Sprint’s Stock Price Will Be Lower After The Softbank Merger Is Completed

I’ve read a lot of comments that imply confusion as to what is happening with Sprint and Softbank.   It should be beyond argument now (despite some goofballs that tried to argue otherwise) that no one will be receiving the $7.65 cash merger consideration for all of their $S shares.   I explained this in a post when the story first broke, and the terms were then changed from the terms that were in my original post, but the theme is the same.   As the press release explains:

Based on the number of shares of Sprint common stock outstanding as of July 5, 2013, each share of Sprint common stock for which a cash election (or no election) was made will be converted into the right to receive approximately $5.647658 in cash and 0.26174408 shares of New Sprint common stock (subject to adjustment based on changes in the number of outstanding shares of Sprint common stock between July 5 and the closing of the merger).

 Sprint and SoftBank currently expect to close the merger on July 10, 2013, effective after the close of trading that day.

So for every share of S you own, you’ll receive roughly $5.65 in cash and you’ll be left with .26 shares of “new” Sprint.   We can, of course, calculate the breakeven price that the market is implying for the new ex-merger Sprint based on the current price of $7.06:

0.26 * S(new) + $5.65 = $7.06

a little 7th grade algebra gets you to:

S(new) = (7.06 – 5.65) / 0.26 = $5.42

That doesn’t mean that Sprint will trade at $5.42 tomorrow, but $5.42 is the reference “value” you should have in your head for trading decisions today.

I’m writing this post because based on questions and comments I’ve seen so far regarding Sprint,  I expect to see tons of “WHY IS SPRINT DOWN?” questions on the morning after the deal closes (Which should be tomorrow morning, although it might be Friday morning).

disclosure: I am long $S, but not for the long haul

related:  Turning Japanese – or “Why Sprint Isn’t Trading Higher This Morning) – note that the analysis in that post is based on old, outdated data.

-KD

EDITnowhere in this post did I insinuate that you will lose money tomorrow if you owned $S today – unless of course you elected to receive stock for the merger consideration – then you will definitely lose money.    For the rest of us/you: you may lose money tomorrow – if New S trades below the value implied by the current price of $S, and you may make money tomorrow if New S trades above the value implied by the current price of $S.  The point of this post is to explain a) you’re not getting $7.65 per share in value – at least not yet – you might if you hold New S for a long time and it rallies and b) the reason why $S will trade down ex-merger.

ps – for a fun exercise you can try to rationalize why 79.7MM Sprint shares elected to receive stock in the merger.   There are 3 basic possibilities:

1) liquidity:  these shareholders thought that it would be too difficult to elect for cash and then buy their shares back lower ex-merger

2) taxes:  these shareholders didn’t want a taxable event

3) stupidity: these shareholders hate money

I don’t find #1 to be plausible, and you have to have really special circumstances to make #2 plausible… In reality, I think most of the stock electing shares probably didn’t understand what they were doing and didn’t understand the dynamics of the trade.

 

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