For the past year, the international telecommunications community has watched with baited breath as several conglomerates bid for control of Sprint Nextel Corp. In the end, SoftBank Corp., a Japanese firm, came out on top with a final offer of $21.6 billion. This would make SoftBank a heavy hitter in the global industry and adds some fuel to the hyper-competitive mobile phone market.
In the past two days, tough developments have threatened to at least partially unravel the gains made by the SoftBank deal. Things seemed to be going Sprint's way when the Federal Communications Commission (FCC) gave its approval for the acquisition, per U.S. law. This was wind in the sails for the Japanese company, which has sought to infuse the Spring brand with much-needed vigor to stay competitive in both U.S. and international markets. Considering that Sprint is the third-largest carrier in the United States, according to CBS News, this revelation should have been a strong moment for SoftBank in terms of future branding.
Yet soon after the announcement, the credit ratings agency Standard and Poor's slashed the Japanese firm's debt score to below investment grade. It cited poor cash flow, rising debt and the risk of future non-profitability as reasons for investor alarm.
"Sprint Nextel's exposure to intense competition in the U.S. market is unlikely to subside substantially in the next two to three years," S&P noted in a statement, according to Bloomberg News. Still, "we expect its operating performance to improve gradually, in part reflecting cost reductions and other merger benefits."
What does this mean for investors in the telecommunications industry? A brief look at the SmartStops Risk State analysis shows that the market is also responding poorly to these revelations. This portfolio management tool shows how Sprint's stock price has been facing elevated risk since June 19, indicating that long-term pressures could be building. Those thinking about buying into Sprint ahead of the acquisition might want to take a look at SoftBank's financial state as well before acting.
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Categories: Stock News