Cable magnate John Malone and billionaire investor Warren Buffett are reportedly weighing whether to pour billions of dollars into recovering U.S. wireless carrier Sprint.
According to a report in the Wall Street Journal, which was independently verified by Reuters, Buffett’s Berkshire Hathaway Inc. is considering taking between a $10 billion and $20 billion stake in the wireless company. John Malone, head of Liberty Global Media Corp, is also reportedly mulling an investment, though the value is unknown, the articles indicate.
SoftBank CEO Masayoshi Son met with Malone and Buffett separately last week at a conference in Sun Valley, Idaho, but Sprint head Marcelo Claure is also privy to the negotiations, Reuters notes.
Sprint’s stock jumped more than 8 percent on the news at the end of last week, and remained at $8.58 per share in premarket trading Monday morning. That compares to $8.16 per share before the reports went out Friday afternoon.
The news appears to be consistent with comments made by Son back in February, when he said he would explore all options for Sprint.
“We may buy, we may sell … we may be dealing with T-Mobile, we may be dealing with totally different people,” he said at the time.
Son in May indicated T-Mobile would be his “first priority” for a deal with Sprint, but in June reportedly put talks with that carrier on pause to engage with cable companies Charter and Comcast. The cable conversation was said to be focused on allowing the cable companies to offer wireless services over Sprint’s network or having Charter and Comcast take an equity stake in the carrier to fund network improvements.
But in light of the discussions with T-Mobile and cable players, the new Malone/Buffett reports raise a number of questions. A flood of analyst takes have been trying to field those queries.
Well Fargo Senior Analyst Jennifer Fritzsche says it appears that SoftBank is doing “exactly what is should be doing – hav(ing) multiple conversations with multiple parties.” She notes Son is negotiating from a position of strength thanks to the company’s liquidity position – which will allow it to handle the near-term maturities of its debt.
But it was the same liquidity position that prompted BTIG’s Walter Piecyk to question “why Sprint Chairman Masa Son is soliciting cash equity investments from Warren Buffett when he already has access to material capital.”
“Perhaps the cost cutting and lack of capital investment has taken a toll on Sprint’s ability to grow,” Piecyk writes in a Monday note. “Some might argue outside investment could bolster Sprint’s growth by funding additional capital investment and store openings. However, that would be a clear contradiction of Sprint management and its Chairman Masa Son, which insist that their very low capital investment has been by choice and that technological advancements like HPUE and Magic Box will enable the company to soon realize its goal of offering the American consumer the best wireless network offering.”
Piecyk observes an investment from Buffett could add credibility to Sprint stock, but notes Son already has credibility on his own. And investments from Buffett and Malone to take a third of Sprint shares would make it “hard to see how Masa could maintain control of Sprint” in the event of a Sprint-T-Mobile merger, he adds.
That investment/merger combo is also problematic for MoffettNathanson analysts, who say an infusion of cash from Buffett and Malone would amount to underwriting given the extreme uncertainty around a T-Mobile-Sprint deal’s ability to pass regulatory muster.
“While an infusion of outside equity would certainly relieve the pressure on Sprint to quickly strike a deal with T-Mobile, it is hard to imagine that anyone would want to make a big equity investment without a deal,” MoffettNathanson analysts write. “And, of course, even if Sprint and T-Mobile do reach a deal, they would then face the problem of highly uncertain regulatory approval. And here’s the problem… the combined equity valuation of the two companies already appears to discount almost certain regulatory success, an assumption that, in our view, is wholly inappropriate … Unless an equity infusion in Sprint can be done at well below the current market, diluting current equity holders, Warren Buffett and John Malone would effectively be underwriting all of the risk that the merger would be rejected (and the synergies therefore lost).”
