Why SoftBank’s ARM Holdings Deal Is Killing Sprint’s Share Price

SoftBank Group CEO Masayoshi Son’s decision to spend $32 billion for ARM Holdings has been a huge boon to investors in the leading mobile chip architecture designer. But for investors in Son’s last big deal, the $22 billion purchase of Sprint, the new deal doesn’t seem so great.

While shares of ARM jumped 42% on Monday after the deal was announced, shares of Sprint (S) lost as much as 8%.

The highly-indebted wireless carrier has been struggling to improve its cash flow this year and many investors expected Sprint would need significantly more help from SoftBank eventually. Son, who owns 80% of the carrier, has been selling off other assets and raising cash this year, further raising the hopes of Sprint investors.

Now it appears that cash stash plus another almost $10 billion of debt will be required to purchase ARM.

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“SoftBank’s $32 billion acquisition of ARM leaves the company with fewer resources for strategic activity in the U.S.,” telecom analyst Jonathan Chaplin at New Street Research noted, who called the deal a “modest negative” for Sprint.

Son raised nearly $10 billion last month selling off some of SoftBank’s stake in Chinese e-commerce giant Alibaba Group (BABA) and will collect about another $8 billion selling its majority stake in mobile game maker Supercell to Tencent Holdings. The departure of former president Nikesh Arora last month was also seen as a sign that Son’s dealmaking might be slowing down. Before Monday, shares of Sprint had been up 36% since news broke of the Alibaba stake sale.

When Arora left, investors “chose to read that as a signal that Sprint would now be SoftBank’s highest priority,” analyst Craig Moffett at MoffettNathanson says. “Today’s acquisition throws cold water on that idea. It’s not a negative signal for Sprint per se, but it’s a reminder that the recent rally was on a pretty thin foundation.”

Softbank’s recent asset sales “increased investor optimism that SoftBank would bankroll Sprint’s recover and speed network improvements but that cash, and then some, will be used to buy ARM,” Walter Piecyk at BTIG Research says.

Carrying over $30 billion of debt, Sprint has improved its cash flow by securitizing assets and other feats of financial engineering over the past year. In April, it raised $2 billion in a sale and leaseback of some of its network equipment and is expected to raise billions more with a similar transaction on some of its spectrum airwave licenses.

Still, Son himself appeared unconcerned. “I have much more confidence in Sprint right now,” Son said on a call with analysts on Monday. “Sprint was a big problem in the past.”

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