Emboldened by the recent deal with Japanese carrier Softbank, Sprint (NYSE:S) is looking to make use of its surer financial footing to acquire more spectrum. The third largest wireless carrier in the U.S. announced Monday that it has reached an agreement with Clearwire to buy the remaining 49% of the smaller company for $2.2 billion, and bolster its spectrum war chest for LTE. While there was some speculation initially that Sprint will have to increase its bid price in order to convince the rest of the company’s shareholders but in the end, it seems the $2.97 per share offer was enough. The completion of this deal is however contingent on the FCC approving Sprint’s 70% stake sale to Softbank.
Clearwire’s acquisition makes a lot of sense to Sprint for it gives it access to a vast swathe of 2GHz spectrum for its LTE network. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average. 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. However, a move on Clearwire means that Sprint will also have to absorb the latter’s over $3 billion in net debt and more than $300 million in operating losses every quarter. But considering that the government’s TV spectrum auctions are at least 3 years away and Sprint now has the financial cushion of Softbank to make this aggressive move, Clearwire’s spectrum does seem like a very attractive option. With Clearwire’s spectrum, Sprint will not only be able to build out a robust LTE network but also compete more effectively with Verizon (NYSE:VZ) and AT&T (NYSE:T), who are farther ahead in their LTE deployment plans.
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Sprint’s lagging LTE plans to get a boost
While Sprint has only just started its LTE rollout with coverage in all of 43 U.S. markets as of November, the country’s largest wireless carrier, Verizon, has its LTE network available to more than 250 million Americans in over 400 markets across the U.S. AT&T’s lead over Sprint is not as wide, but it still offers LTE to as many as 160 million Americans and plans to reach 250 million by the end of next year.
In order to bridge the gap, Sprint is aggressively executing on what it calls its Network Vision strategy to get most of its 4G LTE network ready by the end of 2013. The carrier is trying to phase out iDen gradually and consolidate its network holdings into one 2G/3G/4G network using a combination of CDMA and EV-DO. In order to free up resources for a nationwide LTE network, Sprint is planning to shut down the iDEN network completely by next summer and use the freed up iDEN spectrum to boost its LTE network in 2014. (see Sprint To Build LTE Over iDEN’s Grave)
Since Sprint plans to maintain its niche by keeping its plans for LTE unlimited as well, the carrier will need more spectrum to meet the ever increasing demands of its data-hungry smartphone subscribers. At about 73%, Sprint’s postpaid smartphone penetration is the highest among the top three carriers. In order to support the huge long-term data growth, Sprint needs resources on top of the freed up iDEN spectrum which is why it has been looking to play an active role in consolidating the wireless industry. With Softbank’s cash, Sprint finally has the opportunity to do so without piling on more debt, as can be seen by its recent deal with U.S. Cellular. Acquiring Clearwire would be the next step as Sprint looks to increase scale and bolster its competitive standing with additional capacity for 4G LTE.
CapEx spend to decline
Additionally, Clearwire’s spectrum will enable Sprint to lower its long-term CapEx spend on capacity increases following the initial deployment phase which is seeing burgeoning investments on LTE. The Network Vision Plan which will see large-scale LTE deployment and shut down iDEN has so far cost Sprint $1.6 billion last quarter and will see another $2.5 billion being invested in Q4. Next year, the carrier plans to spend $4 billion. 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, as 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 in bringing these costs down in the long run.
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 the 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.