrealistic to think Masa Son has decided to make sure the news does not turn too negative. He cannot run the price all the way back up to $9,65 by himself, but he can lend a bit of a helping hand.

My contention that SoftBank is engaging in a form of price targeting for the stock is based upon an analysis of the companys submissions to the SEC over the past week and change. Each of these three submissions details purchases of Sprint stock by SoftBank on two separate days. In these forms, SoftBank includes language specifying that the average purchase price it reports, which varies with each submission, is a weighted average. In the footnote, it gives the full range of purchase prices on that day.

Of these six days reported, all have different lower-bound prices, as Sprint stock bounced around. The first day has the lowest upper-bound price, as would be expected since Softbanks purchases had not yet begun to push the stock price upward. The price range shrinks as time goes on, with the gap between the lower-bound and upper-bound eventually reaching just one-fifth of its original size.

However, SoftBank reported the same upper-bound price – the maximum price it paid for that day – on no less than four of the next five days. That upper-bound price: $5.99. In other words, whenever the stock hit $6 on those days, SoftBank stopped buying. That is the price floor SoftBank appears to have targeted.

Admittedly, the pattern isnt perfect. On the final day, SoftBank continued to purchase shares at a price range of $6.05-$6.25, well above the floor I hypothesize SoftBank is targeting. I admit I cannot offer an explanation for that discrepancy. I remain convinced, however, that four days out of six with the exact same upper-bound is unlikely to be mere coincidence.

Reaching Its Limits

It might not matter that much. Either way, SoftBank is severely limited in the amount of shares it can purchase. Under the terms of its merger agreement with Old Sprint, if SoftBanks ownership rises to 85% of the companys outstanding shares, it is required to make a tender offer for the rest.

While that would not necessarily be a bad deal for SoftBank – I still think Sprint is undervalued and Son obviously does, too – Son has made it clear that is not the direction he is looking to go. A lot of investments require his capital right now, including one with Uber (UBER) or Lyft (LYFT), and he doesnt want to spend cash buying the small portion of Sprint he does not already control.

This means that with 4 billion shares outstanding, SoftBank cannot own more than 3.4 billion. Its recent string of purchases have already moved its ownership from 3.31 billion shares to 3.332 billion. In other words, it has already purchased 25% of all the remaining shares it will be allowed to purchase. In less than two weeks. Very soon, Sprint stock will have to swim or sink without SoftBanks assistance.

One Door Closes…..

There is one other piece of evidence of price-targeting: SoftBank has explicitly declined an alternative that would have been better for Sprint in the long-term, whose only real shortfall is that it wouldnt have boosted Sprint stock in the short term. I am speaking of direct sales of newly issued stock.

With Sprint now facing the need to modernize its network to prepare to compete on its own, a task some have estimated could require as much as $25 billion in network spending over the next few years, Sprint needs all the cash it can lay hands on. With SoftBanks 85% cap, Sprint could have issued roughly an additional 500 million shares to SoftBank without breaching the ceiling. Even accounting for a roughly 12% dilution, those shares could have fetched Sprint somewhere between $2.5 billion and $3 billion at its market price.

Not enough to pay the whole way, obviously, but still a considerable boost to its capital expenditure budget. And with SoftBank buying all the newly issued shares immediately and Sprint still well undervalued, such a dilution might not have even pushed the price down very far. But certainly it would not have pushed it up, the way reducing the number of shares available on the open market has.

….But Others Are Still Open

I consider this, as I said before, actually a strategic negative for Sprint, since it has lost one of its principal potential sources of new capital from its current owner, who has the most stake in its success and every incentive to help it thrive. But not enough of a negative to change my thesis. Sprint retains various other methods of accessing capital, including the sale of spectrum backed notes, which it has already used once to such great effect.

SoftBank can even help with these mortgages, since it can lend Sprint money without breaching its share count ceiling. I do not consider SoftBank foreclosed by these transactions from rendering future assistance to Sprint should it need it. And I also think there is a real chance it wont need it, if the open market values its spectrum assets appropriately.

Conclusion

Sprint investors should not mistake this recent bounce in the stock for a permanent bottom, as it is almost certainly being artificially induced. However, Sprints long-term prognosis remains good, owing to its unparalleled spectrum hoard. I am prepared for the possibility the stock may dip further before its real recovery, but I remain confident it will recover, and I consider the dips to be a buying opportunity, should they arise.

Disclosure: I am/we are long S.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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