Spectrum Wars (from Seeking Alpha today)
A little background on wireless spectrum: as the demand for mobile internet usage skyrockets worldwide, the demand for adding capacity to keep pace with that demand is also skyrocketing. Data traffic is doubling annually for AT&T (T) and the demand for spectrum will exceed supply some time in 2013. AT&T has been scrambling to cobble together as much spectrum as possible to alleviate the data requirements of its customers.
Much has been made about the growing demand for smartphones in the US but this is happening all over the world. Wireless devices are exploding in emerging countries like Brazil, China, India, and Argentina. Amongst others, DirecTV (DTV) is bidding for Brazil wireless spectrum as it sees the demand increasing rapidly for wireless data.
Anyone with wireless spectrum is sitting pretty. Service providers are in desperate need of spectrum and are bidding up for it. Sprint (S) is currently in negotiations with Clearwire (CLWR), which owns roughly 46 Billion MHz-pop (Megahertz pop is the name of a telecommunications industry measurement. It refers to one megahertz of bandwidth passing one person in the coverage area in a spectrum license. If you have 6 MHz of spectrum reaching a region of 1 million people, you have 6 million MHz pops. The more megahertz of spectrum you control, of course, the more conversations or data you can transmit simultaneously. And the more people in the coverage area, the more potential demand for your spectrum). The spectrum that CLWR owns is 2.5 GHz spectrum. Below is a list of the recent market prices of spectrum bands per MHz pop.
$1.29 / MHz pop
$1.00 / MHz pop
$0.98 / MHz pop
1.7 / 2.1 GHz
$0.68 / MHz pop
$0.35 / MHz pop
As you can see the valuation of CLWR's spectrum is roughly 46.6 Billion MHz pop x $0.35 = $16.3 billion. After excluding liabilities, etc., Sprint's offer of $3.00 pegs the company at a $10 Billion enterprise value after backing out $5.5 billion in debt and additional $800 million in financing.
Adlitem98 comment: Spectrum value of $10 Billion does not include the value of the thousands of cell towers now being converted to TDD-LTE nor retail operations with 1.4 millions subscribers . But, lets concede for arguement that CLWR is only worth the value of the spectrum minus debts and financing fees.. $10 Billion divided 1.45 billion shares = $6.90 per share.
Sentiment: Strong Buy
... it's tough to compare apples to apples.
For example, focus on 2.5 ghz spectrum as the global standard for data transmission is barely a year old and has not yet factored significantly into transaction valuations.
There is also the reality that networks are being planned more densely for data transmission regardless of frequency as speeds ramp towards 100 mbs with LTE-Advanced and demand per cell radius in more locations requires tighter siting anyway. 2.5 ghz propagation issues are being mitigated almost as a side-effect of what is happening anyway and that narrows the valuation gap between 1.7/2.1 ghz frequencies and 2.5 ghz.
There is also clearwire's "contiguous" holdings which add value relative to smaller, less-contiguous chunks.
Your post is thumbs-up appreciated, adlitem, but like when you're comparing trailing EPS of a growing company against it's forward PEG ratio... the numbers get obsolete pretty fast.
About five years ago the 2.5-2.6GHz spectrum was 'valued' at between 20c-40c /MHz/POP. Today, DISH places a value on just the prime cuts or metro-area coverage at ~22c /MHz/POP. What the value of what is left that includes coverage of rural areas that are not economically viable at this time is lower. Sprint's buy-out price is ~20c but they are willing to take the bad spectrum and debt with the woosie-woo future potential and prime spectrum.
Somewhere in between the plundering price that DISH and Sprint figure they must pay for the corpse of Clearwire and a higher price is a price that the companies may come to agree to... but only if the buyers have to pay it or the scope of what they can do with it as a joint venture expands. The problem with any grand scheme between satellite or cable TV, outliers like Google and Intel, or newcomers like the market innovators and cloud 4G infrastructure players is that these have been talked about from the start but have never come together. CW has run up debt, partners have locked up deals with others, and they have agreed to be sold to Sprint because the other potential players have not come through.
So: CLWR is a fair investment bet based on the circumstances. It could drop back down to $2.87 but also might move up 10-30% or, as a longer shot, see some other arrangement come into play, such as a conversion offering to Sprint-SB or even a 'New New Clearwire' entity. The circumstances for Sprint-Softbank, DISH are that they face the competition from the 70% marketshare holders much more than between themselves. It may not seem that way from he perspective of a wireless infrastructure company, but it is. S-SB, DISH must move to deploy networks and build up new services, including mobile video. They will need to put this thing to bed either by capturing enough shares or pushing up the deal to a level that takes out 2-3 of the larger blocks, upon which point others will likely throw in the towel imo. Or, as a remaining, if not so great possibility, the parties could decide that putting differences aside will result in being in a better long term competitive position.. and forge a "New Deal' that might yet leave Clearwire or shareholders with a stake in the game beyond this year. Slim, but can't rule it out altogether.
"They will need to put this thing to bed either by capturing enough shares or pushing up the deal to a level that takes out 2-3 of the larger blocks, upon which point others will likely throw in the towel imo."
That is a fair statement, most of my posts revolve around proper pricing of assets and how the ceo sharks may look at capturing the hidden value for their company or to conserve cash. Either admirable in some ways but not desired by the Clearwire longs.
At this time the pressure points are well known for all parties involved, I guess the real question is which one of the egos involved will be a true leader and offer an olive branch or which ego will decided he will go it alone.
We cannot fully discount the possibility the some Clearwire management which has a clean view of their limits, may well have planned a "fiduciary escape", as the Sprint bindings have been in place for some time. It is also to be noted that this is not their first rodeo.
Pretty strong support for a company like CLWR.
"Wireless devices are exploding in emerging countries like Brazil, China, India, and Argentina. Amongst others, DirecTV (DTV) is bidding for Brazil wireless spectrum as it sees the demand increasing rapidly for wireless data."
"as the demand for mobile internet usage skyrockets worldwide, the demand for adding capacity to keep pace with that demand is also skyrocketing."
"Anyone with wireless spectrum is sitting pretty. Service providers are in desperate need of spectrum and are bidding up for it."
"Clearwire (CLWR), which owns roughly 46 Billion MHz-pop"
Yes, and Sprint owns Clearwire... for now as their 90% customer and access to spectrum under contract, and also as a 51% majority owner..
The real story is that the potential of the spectrum is good, the ownership of the business is moving out of common shareholders hands.
This: "Wireless devices are exploding in emerging countries like Brazil, China, India, and Argentina. Amongst others, DirecTV (DTV) is bidding for Brazil wireless spectrum as it sees the demand increasing rapidly for wireless data." is true in part. What you left out is that the majority of current growth is in HSPA with LTE just starting. Very little TD-LTE has occurred in these markets yet. That is worth pointing out because what your post infers is that this will be timely. India, for example, has seen very little deployment of LTE because the market is not yet ready to pay for it. LTE starts from near zero in many markets so that the growth rate can be 100s of percent while still only accounting for a small part of the overall market. That is not good enough to impact far away Clearwire.
That does make the argument that IF the DISH deal is accepted and made to work, then Clearwire could hang in another 2-3 years during which time devices and markets for LTE services will have grown up around the world and, more directly, here in the USA. I wish that were likely but it does not appear to be the case unless the current status changes.
What are the chances of a 'New Deal' that would keep Clearwire in the game to redeem the hidden value? Maybe 25%. The problem is that this can pivot on 2-3 decision makers talking over dinner to decide to 'bury their hatchets' in the competition rather than each other's backs.