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SoftBank seeks profitability overseas

Publication Date : 17-10-2012

 

SoftBank Corp.'s planned purchase of Sprint Nextel Corp., the third-largest wireless carrier in the United States, is aimed at ensuring SoftBank's growth through overseas expansion as the domestic market nears saturation, according to sources.

However, concern is rising in the securities market over SoftBank, the nation's third-largest mobile operator, taking on large debt for the purchase. SoftBank is moving to assure the market of the company's ability to produce synergies by working with Sprint, they have noted.

The domestic mobile market is near saturation, as shown by the number of mobile phone subscribers as of the end of March this year surpassing the population.

SoftBank entered the mobile communications market in April 2006 when it purchased the Japanese arm of British telecom firm Vodafone at a huge cost of about 1.75 trillion yen. At the time, SoftBank said the firm was determined to "surpass NTT Docomo within 10 years."

A SoftBank goal calls for the company to hit 1 trillion yen in the group's consolidated operating profits in fiscal 2016. Expanding abroad is thought to be the quickest way to do that, according to the sources, who declined to be named publicly.

Bigger potential in US

Subscriptions to mobile phone services in the United States number about 350 million, about 2.5 times the number in Japan. But US communication speeds are about half of Japan's, meaning the US market has high growth potential, the sources noted.

In a press conference Monday, SoftBank founder and Chief Executive Officer Masayoshi Son referred to Sprint's sitting third among US carriers, saying, "When we purchased Vodafone, the company was in third place in the mobile market in this country, a situation similar to Sprint." Son indicated SoftBank was confident that entering the United States will allow the company to use its business know-how accumulated since the Vodafone purchase.

Anxieties over large debts

Set to jointly extend loans for SoftBank's purchase of Sprint are four banks: Mizuho Corporate Bank, Sumitomo Mitsui Banking Corp., Bank of Tokyo-Mitsubishi UFJ and Deutsche Bank. The four have informed SoftBank of their approval of about 1.6 trillion yen in joint financing.

The four banks said they are considering inviting other financial institutions to lend to SoftBank after completion of its purchase of Sprint.

The banks apparently give high marks to SoftBank's success in steadily expanding its business since 2006 and its potential for future growth overseas.

Some in the securities market, however, say they are concerned that SoftBank, having managed to reduce debts related to the Vodafone purchase, is set to again embark on mammoth investment in an overseas telecom firm.

SoftBank shares closed at 2,268 yen Monday, down about 20 per cent compared to Thursday, just before the plan was made public.

Moody's rating agency announced Monday it was reviewing SoftBank's rating for a possible downgrade.

SoftBank a 'white knight'

The purchase by SoftBank of Sprint has been deemed by some in the United States as a bailout of Sprint, which has been in financial distress.

Sprint booked deficits for the fifth consecutive year and, although it is ranked third among US mobile operators, it is far behind the top two, AT&T and Verizon Wireless, in terms of subscription contracts. Sprint is also lagging behind rapidly changing technology, such as moves to next-generation high-speed networks, including Long-Term Evolution (LTE).

Sprint Chief Executive Officer Dan Hesse, who attended Monday's news conference, noted his firm's subscribers, which he said had been declining from around 2008, turned upward, hitting a record high this year, with profits showing signs of recovery from the beginning of 2012.

Thanks to SoftBank's investment, Sprint will be able to increase its capital investment to upgrade its networks, Hesse said.

Chief Executive Research Director Hideaki Yokota of MM Research Institute said, "As telecommunications industries have now entered an age of competition across national borders, SoftBank, through the planned purchase of Sprint, will be able to secure a stronghold in global competition ahead of other Japanese mobile carriers.

The timing of the purchase is also good in light of the yen's appreciation," he said.

Since SoftBank played a key role domestically in expediting the rapid spread of high-speed communications networks, the company also will push ahead with LTE projects in the United States, Yokota said.

Given that SoftBank has to raise a huge amount of cash to fund the purchase of Sprint, the company, at least for the time being, will find it hard to compete in further domestic price wars, he said.

'Plans envisioned 2 years ago'

Son, in an exclusive interview with The Yomiuri Shimbun Monday, revealed he had been considering buying an overseas telecom firm for the last two years.

He also noted his ambition to overtake NTT Docomo in two to three years in terms of accessibility and communication speed.

Since the Vodafone purchase two years ago, SoftBank has repaid most of the purchase debt and surpassed KDDI, Japan's second largest wireless carrier, in profitability, Son said.

Judging the time has come to expand abroad, he began studying the feasibility of such a purchase, Son said.

"I thought it risky for our company to remain only in the domestic market in light of the fast-dwindling population and increasingly unstable government finances," he stressed.

"I don't rule out the possibility of our company purchasing overseas telecom firms in addition to Sprint, as we are aspiring to be the world's No. 1 in telecommunication services," he said.

"When I said we were resolved to overtake NTT Docomo, I think very few took it seriously, but I meant it," Son said, adding, "We are determined to outpace NTT Docomo not only in terms of subscribers but also comprehensively, in terms of accessibility and communication speeds."

 

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