“Capital and lots of it. That’s always been the key to success in global communications, and now more than ever.”

—Investing Daily Chief Investment Strategist Roger Conrad

Shares of Sprint Nextel Corp. (NYSE: S), the nation’s No. 3 wireless carrier, jumped 13.5% on April 15 after the company announced that it had received an unsolicited takeover offer from pay TV operator Dish Network Corp. (NasdaqGS: DISH).

According to its press release, Dish values its offer at $25.5 billion, consisting of $17.3 billion in cash and $8.2 billion in stock. Under the proposal, Sprint shareholders would receive $4.76 in cash and 0.05953 Dish shares for every Sprint share they hold, for a total value of $7.00 a share, based on Dish’s closing price on April 12, 2013. If the bid is successful, Sprint shareholders would hold 32% of the combined company. Dish has about $10 billion in cash, according to Bloomberg.

Dish, with about 14 million pay TV subscribers, aims to expand its reach by combining Sprint’s voice and wireless operations with its TV and broadband Internet businesses. That would let it bundle these services. It also opens the door to delivering Dish’s television programming over Sprint’s wireless network.

However, Sprint has already agreed to a takeover offer from SoftBank Corp. (TYO: 9984, OTC: SFTBF), Japan’s No. 3 wireless company, in a complex deal valued at $20.1 billion for a 70% interest. Under that agreement, $12.1 billion will be paid to Sprint shareholders, Sprint would get $8.0 billion in cash, and shareholders would be left with 30% of Sprint alone. SoftBank aims to close the deal on July 1. According to the Wall Street Journal, Dish assigned a value of $6.22 a share to SoftBank’s offer.

Right now, Sprint is trading at $7.20 a share, which is well above the value of Dish’s offer. That indicates that investors expect a higher bid, either from SoftBank, Dish or another bidder.

Weak Balance Sheet Hobbles Sprint

As Investing Daily Chief Investment Strategist Roger Conrad, who focuses on essential services stocks in our Utility Forecaster newsletter, pointed out in an April 5 article, the reason Sprint finds itself in this position is its dire need for cash as it deals with rising debt and the need for costly network upgrades in the face of strong competition from No. 1 wireless provider Verizon Communications (NYSE: VZ) and No. 2 AT&T (NYSE: T).

“The primary motive for the Sprint deal is money, or rather the lack of it,” he wrote. “The company has massive prospective capital outlays ahead to upgrade its network to 4G as well as to fulfill an agreement to buy Apple Inc. (NasdaqGS: AAPL) iPhones. That’s on top of trying to service $23.6 billion in debt already on its books, even as it continues to lose valuable post-paid contract wireless customers.”

Sprint’s rivals are currently outspending it on network upgrades by a significant margin: the company’s capital expenditures were $1.9 billion in the fourth quarter, compared to $5.9 billion for AT&T and $2.8 billion for Verizon.

Sprint also aims to buy the 48.3% of Clearwire Corp. (NasdaqGS: CLWR) that it doesn’t already own. In December, it reached a $2.2-billion deal to buy this stake, but then Dish jumped in with its own $5.15-billion bid for Clearwire, which operates the seventh-largest wireless network in the U.S. and holds valuable wireless frequencies (or spectrum) that would be valuable for Sprint’s network upgrades.

To further complicate matters, Verizon Wireless has reportedly offered to buy spectrum from Clearwire for $1.5 billion on April 15, after Dish revealed its bid for Sprint.

Higher Bid Seems Likely

A key question is whether either deal gives Sprint the scale to reel in AT&T and Verizon. As of March 2013, SoftBank had 32.5 million mobile subscribers in Japan, and Sprint had more than 55 million customers as of the end of 2012. That still trails 111 million for Verizon and 105 million for AT&T, according to figures from the Wall Street Journal. Dish doesn’t directly add to Sprint’s wireless numbers, but a deal would give Sprint access to its pay TV subscribers.

In a curious twist, SoftBank could stand to gain either way. Under the original agreement, it’s entitled to a $600-million break fee if Sprint accepts an offer from a higher bidder. Add in currency hedges and a potential windfall from a $3.1-billion convertible bond it purchased from Sprint last year that it could convert at $5.25 a share (Sprint now trades at $7.20), and it could walk away with as much as $3.5 billion if its offer is rejected, according to Reuters.

However, the company’s highly competitive CEO, Masayoshi Son (who said, “I am a man, and every man wants to be number one, not number two or number three,” when SoftBank revealed its offer for Sprint), seems unlikely to back down without a fight.

“SoftBank is keen on buying Sprint and will probably raise its offer if the rival bidder doesn’t back down,” Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co., said in an April 16 Bloomberg article. Bloomberg also cites Piper Jaffray analyst Christopher Larsen, who feels SoftBank would have to boost the cash portion of its bid by as much as $2 billion to match Dish’s offer.

No matter what happens, AT&T and Verizon look set to maintain a healthy lead over Sprint, and history does not appear to be on the company’s side, as Conrad pointed out in an October article on the original SoftBank deal:

“Almost from the time telecom deregulation officially launched in the mid-1990s, Sprint has lagged industry leaders in the great capital race,” he wrote. “In other words, even if a deal goes through and Sprint does have considerably more capital at its disposal, there’s still a lot of ground to make up with AT&T and Verizon.”

Canaccord Genuity analyst Greg Miller echoed those concerns yesterday:

“The deal would clearly transform Dish Networks as a company, greatly increase its debt load, and would by no means ensure the financial certainty of the company’s future,” he wrote in a note to investors quoted by the Associated Press. “There have been many cases built for an investment in Sprint that have failed to produce any tangible results for shareholders over the years.”

Whether Sprint could do better with its management combined with that of Dish (as would likely be the case if that company’s bid is successful) is an open question at this point, but this drama likely still has several twists and turns ahead yet.