ClearWire Feels the Love as Sprint Revokes Lightsquared Deal

by Trefis Team
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After postponing for months, Sprint (NYSE:S) finally gave up on its LTE deal with Lightsquared Friday. [1] Sprint had extended its December 31st deadline to March 15th in order to give Lightsquared more time to secure regulatory approvals for its LTE network plans. However, the FCC said last month that it will not be able to grant clearance for the proposed network as it found potential interference issues with GPS receivers that could harm public safety.

With Sprint’s relationship with Clearwire on a much stronger footing now, it made little sense for Sprint to continue to hope for a Lightsquared turnaround. Instead, it can now give its own as well as Clearwire’s plans to aggressively deploy LTE networks complete attention as rivals Verizon(NYSE:VZ) and AT&T (NYSE:T) continue to add more markets to their ever-expanding LTE footprint.

See our complete analysis for Sprint stock here

Sprint-Clearwire relationship on firm footing

Last year, Sprint opted to use the resources of a few other wholesale providers in addition to its own to aggressively build out LTE coverage and make up for lost time as AT&T and Verizon were marching ahead with their LTE plans. But when it chose Lightsquared ahead of Clearwire – a company it not only has a majority stake in but is also its 4G WiMax network provider – in July of last year, the markets were shocked. Clearwire’s stock fell almost 24% following the news. The company’s statements that followed in the coming months made it amply clear that Sprint was distancing itself away from Clearwire.

However, Sprint still needed Clearwire’s WiMax network for its existing WiMax subscribers. So when Clearwire threatened to default on an interest payment in December last year, Sprint had to yield and Clearwire got a huge $1.6 billion network sharing agreement that not only addressed its financial woes but also secured it cash for a LTE build-out. (see Sprint Update: Clearwire Plays Chicken With Sprint on Debt Payments) Sprint had to share a part of the $4 billlion debt it had raised for this deal.

Considering that the company’s balance sheet was laden with debt, Sprint’s management might have felt that they were pushed into a corner, but in hindsight, they couldn’t be more relieved now. In fact, as a sign of improving relations with Clearwire, Sprint has recently tapped the debt market again for another $2 billion, a part of which it intends to use to finance Clearwire’s LTE network. (see Clearwire Cheers Sprint’s Plans to Tap Debt Market Again)

However, Sprint will have to fork over $65 million as separation fee now that it has terminated its contract with Lightsquared. With the company already having guided an aggressive 2012 in terms of capital expenditures for its Network Vision Plan, this could put further strain on its balance sheet. We believe that although the company may end up with a little less cash by the end of this quarter, it should be thanking its stars that it didn’t put all its eggs in one basket.

As for Clearwire, it will be extremely gladdened by the swift change in fortunes. Only a few months back, it was considering defaulting on an interest payment. Now, with Lightsquared’s LTE plans floundering, Clearwire not only has one less wholesale competitor in the market but also Sprint’s backing and enough cash to put its LTE plans to work. Lightsquared’s clients have also been slowly defecting and signing up with Clearwire one by one. Lately, we have seen two of former Lightsquared clients, FreedomPop and Leap Wireless publicly switch allegiances.

Clearwire’s shares were up almost 6% Friday.

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Notes:
  1. LightSquared gets $65 million as Sprint quits, March 16th, 2012 []
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