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Security threat on Sprint bid rings hollow

by William McConnell | Published May 24, 2013 at 9:46 AM

National security arguments by Dish Network Corp. to scare Sprint Nextel Corp. shareholders away from Softbank Corp.'s rival offer don't hold water, say Washington attorneys well versed in the federal government's investigations of acquisitions of U.S. telecommunication companies by foreign buyers.

On Thursday, Dish showed it isn't ready to fold on what it believes is a strong hand for thwarting the rival bid from Japan's Softbank to acquire control of Sprint. Responding to a Wall Street Journal report that Softbank is willing to let the federal government approve one of the directors it names to Sprint's board, Dish said the plan was inadequate to protect national security, an assertion that implies Softbank's proposed agreement will not be accepted by the government.

The government's board seat veto would be included in a mitigation agreement addressing security concerns raised by the Committee on Foreign Investment in the United States about Softbank's gaining control over Sprint. CFIUS is the Treasury Department-led federal panel that reviews cross-border deals for national security threats. The CFIUS-approved director would be responsible for overseeing national security issues, according to a Monday regulatory filing by Sprint that was first reported by The Wall Street Journal.

The government reportedly is also seeking the right to approve some of Sprint's equipment purchases and wants the removal of Chinese-made equipment from a Sprint network.

Clearwire Corp., which Sprint is acquiring, uses some equipment from China's Huawei Technologies Co. Ltd. in its network. Softbank also has business relationships with Huawei and ZTE Corp., which are China's two largest makers of phone-network equipment that purportedly have ties to the Chinese military. Huawei has been blocked by CFIUS from doing some U.S. deals.

Negotiations between Softbank and the government continue, as Sprint shareholders are set to vote on Softbank's $20 billion offer for a 70% stake on June 12. Softbank has said it expects to receive approval from CFIUS on May 28 and from the Federal Communications Commission on May 29. The company plans to close the deal July 1 if shareholders approve the merger.

Dish Network has made a $25.5 billion alternative bid for Sprint and has aggressively raised CFIUS concerns about Softbank's deal to turn shareholder support toward its own bid.

As the vote draws nearer, Dish officials were in no mood Thursday to let the CFIUS threat to Softbank's bid fade away. They warned that a requirement to remove the Chinese equipment could cost Sprint $1 billion and would not address all of the security concerns raised by the Softbank deal.

"We remain concerned, however, that these reported steps do not adequately protect our national security interests, especially with respect to Sprint's critical fiber backbone network and Sprint's extensive contracts to provide important telecommunications services for government, law enforcement and defense customers," Dish general counsel Stanton Dodge said in a statement.

However, regulatory attorneys who have represented clients before CFIUS say this kind of agreement, including allowing CFIUS to approve one or two board members with responsibility for overseeing compliance with national security agreements, has been done before and it would be a big surprise if Softbank was unable to reach mitigation terms with CFIUS.

"It would not be unheard of for CFIUS as part of mitigation agreement to have a say in the appointment of a board member by foreign acquirers," said Ted Posner, partner in the international arbitration practice of Weil, Gotshal & Manges LLP.

Mark Plotkin, a partner at Covington & Burling LLP, added, "A Japanese entity that already does business in the U.S. without any security issues should be able to get this deal done with adequate safeguards from CFIUS."

Plotkin's CFIUS experience includes representing IBM Corp. in the company's $1.75 billion sale of its personal computer division to Lenovo Group Ltd.; Stanley Inc. in its $1 billion acquisition by CGI Group; Deutsche Börse AG in its failed $9.5 billion attempt to buy the operator of the New York Stock Exchange; and Global Crossing in its acquisition by Singapore Technologies Telemedia.

Plotkin said that in the 2003 Global Crossing deal, CFIUS insisted that a director with a focus on security be put in place.

"It happens all the time in the telecom sector," he said. "Post-9/11 there has been an inclination by CFIUS to make sure there is somebody sensitive to security interests on the board" when a U.S. telecom firm is acquired by a foreign buyer. "That includes when the buyer is from a friendly country like Singapore or Japan."

Plotkin said CFIUS and the Department of Homeland Security have been "jawboning" telecom companies for several years to make sure their equipment suppliers don't cause security concerns. In that vein, "CFIUS wants to have some oversight of the supply chain for Sprint," he said.

One risk arbitrageur tracking the deal attributed Dish's continued focus on the purported security risks to Dish chairman Charlie Ergen's determination not to give up any avenue that will help him get a deal done. "It's just a personality trait of Charlie Ergen," the source said.

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