Deal to Buy Sprint Is SoftBank\'s Biggest Gamble

SoftBank of Japan is making its biggest gamble yet: entering the American cellphone market.

SoftBank's complex $20.1 billion deal to buy majority control of Sprint Nextel will unite Japan's fastest-growing cellphone service provider with one of the United States' most troubled. The idea is to provide Sprint with a stronger, deeper-pocketed partner that can help finance its network overhaul and, eventually, pursue additional mergers. But SoftBank, an Internet and communications company, is making a risky wager that it can break the dominance of Verizon and AT&T in the United States the way it did a similar duopoly that long reigned over the Japanese market.

“SoftBank brings so much more to Sprint than money,” Daniel R. Hesse, Sprint's chief executive, said on an analyst call. “This investment provides the opportunity to benefit from the knowledge and expertise of a leader in mobile Internet technology with a proven track record of challenging larger incumb ent carriers.”

Together, the two companies would have $80 billion in revenue and $18 billion in earnings before interest and taxes. And they would nearly double Sprint's customer base to 96 million, giving the company greater purchasing power.

SoftBank's founder and chief executive, Masayoshi Son, was blunt in his goal: creating the biggest and fastest wireless network in the United States. It is the strategy his own company is pursuing in Japan, aimed at drawing in users of the latest smartphones.

Sprint is only beginning to roll out its next-generation Long Term Evolution network, trailing Verizon Wireless and AT&T.

“U.S. citizens don't have this experience of high speed,” Mr. Son said on the analyst call. “We're going to bring that to the States.”

Shareholders in Sprint and SoftBank appeared less pleased by the transaction. Sprint's shares closed down slightly on Monday, at $5.69, while SoftBank's stock tumbled 5.3 percent, to 2,268 yen ($28.92).

While infusing Sprint with cash, the deal would slow SoftBank's efforts to repay its own hefty debt load, which stood at nearly $13 billion as of June 30. Mr. Son has said that he has already repaid much of the debt his company took on when it bought Vodafone's Japan arm in 2006 and has done it well ahead of schedule.

The deal on Monday was a welcome development for the financial advisers involved in a year starved for deal activity. If completed, Monday's transaction would be the biggest deal by a Japanese company in the United States in more than three decades, according to data from Thomson Reuters. It would also be the biggest deal so far this year involving a foreign investment in an American company.

It is also a model of complex financial maneuvering. SoftBank will initially pay $8 billion to acquire new shares of Sprint, infusing the company with much-needed cash ahead of looming debt maturities. It will then offer existing Sprint sha reholders the chance to cash out some of their holdings for $7.30 each, a handsome premium to the stock's current levels.

SoftBank would gain a 70 percent stake in Sprint, which would remain a publicly traded company. That would give Sprint additional flexibility to raise money or make acquisitions. And it would allow the transaction to close more quickly. The two sides expect it to be completed by the middle of 2013.

The pact signals a belief that more mergers are to come in the rapidly shrinking telecommunications industry. Two weeks ago, T-Mobile USA announced plans to merge with a smaller network operator, MetroPCS, to create a stronger competitor in low-cost service plans.

Investors in Clearwire seem to believe that their company, a network operator and a Sprint partner, will be a natural merger target. Shares in the company rose 16 percent on Monday, to $2.69, while several classes of its bonds gained as much as six percentage points of value.

S print, which owns nearly half of Clearwire and has several board seats, has been exploring options to take greater control of its partner, according to people briefed on the matter, who spoke anonymously because they were not authorized to discuss private negotiations. But the bigger service provider feels no particular urgency to complete a deal soon.

As with the Sprint deal, Mr. Son has taken risks throughout his career. He founded SoftBank as a software publisher in 1981, but he began moving the company into Internet services, partnering with the likes of a nascent Yahoo.

SoftBank entered the mobile services business in 2006 by buying Vodafone's operations in Japan, becoming a distant third to NTT DoCoMo and KDDI. The deal drew brickbats from investors, who fretted that Mr. Son had overpaid and could not compete against better-financed rivals.

But through a combination of deal making, aggressive marketing and smart pricing, the company became a serious p layer, earning $2.5 billion before interest and taxes in its 2012 fiscal year. It is poised to overtake KDDI as Japan's second-biggest service provider, if a planned takeover of a smaller competitor is completed.

Still, Mr. Son apparently believes that moving into a new market - a larger one with plenty of growth in the lucrative smartphone field - is a better overall strategy for his company and its investors.

“It's not an easy path to go,” Mr. Son said at a news conference on Monday. “But without taking on a challenge, we may end up facing bigger risks.”