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UPDATE 7-Sprint confirms in talks on potential sale to Softbank

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* Deal would give Softbank cheaper access to smartphones

* Deal could be at 27 percent premium - analyst

* Sprint, Clearwire soar in early trade, MetroPCS sinks

(Recasts lead paragraph, adds background on Softbank, Sprint)

By Taro Fuse and Sinead Carew

TOKYO/NEW YORK, Oct 11 (Reuters) - Japanese mobile carrierSoftbank Corp and U.S. operator Sprint Nextel Corp

are in talks about a deal that could see Softbank assumecontrol of Sprint.

A deal would give Softbank a much-desired toehold in Americaand help Sprint fund costly upgrades to its network and competeagainst larger rivals.

In response to reports of a pending deal, Sprint said onThursday that it was in talks with Softbank on a "potentialsubstantial investment" that could involve a change in controlof the company. It said there was no assurance of a sale.

Softbank is eyeing a controlling stake in Sprint worth morethan 1 trillion yen ($12.8 billion), according to a source withdirect knowledge of the matter, adding that the Japanese companyis in talks with several banks to borrow money to finance a bid.

Sprint shares rose 19 percent to levels not seen since thesummer of 2011, on the heaviest volume in the stock's history.Its bonds also jumped, and the coast of protecting that debtagainst default plunged, as investors priced in the prospectthat a backer could pull the debt up to investment grade.

"The addition of Softbank would provide a deep-pocketedpartner - removing any financing risk and meaningfully reducing(Sprint's) ongoing cost of capital," Evercore analyst JonathanSchildkraut said.

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Sprint, whose market capitalization was $15.12 billion atWednesday's market close, is the third-largest U.S. carrier,with more than 56 million users at the end of June. It is in themiddle of a costly network upgrade that has led it to consider arange of partnerships.

One analyst said Sprint might be the Japanese company's onlyoption if it has eyes on the American market.

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

WATCHING AND WAITING

The reports notwithstanding, the atmosphere was calm atSprint headquarters in Overland Park, Kansas on Thursday.

Sprint has been a key employer in the state's wealthiestcounty, as evidenced by the upscale shopping center across thestreet from its offices. But Sprint veterans kept their emotionsin check, particularly given all the speculation of late aboutwhether the company might be a buyer or a seller.

"This will be interesting to see if it happens, if it haslegs," said one longtime Sprint manager who did not want to benamed. "There are always a bunch of rumors. Something like thisis always a possibility when your stock price is so low."

Sprint may also be attractive as it has a majority interestin wireless data company Clearwire Corp , which ownsattractive spectrum, Wells Fargo's Fritzsche said. Schildkrautsaid Softbank and Clearwire are both in the process of upgradingtheir networks to the same standard, which might add synergies.

Clearwire shares rose 37 percent in morning trading to$1.78, their highest in a month.

Meanwhile, Sprint has been considering whether to make a bidfor smaller rival MetroPCS Communications , which thismonth agreed to merge with Deutsche Telekom'sT-Mobile USA, a source told Reuters this week.

It was unclear what effect, if any, a Softbank deal mighthave on Sprint's potential pursuit of MetroPCS, whose sharesfell 4.9 percent to $11.45 in morning trading.

WEALTHY FOUNDER

A second source familiar with the situation, who declined tospeak publicly about the matter, said Softbank has beenexploring ways to get into the U.S. market since this summer, asit sees opportunities for growth here to offset a stagnatingmarket in Japan.

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

Founded and led by Masayoshi Son - Japan's second-richestman, according to Forbes - the company has grown from a packagedsoftware distributor 30 years ago into a broad telecoms groupworth more than $40 billion.

But it faces tougher competition at home against the likesof KDDI Corp and NTT Docomo .

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

Japanese media said buying Sprint - which competes in theUnited States against Verizon Wireless and AT&TInc - would also make it cheaper for Softbank to procuresmartphones and other mobile devices.

Wells Fargo's Fritzsche said regulators would likely lookfavorably upon a deal that would bring an outside internationalplayer to the United States.

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

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

((Ben.Berkowitz@thomsonreuters.com)(+1-617-856-4334)(Reuters

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