Softbank's Brilliant Buy One (Sprint), Get One Free Deal (Clearwire)
"Whether you own Clearwire’s common shares or its bonds, any worry of default or bankruptcy has just been completely erased by the Softbank bid for Sprint. The call is Clear, pun intended . This whole deal is about Clearwire and its V A S T spectrum position."
Sentiment: Strong Buy
The notion that SB will treat CW any better than S has been over the years, is being delusional. S would have never let CW gone into BK as well just like back in Dec 2011. To cover for the funding shortfall in Q4 2013 CW will more than likely have to resort to massive equity financing starting in Q1 2013 because selling some of its spectrum asset will not be acceptable to either S or SB. I don't believe S and SB will finance CW but rather they would prefer to let CW shareholders bleed and carry the heavier load. (imo)
Do you seriously thin Son will set back and watch clwr go backrupt and lose all that spectrum to highest bidders? Sprint has made a committment to supporting clwr by increasing ownership to over 50%? A clwr BK would show as a S default on loan payment in that case. The reason nothing is happening us because S/SB are waiting for regulatory approval. So many people here keep wanting to pretend there is no significant interest in the spectrum (by this repeated stupidity that clwr will go BK)- forgetting the very clear early reports that SB seriously wants clwr spectrum for obvious reasons: Tdd-lte and 2.5 GHZ.
After experiencing the high risk poker games these executives play with other peoples money, I still worry about a strategic default. What if it is true that Dish bought $1 billion of Clearwire debt. What if Sprint buys the other $3 billion with the cash from Softbank. After the Softbank Sprint merger completes they let Clearwire run out of cash and go into default.
The debt holders then look at the $4 billion book value of spectrum holdings and decide Dish gets 1/4 and Sprint gets 3/4 and shareholders get nothing? I don't think McCaw would have agreed to sell his shares if he saw this as the strategy, but I'm not sure what would prevent this either?
Excerpt: First, some history. Clearwire as we know it today was created in 2008, when Sprint merged its Xohm broadband division with the old Clearwire, taking a majority stake in the company. Investors including Comcast (CMCSA), Intel (INTC), Google (GOOG), and Time Warner Cable (TWC) invested $3.2 billion into the company, taking a stake as well. At the time, giving up billions in spectrum to Clearwire seemed like a good idea, for Sprint had no idea just how much data demand would soar, thanks to rapid smartphone adoption. That decision has now come back to haunt Sprint.
In June, Sprint announced that it is cutting its majority stake in Clearwire to around 49.7%. Sprint did so because of worries about a Cearwire bankruptcy and default. Some of Sprint's debt is structured in such a way that if Clearwire defaults on its debt, then Sprint is deemed to be in default on its own debt. We think this move was a mistake on the part of Sprint, and recent events have proven this to be true.
When Sprint effectively outsourced its 4G network to Clearwire, it seemed like a good idea to solidify its lead in the 4G race. But now that lead is gone and Sprint's 4G network has little to differentiate itself from its competitors. Furthermore, Sprint must still service Clearwire's debt. Why? Because Clearwire's debt is backed by its spectrum. And should it default, the spectrum would go to creditors, along with Sprint's 4G network. This is why the agreements announced with Sprint on December 1 specifically state that as part of the deal, Clearwire will make its $237 million interest payment on schedule. This bizzare relationship can be summed up in one chart, outlined in a Clearwire's 10-K.
(Google: 'How A Bizarre Ownership Structure Creates A Compelling Opportunity In Clearwire' article for Chart)
This chart shows just how entangled Sprint is with Clearwire, and how little leverage it truly has. Clearwire's spectrum and assets are housed in a subsidiary called Clearwire Communications. Clearwire has two classes of stock, the publicly-traded Class A stock, and Class B stock. Each share of Class B stock gives the owner a share of Clearwire Communications Class B stock. Sprint controls about 68% of Clearwire's Class B common stock, giving it the majority interest in Clearwire Communications. Clearwire itself holds 100% of the voting power at Clearwire Communications via its Clearwire Communications Voting units, but controls only around 24.7% of the economic interest with its holdings of Clearwire Communications Class A Common Units. Such an arrangement is mostly unheard of in corporate America. Clearwire does control only around a fourth of the equity in its assets, despite having all of the voting power. As a result, Clearwire's true "book value" is somewhat unclear, with a variety of financial organizations stating a variety of book values.
