Is Sprint (S) Undervalued by 67%? - A look before its 2012 Q4 Earnings Report

Softbank's Acquisition Revisited 

Did you know?

Sometime in October of 2012, Softbank, a Japanese telecommunications and internet service provider, offered to buy 70% of Sprint for $20B. This would result in Softbank effectively owning a majority share in Sprint. $12.1 billion would be used to purchase existing shares at $7.30 per share. The remaining $8 billion would go towards purchasing new shares at $5.25 each. The two companies were expecting the deal to close in mid-2013.

This effectively means there will be an additional 1.5B shares or 4.5B total of Sprint. $8B divided by $5.25/share is approximately 1.5B shares.

Also, Softbank is paying $20B for 70% of the company. Basically Softbank is valuing Sprint at $28.5B. The remaining thirty percent of the company would be at $8.5B.

Given that the market capitalization (as of 1/24/2013) is approximately $17B. We can argue that Sprint is undervalued by $11.5B  or about 67% of its current value. 

If this is the case, we are looking at a $3.79 premium that Softbank is paying at current market level of $5.67. This would give us a share price of $9.46.

Suppose the dilution of the shares WAS NOT factored in Softbank's valuation, which I can't imagine why it wasn't. But, regardless suppose that the remaining 1.3B shares (4.5B shares after new shares issued less 3.2B shares purchased by Softbank) is calculated at current market prices after dilution. Seeing how the market cap is $17B (as of 1/24/2013) we divide this by 4.5B shares and arrive at $3.77/share.

Take the $3.77/share and multiple that by 1.3B shares and we get approximately $5B. $5B plus the $20B Softbank has agreed to pay is still $8B more than the current market cap or 47%.

However way you cut it, Sprint shares are either undervalued or Softbank got ripped off.

What current and new information do we have? Do the technicals add up?

Honestly, there hasn't been much action since the acquisition. The market seems to have already factored in Softbank's valuation or maybe Sprint needs a boast. Earnings are scheduled to be released February 7th. That means there's still two weeks including today.

We all know that the big 4 telecommunications companies in the US are Verizon, AT&T, Sprint, and T-Mobile. If one does better than the other, it is usually because subscribers switched carriers. So then is it possible to have Verizon, AT&T, and Sprint do better than they did last quarter? In theory yes, because they could all take customers from T-Mobile. Actually, in Q3 2012, Verizon, AT&T, and Sprint all released positive earnings beating expectations on varying degrees. For Q4 2012, AT&T and Verizon already released positive earnings. 

What are our options?

Here is the punchline, basically you have the same options you do with any other stock. Buy, Sell, Short, etc.

Disclaimer: Article is written for informational purposes. It isn't intended as investment advice.
Disclosure: I have a position in S.

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