Sprint's investment designed to scare off Clearwire suitors
October 21, 2012 | By Tammy Parker
Sprint Nextel may not yet have Clearwire in the palm of its hand, but its decision to buy Eagle River Holdings' stake might buy Sprint some time by scaring off any other companies pondering a Clearwire takeover.
Sprint's announcement last week that it's purchasing about $100 million worth of Clearwire stock from Eagle River Holdings, the investment firm owned by wireless pioneer Craig McCaw, "is likely another step in an evolutionary process that could eventually result in the company gaining sole control of the wireless network operator," said Fitch Ratings. "At the very least, Sprint's link to Clearwire would be stronger, and therefore complicate things a bit for those companies considering a move to buyout (sic) Clearwire."
The transaction would give Sprint a 50.4 percent majority voting stake in Clearwire, vs. the 48 percent it currently controls. However, the transaction would not increase the seven board seats that Sprint currently controls on Clearwire's 13-member board because the board seat designated by Eagle River will get appointed by Clearwire's Nominating and Governance Committee, not Sprint.
"Sprint believes that their existing seven votes combined with the now three independent votes give them a supermajority voting power. This of course assumes that an independent board members will vote the same way as the Sprint directed board members," said BTIG analyst Walter Piecyk. He noted Sprint now can designate its seventh board seat, currently held by Chairman John Stanton, as an independent designee because there are currently three independent directors.
Yet Sprint CFO Joe Euteneuer has indicated that despite the acquisition of Eagle River's holdings, Sprint would be unable to block a spectrum sale by Clearwire to AT&T (NYSE:T), Dish Network or anyone else that might be interested.
Dish may be the company Sprint most fears getting its hands on Clearwire. Charlie Ergen, Dish's founder and chairman, is rumored to already hold in excess of $900 million of Clearwire's debt, according to Tim Farrar, head of Telecom, Media and Finance Associates.
Fitch and Piecyk both noted that Sprint previously had majority control of Clearwire but reduced its voting interest below 50 percent during June 2011 in order to eliminate potential cross default risk. "Sprint could choose a similar route to reduce only its voting interest if Clearwire struggles more financially," said Fitch.
Similarly, Piecyk said, "We would expect Sprint to surrender Clearwire shares to take their stake back under 50 percent if they are unable to take control or materially fund Clearwire before the closing of the Softbank transaction."
It is widely believed--despite Sprint CEO Dan Hesse's contention that the Eagle River deal was not a condition of its deal with Softbank--that Clearwire and its vast 2.5 GHz spectrum holdings are playing a crucial role in the deal negotiated between Japan's Softbank and Sprint, in which Softbank will invest $20.1 billion for a 70 percent stake in Sprint.
Softbank President Masayoshi Son initiated the investment deal with Sprint about two months ago when he traveled to Kansas City to meet with Hesse, according to Bloomberg. The pending deal was code-named "Swan." Son and Hesse have a long history, given that Son invested $100 million during 2000 in Terabeam Networks, a laser communications company Hesse was running.
Clearwire holds a healthy 120 MHz of spectrum in many markets across the United States. Softbank and Clearwire are both part of the Global TD-LTE Initiative that was formed in February 2011, and there are natural synergies and scale that could be exploited between Softbank's own TD-LTE deployment in Japan and Clearwire's TD-LTE ambitions. Clearwire's spectrum is the key to unlocking growth opportunities for Softbank in the United States, said Chris Nicoll, principal analyst at Analysys Mason.
"The 2.5 GHz spectrum licensed by Clearwire could provide 50-100 Mbps Internet service with the proper technology investments (TD-LTE), and Softbank can provide network expertise in this area. Clearwire has had funding problems, but would be a perfect fit for Softbank's corporate strategy. Sprint re-taking control of Clearwire would be a logical and potentially game-changing step," said Nicoll.
A deal that gives Sprint operating control of Clearwire "would allow Sprint to fully integrate those assets into its network, thus eliminating operating expenses, [allowing them to] control spectrum resources longer term and facilitate execution of its strategic plans," said Fitch.
But throwing a potential wrench into any plan involving Clearwire is the fact that the latter is burning through cash at an annual run rate of about $700 million to $800 million while it works to migrate from WiMAX to TD-LTE.
"Whether the company can improve its cash-generation and develop a sustainable long-term wholesale business model for wireless broadband services is key to sustainability. Clearwire's inability to reach additional material strategic agreements for 4G LTE capacity and spectrum with other operators is a significant cause for investor concern," said Fitch.
Whether Sprint is devising their ownership to thwart suitors is largely out of place with the fact that there have been too few 'suitors' willing to either partner to build and use networks or acquire spectrum at a price that is attractive to Clearwire.
Look at the facts about spectrum pricing that reflects how operators have made use of it to date: 2.6GHz spectrum is valued only slightly higher.. in proportion to its former price, it has vaulted as much as 2-3 times the price of five years ago in EU and other auctions... but that is from price level below 20c/MHz/pop to 30-40c. The times it is seen at the higher price within the range has been where the operator has specific needs for 20-40MHz blocks rather than for large aggregations that will continue to go unused for up to decades at the current BD pace.
