Dial M for Merger
Global M&A Deal of the Year, U.S.: Softbank/Sprint
Honorees: Dow Lohnes; Foulston & Siefkin; Lawler, Metzger, Keeney & Logan; Mori Hamada & Matsumoto; Morrison & Foerster; Polsinelli Shughart; Shearman & Sterling; Skadden, Arps, Slate, Meagher & Flom; SoftBank Corporation; Sprint Nextel Corporation
SoftBank Corp.'s $21.6 billion acquisition of a 78 percent stake in Sprint Nextel Corporation was a classic piece of dealmaking drama. It had everything: box office numbers (it was the largest announced U.S. transaction of 2012 and the largest ever outbound investment by a Japanese company); myriad plot twists; and colorful protagonists.
The story started in October 2012, when Masayoshi Son, the charismatic billionaire founder and CEO of Japanese telecom giant SoftBank, announced a bold deal for Overland Park, Kansas–based Sprint.
For Sprint, North America's third-ranked wireless company, the combination would provide much-needed capital to better compete against leaders AT&T Inc. and Verizon Communications Inc. For SoftBank, it would gain a solid foothold in the lucrative U.S. cellular market and the chance to revive Sprint's fortunes, as it had with Vodafone Japan following its $15 billion acquisition of that company in 2006. "When two rich firms rule the market like a duopoly, we see this as a real opportunity for a challenger," SoftBank's Son said at the time.
Keen to ensure that Sprint didn't fall further behind its rivals, SoftBank offered to inject $3.1 billion in up-front capital to help develop its network capacity. Sprint earmarked some of the funds to purchase the remaining stock of wireless Internet company Clearwire Corporation (Sprint already owned a 50.8 percent stake in the business), which was struggling financially but owned valuable spectrum assets—including a large holding in the 2.5 GHz range, a key frequency for the new breed of 4G mobile services.
An equity investment would have triggered regulatory restrictions on foreign ownership of U.S. companies, however, necessitating a lengthy approvals process. "It left us facing an interesting challenge," explains Morrison & Foerster global M&A cochair Robert Townsend, who led the firm's advice to SoftBank alongside Tokyo managing partner and longtime SoftBank counsel Kenneth Siegel. "Sprint was already lagging behind its competitors, so we didn't have time to wait for [Securities and Exchange Commission] approval."
To circumvent this issue, MoFo, together with Sprint's advisers, Skadden, Arps, Slate, Meagher & Flom, came up with the ingenious plan to structure the initial investment as a debt security that would convert to equity at $5.25 per share—Sprint's share price before news of the SoftBank acquisition inflated its value—if the acquisition was approved.
The innovative transaction structure also involved the creation of a new publicly traded corporate entity, "New Sprint," of which Sprint would become a wholly owned subsidiary. Once the deal was met with shareholder approval, SoftBank would pay $1.9 billion to buy new common shares of New Sprint, which would be renamed "Sprint Corporation" upon consummation of the merger, further fortifying the company's balance sheet. The remaining $16.64 billion in cash would then be distributed to existing shareholders, who were given the option to either cash out at $7.65 per share—a more than 50 percent premium on Sprint's closing share price prior to the merger announcement—or go for a longer-term play by exchanging their existing shares for stock in the new, stronger company.
Meanwhile, in Tokyo, Siegel was leading round-the-clock efforts to finalize the equally complex financing package. His team worked wonders in putting the transaction—comprising $17.7 billion in bridge loans from Japanese banks and a $3.3 billion 144A bond offering on the Singapore Stock Exchange that ranks as the largest ever by a nonfinancial Japanese corporation to retail investors—together in less than 10 weeks from start to finish. (The banking consortium was advised on the financing by Baker & McKenzie.)
Then things got really interesting.Last December, another maverick billionaire, Charles Ergen, cofounder and chairman of satellite TV company DISH Network L.L.C., entered the fray by making a rival bid for Clearwire. Townsend describes the move as "frustrating and exceptionally unusual," as Sprint already owned a controlling stake in Clearwire and had no intention of selling, but Ergen wasn't a stranger to confrontation and controversy: His company was sued last year by all four major networks over its introduction of a TV player that automatically skips advertisements, leading The Hollywood Reporter to label him "the most hated man in Hollywood."Clearwire ultimately deemed the Sprint offer to be more attractive, but Ergen wasn't done yet. Far from it.