The battle for Clearwire is heating up with Dish Network (NASDAQ:DISH) making a much improved bid for the company, topping the offer Sprint (NYSE:S) had made last week. The satellite provider said late Wednesday that it has offered to acquire Clearwire at $4.40 per share – a premium of about 30% over Sprint’s $3.40 per share bid. With its recent moves, Dish has made it amply clear that it wants to be an aggressive player in the wireless industry.
However, merely outbidding Sprint won’t help Dish acquire Clearwire. Sprint, being Clearwire’s majority shareholder with more than 50% stake, needs to sign off on any acquisition bid before the deal passes regulatory muster. While regulatory approval may not be tough to garner considering that the FCC will only be pleased with more competition in the industry, asking Sprint to part ways with Clearwire will require some convincing. Although Sprint has said that its earlier offer was its ‘best and final’ one, it is most likely going to either match or increase its bid given how central Clearwire is to its future LTE plans. This will however leave less capital for Sprint’s LTE expansion plans and might cause Softbank to view Sprint as a less attractive acquisition option.
Dish raises the stakes, waiting for Softbank to fold
By making it costlier for Sprint to acquire Clearwire, Dish wants Softbank to back away from a deal with Sprint. Both Softbank and Dish are vying to gain control of the third largest U.S. carrier in order to diversify away from their respective stagnant businesses. While Dish is looking to bundle its existing pay-TV service with a wireless one, Softbank is betting on the future of LTE and its ability to derive greater synergies out of running similar networks in the U.S. and Japan. Clearwire’s spectrum is central to both their plans, but gaining control of the same without Sprint on board will be tough. The fact that Clearwire is on the brink of bankruptcy means that its minority shareholders are also under pressure to salvage a deal as soon as possible.
Clearwire filing for bankruptcy protection wouldn’t be in Sprint’s favor either since the former’s spectrum assets would then have to be auctioned off to pay the debtors before the shareholders. Sprint’s majority stake-holding would then count for zilch, and it would have to fight with other deep-pocketed rivals such as Verizon and AT&T for Clearwire’s spectrum, making it even more expensive for the third-placed carrier. And it is the spectrum that Sprint is after with its Clearwire acquisition bid. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average, which would go a long way in bolstering Sprint’s LTE network. Moreover, the two companies already have a deal in place, according to which Sprint will be able to offload 4G LTE traffic onto Clearwire’s planned TD-LTE network.
Sprint needs Clearwire for LTE
Sprint was the latest of the three to launch a 4G LTE network, and with coverage in all of 88 U.S. markets as of April, the carrier far trails both Verizon and AT&T in LTE deployment. In order to bridge the gap, the carrier is accelerating its LTE buildout and incurring huge capital expenditures. Clearwire’s spectrum will enable Sprint to lower its long-term CapEx spend on capacity increases following the high CapEx initial deployment phase. The Network Vision Plan, which will see large-scale LTE deployment and the shutdown of iDEN, has cost Sprint over $4.4 billion in the last three quarters and will see another almost $6 billion being invested in the rest of the year. As can be seen below, these capital expenditures are much more than what Sprint has historically spent. Moreover, Sprint is highly sensitive to CapEx increases, which can be seen by moving the trend line in the forecast chart below and following the corresponding impact on its price estimate. Additional spectrum capacity will go a long way to bring these costs down.
Margin improvement is also one of the key goals of Sprint’s Network Vision plan – a successful implementation of which will help reduce operating expenses substantially by eliminating duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN will now be available for the CDMA/LTE network. Also, since 4G LTE is more efficient at handling data, Sprint will be able to realize the margin benefits as it rolls out in new LTE markets and more people adopt the high-speed technology.