As you can see, different firms value Clearwire differently, most notably Credit Suisse. We believe its outlier valuation derives from the fact that the firm values Clearwire's spectrum at market rates, not its value as carried on Clearwire's balance sheet. Our own analysis of Clearwire derives a book value per share of $3.42, based on the most recent 10-Q, as well as the recent equity raise.
Clearwire seems to be in a bind here. It does not hold a majority interest in its assets (spectrum), and Sprint has a right of first refusal over Clearwire, essentially being able to block anyone from being able to takeover the company. Clearwire may seem as being subservient to Sprint, but it has a major trump card: Billions in debt.
Clearwire has just over $4 billion in debt, which is backed by its spectrum holdings. And that is what holds Sprint hostage. In giving up voting control of Clearwire due to fears of a Clearwire default, Sprint allowed Clearwire to regain leverage with the threat of a default. Clearwire's board of directors, which Sprint no longer has control over, can choose to default and file for bankruptcy. Should that happen, creditors will seize Clearwire Communications, taking all of its spectrum, and Sprint's 4G network with it. This is basic corporate finance. Bondholders take control of a company's assets should it enter default. Sprint's majority control of Clearwire Communications will mean nothing should this happen.
In our previous article on Clearwire, we noted that in a bankruptcy liquidation, holders of Clearwire stock should receive around $10/share. In a bankruptcy auction, bondholders will receive only the $4 billion that they are owed, with shareholders receiving everything else. It is here that critics of Clearwire will pounce, arguing how holders of Clearwire stock can receive anything close to $10/share, when Clearwire itself owns so little of its operating assets. Once again, Clearwire's bizarre ownership structure provides the answer, and once again, it benefits Clearwire investors enormously.
As a reminder, Clearwire has two classes of stock, the publicly-traded Class A stock, and Class B stock, which also gives holders one equivalent share of Clearwire Communication Class B Common Units. However, Clearwire's by laws give no rights to Class B stockholders in liquidation. Should Clearwire default, and the company's spectrum be sold off to pay the bondholders, only Class A stockholders would be entitled to the remainder of the proceeds. The Class B stock, as well as their associated Clearwire Communication Units, would be worthless, with each investor receiving only the par value of their stock, which is $0.0001 per share. This means that should Clearwire's spectrum be liquidated, Class B stockholders would receive a grand total of $83,970.30, based on Clearwire's 839.703 million Class B shares.
Here, critics will argue that Class B stockholders can simply convert their shares into Class A stock, as is their right in accordance with Clearwire bylaws, and receive proceeds from a liquidation. It is true that this could happen, but any investor who elects to convert their Clearwire Class B stock into Class A stock gives up their Clearwire Communications Class B Common Units. Thus, any dilution in the Class A stock is offset by a rise in Clearwire's equity stake in Clearwire Communications. If every share of Clearwire Class B stock were converted into Class A common stock, Clearwire would regain a 100% equity interest in Clearwire Communications, thus offsetting the dilution resulting from such a conversion.
Below we break down the liquidation value of Clearwire, eliminating all assets except cash, including Clearwire's debt and all other liabilities, and valuing Clearwire's spectrum at 34 cents per MHz-POP, half of what Verizon paid for its spectrum from Comcast (CMCSA), Time Warner Cable (TWC), and BrightHouse Networks. This scenario includes the cash raised from the recent equity offering, as well as the dilution from those shares. Currently, Clearwire has 1,290,658,000 shares outstanding, and this assumes that all shares are converted into Class A stock.
That is what I’ve been saying all along that S and SW are not here to make CW’s shareholders rich; rather, they are here to make money “off you”. Either CW will be bought out in 2015 at a small premium (35-40%) or wouldn’t be bought out at all with your scenario being played out (basically a looting) imo. There is nothing much CW shareholders can do anything about it. I’m sure some of you must have been regretting not getting out in the $2’s.
someone with big pockets can show up, pay the bondholders in full and keep the whole company for himself. Even if you own the bonds it doesn't guarantee you'll get the company in a bankruptcy.
letting CLWR fail is letting the dice roll, why would Sprint do that? they risk losing the company, plus 2/3 years delay to the network completion
Clearwire's board knows they own a fudiciary responsibility to represent the shareholders in the highest order. As the article stated, there will be plenty of lawsuits if the shareholders are not given the same opportunity to sell their shares at a fair price like McCaw did.