Softbank Hits ‘Junk’ Status as it Unveils Sprint Capex Plan

by Matt Klassen on July 11, 2013

Now that the “i’s” are dotted and the “t’s” are crossed in its Sprint acquisition, Softbank has unveiled its capital expenditure (Capex) plan for America’s third largest wireless provider. Over the next two years Sprint will spend approximately $16 billion to boost its business, investing in infrastructure and network improvements that will allow it to better compete with larger rivals AT&T and Verizon, Softbank CEO Masayoshi Son explained.

The money for the steep Capex budget will come in part from “cost savings and synergies associated with the merger,” more than doubling Sprint’s previous pace of investment, with much of that money going to build the company’s LTE network.

But news of Softbank’s Sprint acquisition and this steep capital spending plan did not sit well with everyone, as following the official announcement of the acquisition yesterday credit rating agency Standards & Poor’s immediately downgraded Softbank’s debt rating two notches to BB+, ‘junk’ status, over concerns that the investment carries significant risk.

While S&P cited financial risks associated with the purchase of Sprint as the reason for the downgraded rating, it noted that Softbank’s outlook remains strong, in part due to the potential for cost savings associated with the merger. In the short term, however, any cost savings the merger will generate will quickly be spent, and that’s not the sort of news that investors like to hear, even if the end result is a greater return on their investment.

Further, the downgrade is unlikely to increase Softbank’s “financing costs” as it will still be able to rely on funding from Japanese banks, said Hiroshi Yamashina, senior telecoms analyst at BNP Paribas in Tokyo.

Seemingly unphased, Mr. Son explained that the two companies, Softbank and Sprint, will each benefit greatly from the merger. According to reports, the two carriers will open a joint R&D facility in California as early this year, one that will “”give birth to new technology inSilicon Valley, the center of Internet technology.”

The risk that credit agency S&P has stated, however, remains a very real concern for Softbank and its new subsidiary Sprint. Having lagged behind on LTE development, Sprint has seen its subscriber base continue to haemorrhage, as consumers look to rivals AT&T and Verizon for better network coverage and performance. While Mr. Son acknowledged that much needs to be done to bolster Sprint’s LTE network, there’s no guarantee that the customers will return once such work is complete.

That said, the news that Softbank has officially arrived and brought with it Mr. Son’s deep pockets—and his company’s ‘junk’ status—is certainly good news for Sprint, as over the last several years the company has been spinning its wheels, struggling to fend off the lower end of the market while unable to grow to compete with its larger rivals. Now things will change, one way or another.

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Written by: Matt Klassen. www.digitcom.ca. Follow TheTelecomBlog.com by: RSS, Twitter, Facebook, or YouTube.

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