Sprint has had 2.6GHz as part of their plans for over ten years now. However, they don't need to blacken their balance sheet with $4+ billion in junk-bond level debt. Put yourself in Sprint/Hesse's shoes: If I were he, I wouldn't want to outright acquire this albatross unless it could be made more healthy. They have agreements in place and a high enough degree of control thru ownership and marketshare to avail themselves of as much of it as they will need over the next 5-10 years.
In what may seem odd, Sprint-Softbank would love to see Clearwire become a thriving sister company that takes on and helps enable the bottom less than 15% of the market not held by the top five operators. "Bring it on!" might as well be the slogan... bring on all the beleaguered small fry who are likely to become even more marginalized as the market becomes higher demanding of BB and video service. Sprint made the drastic step of selling off the 70% stake to SB so that they too would not be thrown on the scrap heap of time along with the 'also ran' operators. metroPCS, which had been growing rapidly, 'sold out' to DT/T-Mobile because they would otherwise have been marginalized due to lack of coverage, spectrum and breath of services compared with the leaders.
DISH acquire Clearwire? Foolish nonsense. It is not going to happen.
What may happen is that DISH/Ergen will do what they have said all along: partner with a MOBILE operator to jointly develop their 40MHz of better MSS spectrum. Why does anyone in their right mind think that small DISH won't have their hands full developing their own spectrum? Why partner with a company that has failed to make good on business plans for their own networks in 2.6GHz?
What Ergen has said and its even more likely now they would do is to use Clearwire's 2.6GHz in the dense urban areas to overlay their wider area coverage using MSS spectrum. The increased financial strength of Sprint combined with Softbank looks much more attractive than partnering with a company that is so weak that financial analysts have questioned their long term survival. Clearwire probably comes along as part of the package even if that is as a distinct agreement.
A way to deal with the albatross of CLWR debt is to pay the debt out of the forthcoming $8B, and convert CLWR shares to S shares at a negotiated price (most here would be very happy with 1:1). That way, S has all the sprectrum which, without the debt, now generates revenues from the existing partners CLWR has while at the same time creating the best LTE network (for urban areas) in the country by 2013. I do understand that is more spectrum than Sprint needs, but Masayoshi Son has a 300 year plan... He is looking WAY ahead and he likes 2.6 GHz.
It's not up to S and Hesse anymore. It's Softbank that wants CLWR... and IMO, Son is getting a buy-one-get-one-half-off deal. If I was going after Clearwire, I would buy S first too because they already own 1/2 of CLWR. What's so hard to understand about that?
It's about data delivery and mobile video going forward. Son understands that and knows how to fill in the swiss cheese holes.
Softbank needs an assurance that it couldn't lose clearwire because clearwire is a MAJOR OBJECTIVE of this whole merger.
I'm 100% certain that softbank want's all of clearwire... Mr. Son isn't going to want to dither with clearwire's board/management like Hesse has for the past few years... he's going to want ALL of sprint's towers transmitting TD-LTE as soon as Network Vision makes it possible to hang those radios for pennies on the dollar. That's what he's doing in japan with TD-LTE @ 2.5ghz, and that's what he's going to do HERE.
Sprint would buy ALL of clearwire now except they need their precious cash to chase Verizon and AT&T with Network Vision and the LTE that requires it... so sprint is doing only what it must to assure softbank that clearwire is there for the taking...
... and once sprint get's it's $8 billion in softbank cash next June, Softbank's expectation is that they will tender for 100% of clearwire shares... just as Craig McCaw's "make whole" agreement makes so obvious.
Here is some news on the investigation of S and the buy from Eagle River:
Clearwire Corporation(NASDAQ:CLWR) shares fell 8.87% to $1.85 in yesterday’s session. Law Firm of Wohl & Fruchter LLP, last week, announced that it has commenced an investigation into the acquisition by Sprint Nextel Corporation (Sprint) of majority voting control of Clearwire Corporation (Clearwire) through a negotiated purchase from Eagle River Holdings, LLC (ERH). On October 15, 2012, Softbank Corp. announced its agreement to buy a 70% ownership stake in Sprint. According to news reports, one of the conditions imposed by Softbank`s lenders was that Sprint obtain voting control of Clearwire.
Might have something to do with today's rise?
When you mark-to-market clearwire's spectrum, then the value of clearwire's assets, net of it's debt, exceed the current market price of clearwire's stock by many times over.
One thing that has been lost over the past couple of years of conversations about clearwire's "cash burn" is the fact that the annual appreciation of clearwire's spectrum has easily EXCEEDED their annual cash burn...
... which may look lousy from an "operational" perspective but looks quite attractive from a "balance sheet" perspective... just ask softbank and their obsession with clearwire control.