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UPDATE 5-Japan's Softbank seeks majority Sprint stake-source

* Deal would give Softbank cheaper access to smartphones

* Deal could be at 27 percent premium - analyst

* Sprint, Clearwire soar in early trade, MetroPCS sinks

(Updates shares to open, adds debt markets)

By Taro Fuse and Sinead Carew

TOKYO/NEW YORK, Oct 11 (Reuters) - Japanese mobile carrier Softbank Corp is in talks to buy a majority stake in U.S. operator Sprint Nextel Corp for more than 1 trillion yen ($12.8 billion), according to a source with direct knowledge of the matter, adding yet another potential shake-up to the fast-changing U.S. wireless market.

Softbank, Japan's No. 3 carrier, said reports about the talks were "based on speculation" and it had no comment. Sprint declined to comment.

Sprint Nextel, whose market capitalization was $15.12 billion at Wednesday's market close, is the third-largest U.S. carrier, with more than 56 million users at the end of June.

It has often been rumored as both a buyer and a seller in the last couple of years, as peers seek ways to consolidate and wring fresh profit out of the maturing market.

Shares surged nearly 17 percent to $5.88 in early trading, their highest in 16 months. Meanwhile Sprint bonds surged on heavy volume and the coast of protecting that debt against default plunged sharply.

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Kevin Roe at Roe Equity Research estimated that Softbank could be offering about $6.40 per Sprint Nextel share, a 27 percent premium to Wednesday's close.

Softbank is in talks with several banks to borrow money to finance a bid, the source told Reuters. One analyst said this deal might be the Japanese company's only option if it has eyes on the American market.

"In terms of (Sprint) standalone, we believe the asset represents the only way for a potential new entrant to get a national presence immediately in the U.S.," Wells Fargo analyst Jennifer Fritzsche wrote in a note to clients.

WEALTHY FOUNDER

Softbank, founded and led by Masayoshi Son - Japan's second-richest man, according to Forbes - was the first of Japan's leading carriers to offer Apple Inc's iPhone in Japan.

It lost that monopoly last year, when rival KDDI Corp

also began to offer it. Softbank faces tougher competition at home against KDDI and NTT Docomo .

The company has grown from a packaged software distributor 30 years ago into a broad telecoms group worth more than $40 billion. It took over Vodafone Japan in 2006.

As it chases market share, Softbank said this month it would buy smaller mobile service operator eAccess Ltd in a $1.84 billion deal. It said the buy would give it a total of 39 million users, just ahead of KDDI's 36 million.

Japanese media said buying Sprint - which competes in the United States against Verizon Wireless and AT&T Inc - would also make it cheaper for Softbank to procure smartphones and other mobile devices.

NETWORK REVAMP

Sprint, led by Chief Executive Dan Hesse, has been bleeding customers for years and is in the middle of a costly network modernization project that involves upgrading its Sprint network. At the same time, it is decommissioning the Nextel iDen network it bought in 2005.

"The challenge is not access to capital," said Roe. "The challenge is that they're sub-scale (much smaller than rivals AT&T and Verizon) and going through a very challenging network transition."

Sprint may also be attractive as it has a majority interest in wireless data company Clearwire Corp , which owns attractive spectrum, Wells Fargo's Fritzsche said. Analysts at Evercore said Softbank and Clearwire are both in the process of upgrading their networks to the same standard, which might add further synergies.

Clearwire shares rose 29 percent in early trading to $1.68, their highest in a month.

JAPANESE FORAY

Fritzsche said regulators would likely look favorably upon a deal that would bring an outside international player to the United States.

Japanese companies made a record 642 cross-border deals last year, according to Thomson Reuters data. Buoyed by a stronger yen , the value of all overseas deals rose to $69.5 billion, up 81 percent from 2010, also a record.

The biggest foreign acquisition by a Japanese company to date was Japan Tobacco's 1.8 trillion yen buy of British-based tobacco firm Gallaher in 2007.

The Japanese are no stranger to U.S. wireless companies. NTT Docomo was once a major shareholder of the former AT&T Wireless and explored an outright bid for the company at one time.

Meanwhile, Sprint is considering whether to make a bid for smaller rival MetroPCS Communications , which this month agreed to merge with Deutsche Telekom's T-Mobile USA, a source told Reuters this week.

It was unclear what effect, if any, the Softbank offer might have on Sprint's potential pursuit of MetroPCS. Shares fell 8 percent to $11.08 in early trading.

(Additional reporting by Mari Saito and James Topham, with Sruthi Ramakrishnan in Bangalore; Writing by Ian Geoghegan and Ben Berkowitz; Editing by Ron Popeski, John Wallace and Bernadette Baum)

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