Sprint Investors Want Out

With the FCC giving a thumbs up for SoftBank to acquire Sprint Nextel (NYSE: S  ) and Sprint to swallow Clearwire, the three companies have all the necessary regulatory approvals to move forward. Sprint investors have already approved the deal -- and now they want out.

Three's company
The deal was structured in a way that current Sprint shareholders could receive shares in "New Sprint" if they wanted to participate in the company's future performance, for better or for worse. Current Sprint investors will own 30% of "New Sprint," with SoftBank owning the remaining 70% through a subsidiary holding company.

Sprint has now announced the results of how investors elected, and only 3% have actively opted in for "New Sprint."

Option

% of Outstanding Shares Elected

Receive shares of "New Sprint"	3%
Receive cash	53%
No election, defaults to receive cash	44%

Source: Sprint.

Nearly half of investors made no vote at all, in which case Sprint defaults them to the cash election. That's a considerable portion of Sprint's investor base that didn't feel too strongly one way or another, but the deal's prospectus makes it clear that not making an election puts investors in the cash bucket. With the transaction being one of the largest telecom mergers in years, it's unlikely that investors simply didn't know it was happening, either.

The deal is subject to proration, and there's simply not enough cash to go around to pay out all the shareholders that prefer cold, hard dollars. The total cash consideration is $16.6 billion. That means that everyone who elected for shares of "New Sprint" will get exactly that, but all the investors that opted for cash (either actively or passively by not electing anything) will get a combination of cash and stock. The company estimates that these amounts will be approximately $5.65 per share and 0.26 shares of "New Sprint."

That doesn't seem to be a lot of confidence in "New Sprint," and investors that are receiving unwanted shares will just have to sell them outright. "New Sprint" could potentially see some immediate selling pressure once the transaction is completed. SoftBank and Sprint expect the deal to close on Wednesday.

Part of that skepticism may be related to the highly leveraged nature of the deal, since SoftBank is borrowing $10.2 billion to make the deal happen. S&P just downgraded SoftBank's credit rating by two notches into junk territory as a result. The rating agency cited Sprint's "weak free cash flow generation and high debt ratios" along with "intense competition in the U.S. market."

The money that SoftBank is pouring into Sprint will help the No. 3 carrier beef up its network, but it also lacks pricing power since its primary value proposition to smartphone users is unlimited data. Larger rivals have switched to tiered pricing plans that give them revenue upside as data usage continues to soar.

Sprint shareholders may want out, but they won't be able to get out until Wednesday.

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