TOKYO Japanese wireless service provider Softbank Corp (9984.T) is in talks with three major Japanese banks to borrow $23 billion (1.8 trillion yen) to finance a bid for U.S. operator Sprint Nextel Corp (S.N), sources with direct knowledge of the matter told Reuters on Friday.
Softbank has been looking at how to break into the U.S. market for months, eyeing growth beyond its stagnating home market, according to a person with knowledge of its planning. But one brokerage warned that a deal of this size could leave Softbank with "unacceptably high" levels of debt.
Sprint, whose market value soared on news of its talks with Softbank - confirmed by both companies - has net debt of about $15 billion, while Softbank has net debt of about $10 billion.
Adding the $2 billion net debt of smaller rival eAccess Ltd 9427.T, which Softbank recently agreed to buy, would raise the new company's "post-deal gearing levels to unacceptable heights," Societe Generale said in a client note. "This deal simply appears to be driven by Masayoshi Son's belief that Sprint Nextel is too cheap, and little more."
Son, 55, and ranked by Forbes as Japan's second-richest man, has built Softbank from a small packaged software vendor in the early 1980s to a telecoms-centered group worth more than $40 billion through a series of risky acquisitions.
Buying about 70 percent of Sprint Nextel could be his riskiest yet.
Analysts said Son - a Japanese citizen of Korean heritage who went to high school and college in California - was likely taking advantage of both a strong yen and a shake-up in a U.S. wireless market dominated by AT&T (T.N) and Verizon (VZ.N) to make his move.
Softbank's ambitions may not stop with just Sprint, which might also be looking to buy out its partner, wireless service provider Clearwire Corp CLWR.O.
After sharp rallies on Thursday, both Sprint and Clearwire gave up some ground in noon trading on Friday. Sprint fell 1.7 percent to $5.66 and Clearwire dropped 1.1 percent to $2.24.
A consensus appears to be emerging among analysts and investors that if Softbank controlled Sprint it would make sense to be more involved with Clearwire somehow, given that the latter has attractive wireless spectrum assets.
"It seems plausible if a Softbank controlled Sprint it would more actively partner with Clearwire - maybe fund Clearwire or even acquire Clearwire," said RBC Capital Markets analyst Jonathan Atkin.
Similarly, Pacific Crest Securities analyst Michael Bowen said that a deal for Clearwire would be expensive, but would help Sprint with its network capacity.
But the Nikkei newspaper reported Softbank's next target might actually be smaller U.S. mobile provider MetroPCS Communications Inc PCS.N, which this month agreed to merge with T-Mobile USA, part of Deutsche Telekom AG (DTEGn.DE).
A two-step deal to buy Sprint and MetroPCS could cost more than 2 trillion yen ($25.6 billion), Nikkei reported on Friday. It would be the biggest overseas acquisition by a Japanese firm ever and would vault Softbank into the top ranks of wireless carriers worldwide.
But investors' biggest concern is how Softbank would finance such a big buy. Some analysts also queried the business logic of combining Japan's No. 2 wireless service with the No. 3 carrier in the United States.
"How Softbank will finance this deal, what this means for management structure and its finances, that's where the market is looking right now," said Mitsushige Akino, chief fund manager of Mitsuyoshi Asset Management.
The proposed bank syndicate in talks with Softbank includes Mizuho Financial Group Inc (8411.T), Sumitomo Mitsui Financial Group (8316.T) and Mitsubishi UFJ Financial Group (8306.T), said the sources, who asked not to be named as the talks are private.
Standard & Poor's put its "BBB" long-term rating on Softbank on credit watch with negative implications, saying the deal "may undermine Softbank's financial risk profile."
Investors dumped Softbank shares in Tokyo on Friday, pushing the stock down as much as 17 percent in its biggest one-day decline and knocking close to $7 billion off its market value.
"The strong yen is probably one of the reasons for Softbank to acquire overseas assets, but I don't think this deal will be good for Softbank," said Yasuo Sakuma, portfolio manager at Bayview Asset Management in Tokyo.
"For Sprint, this seems a must-do deal, while it's not for Softbank. The U.S. mobile telecom market is already mature," he said. "It's going to be very difficult to turn Sprint around."
Shares in eAccess dropped 15 percent on Friday as the market adjusted the value of the agreed Softbank share swap deal in the wake of Softbank's sharp slide.
(Additional reporting by Dominic Lau; Writing By Kevin Krolicki and Ben Berkowitz; Editing by Ian Geoghegan and Tim Dobbyn)