The deal for the third-largest U.S. wireless carrier represents the most a Japanese firm has spent on an overseas acquisition.

Announced by Softbank's billionaire founder and chief Masayoshi Son and Sprint Chief Executive Dan Hesse at a packed news conference in Tokyo on Monday, the transaction gives Softbank entry into a U.S. market that is still growing, while Japan's market is stagnating.

Part of the deal involves a direct infusion of billions of dollars into Sprint, giving it the firepower to buy peers and build out its 4G network to compete in a market dominated by AT&T Inc and Verizon Wireless.

Shares in one of those potential targets, Clearwire Corp, surged 12 percent to $2.60 in afternoon trading. Sprint owns 48 percent of Clearwire, and while Softbank said no action was required, most analysts and investors see a Sprint-Clearwire tie-up as an inevitable consequence of the Softbank deal.

One way or another, analysts have long said the U.S. telecommunications industry needed to consolidate, but few looked to Japan as a catalyst. Some investors and rating agencies worried that Softbank is biting off more than it can chew.

But the 55-year-old Son, a rare risk-taker in Japan's often cautious business circles, is betting U.S. growth can offer relief from cut-throat competition in Japan's saturated mobile market. Combined, Softbank and Sprint will have 96 million users.

"It could be safe if you do nothing, and our challenge in the U.S. is not going to be easy at all. We must enter a new market, one with a different culture, and we must start again from zero after all we have built," Son told the news conference.

"But not taking this challenge will be a bigger risk."

FIREPOWER

The financing is highly complex, involving at least three steps with two entities as well as a debt conversion.

Softbank's newly created U.S. subsidiary New Sprint will buy $3.1 billion in old Sprint convertible bonds to start. After shareholders and regulators approve the proposed deal, Softbank will then buy $4.9 billion in New Sprint shares. The two together represent the $8 billion infusion directly into Sprint.

On top of that, 55 percent of existing Sprint shares would be exchanged for $7.30 per share in cash, representing a further $12.1 billion. A source close to the matter, who declined to be named publicly, said shareholders would actually be offered a choice between taking the cash or shares in the new company - though there will be caps in place so Softbank would not pay out more cash or give up more stock than planned.

The transactions are to be completed by mid-2013, at which point New Sprint will be a publicly traded company and the old Sprint will survive as its subsidiary.

A second person familiar with the negotiations told Reuters that one reason for the deal's complex structure, and for the use of the convertible debt, was the desire to infuse some capital into Sprint in short order without having to wait for regulatory approvals for the full investment.

Sprint fell 1.3 percent to $5.65 in afternoon trading after surging last week on the first reports of a pending deal. The offer, while a substantial premium, is still less than some observers had hoped. A fund manager at T. Rowe Price, a top-15 Sprint shareholder, told Reuters last week he thought Sprint would be worth $10 a share in 18 months.

Hesse, who will stay on as Sprint CEO, said the Softbank investment would give Sprint opportunities it hadn't had since he joined the firm in late-2007, and enable the U.S. firm to play a bigger role in future market consolidation.

"This is pro-competitive and pro-consumer in the U.S. because it creates a stronger No. 3 ... it competes with the duopoly of AT&T and Verizon," he said.

Hesse, one of the few corporate CEOs in America to star in his own company's commercials, also acknowledged the financial challenges Sprint has faced -- which the new capital could fix quickly.

"Sprint has been engaged in turnaround since 2008. We have been at a disadvantage due to our debt," he said on an investor call Monday morning.

But it was not all serious, as the American took some time for a bit of levity with his Asian counterparts. At the press conference, Hesse noted it was the first time he had seen his long-time acquaintance Son with a tie on.

Later in the day, Hesse sent a note to Sprint staff, listing the positives of the deal, while directors held calls with their various units to talk about what Sprint could do faster or better - like its network build-out - with the extra capital.

SOFTBANK WEAKENS

Softbank shares tumbled more than 8 percent on Monday before closing down 5.3 percent to their lowest finish in five months. The stock has lost more than one-fifth of its value - or $8.7 billion - since news first surfaced late last week about its interest in Sprint.

On Monday, credit rating agency Moody's said it was reviewing Softbank's ratings for a possible downgrade, but some analysts said Son's gamble might pay off in the end.

"It's the same (market) reaction as when Softbank said it was going to buy Vodafone a few years ago. Everyone came out and said it was far too expensive," Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities, said ahead of the announcement.

Softbank bought Vodafone's Japan unit for $15.5 billion in 2006.

"Son made a company worth 3 trillion yen, and now it will be worth 6 trillion yen. That's quite impressive, and I think investors will realize he's making the right decision down the road," said Nakanishi.

Four banks - Mizuho Financial Group Inc, Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial GroupM and Deutsche Bank - have approved loans totaling 1.65 trillion yen ($21.1 billion) to Softbank, three sources with direct knowledge of the matter told Reuters.

Standard & Poor's has warned the deal "may undermine Softbank's financial risk profile" and pressure its free operating cash flow for the next few years.

Reflecting the concerns, Softbank's 5-year credit default swap spreads - the cost of protecting its debt against default - widened to 267/327 basis points from around 160 basis points before the deal, and yields on its yen bonds have risen sharply.

NO CLEARWIRE OBLIGATION

Sprint is going through a $7 billion upgrade of one of its networks, while closing its Nextel iDen network, which makes Softbank's capital especially useful. But the Clearwire question looms large as well.

Macquarie analyst Kevin Smithen, in a note to clients, described Softbank as the "white knight" that could give Clearwire management and investors a successful exit, though he also warned the company may drive a hard bargain in negotiations.

According to the second source, one thing Softbank's Son liked about Sprint was the benefit of the affiliation with Clearwire, without the need for full ownership.

An alliance with Sprint could also give Softbank leverage when dealing with Apple Inc, helping bolster its domestic position against KDDI Corp, which also offers the iPhone in Japan, and market leader NTT Docomo, which has yet to offer the Apple smartphone.

The Sprint deal takes outbound deals by Japanese firms to a record $75 billion this year, according to Thomson Reuters data, underscoring a strong appetite for overseas assets seemingly unaffected by signs of slowing global growth.

This is not the first Japanese foray into telecoms overseas. NTT Docomo racked up big losses after a string of failed investments in names like AT&T Wireless and Taiwan mobile operator KG Telecom in the late 1990s and early 2000s.

Raine Group LLC, a boutique merchant bank focused on the technology, media and telecoms sector, and Mizuho Securities were lead financial advisers to Softbank. Deutsche Bank also acted as an adviser to the firm.

($1 = 78.3550 Japanese yen)

(Additional reporting by Soyoung Kim and Nadia Damouni in New York and Carey Gillam in Overland Park, Kansas; Writing by Linda Sieg and Ben Berkowitz; Editing by Jeffrey Benkoe)

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