Softbank to Invest in Willcom

(Reuters) – Softbank Corp, Japan’s third-largest mobile phone operator, said it would invest in bankrupt rival Willcom Inc as it aims to expand its network and close the gap with NTT DoCoMo and KDDI Corp.

Willcom, majority-owned by U.S. private equity firm Carlyle, last month filed for bankruptcy with 206 billion yen ($2.3 billion) in debt and sought assistance from a state-backed fund to help it find new investors.

The state-backed fund, the Enterprise Turnaround Initiative Corp of Japan (ETIC), said on Friday that it had agreed to support Willcom along with investment from Softbank and Japanese private equity firm Advantage Partners.

Under the deal, Willcom will spin off an advanced, high-speed mobile service into a new company, separating it from its existing service. Both services are based on personal handy-phone system (PHS) technology.

Softbank will invest 3 billion yen ($33 million) into the advanced unit, which Willcom said would take over most of its phone networks. Advantage Partners will invest 5 billion yen, while the ETIC will offer a credit line of 12 billion yen.

The ETIC will not put in any equity.

“This is an attractive deal for Softbank,” said Hiroshi Yamashina, an analyst at Citigroup Global Markets Japan. “Softbank can gain nationwide networks for just 3 billion yen.”

Willcom was founded as a mobile phone unit of KDDI. In 2004, Carlyle and electronics maker Kyocera Corp (6971.T) bought a 90 percent stake in the company from KDDI for 220 billion yen, while KDDI kept a 10 percent holding.

PHS phones initially attracted young users with cheaper fees and smaller models compared with cellular phones, but sales growth has since slowed as cellphone technology improved and became more cost-competitive.

PHS technology is still favoured by many hospitals because the electromagnetic interference with medical equipment is weaker than with cellular phones. This is one reason why the ETIC decided to support Willcom.

Softbank has 22 million mobile subscribers. Willcom has roughly 4 million. The deal could help Softbank close the gap with DoCoMo, which leads the industry with 56 million customers, and KDDI at 32 million.

Hironori Tanaka, an analyst at Morgan Stanley, said Softbank could also gain guaranteed revenues from Willcom’s existing service unit, which will need to pay to use its network.

Makio Inui, an analyst at UBS Securities, said he was wary of the potential burden of investing in Willcom’s network.

“It might be better for Softbank to make further investments on its current networks rather than spending money also on Willcom’s networks,” Inui said.

Willcom’s bankruptcy will wipe out the equity of Carlyle and cause pain for lenders and bond holders as well. Creditors will probably have to forgive 115 billion yen of 150 billion yen in total exposure, Willcom said.

Its main creditors include Bank of Tokyo-Mitsubishi UFJ (8306.T), Mizuho Corporate Bank (8411.T) and Norinchukin Bank, according to a Willcom filing. (Reporting by Junko Fujita; Editing by Joseph Radford)