Debt Dish May Give Sprint Indigestion

Debt is cheap these days. But then again, so is talk. That is something for Sprint Nextel shareholders to bear in mind as they weigh competing offers: a $20.1 billion bid from Japan's SoftBank to buy 70% of Sprint versus a rival $25.5 billion one from Dish Network for all of it.

On the face of it, Dish's bid, with more cash, $37 billion in present value from potential synergies and large swaths of wireless airwaves, seems a better deal. SoftBank's offer comes with neither synergies nor spectrum. But SoftBank brings a cash infusion for Sprint; Dish brings a boatload of debt. Despite Dish's assertions that the new company will be more than able to handle such a load, deal financing matters for equity investors. They will be left with a stake in the combined company no matter who wins. And high levels of debt can hinder performance given the capital-intensive nature of the telecom business. To complete the financing for its deal, Dish needs to raise an additional $9.3 billion of debt. The "vast majority" of this will likely be raised via Sprint, even though Dish's leverage of gross debt that is four times earnings before interest, taxes, depreciation and amortization is lower than that of Sprint at five times.