In what seems like a big setback to Sprint (NYSE:S), Clearwire’s board has announced that it is backing Dish’s (NASDAQ:DISH) bid over its majority stakeholder’s. The announcement came just the hours before Clearwire’s shareholders were set to vote on a Sprint takeover and was a sharp departure from the board’s earlier stance that Sprint’s bid is the better option. Clearwire now believes that Dish’s bid not only offers better value to the company (almost a 30% premium over Sprint’s bid) but may also face less opposition from minority shareholders. It also said that Sprint hasn’t raised its bid despite being given a five days advance notice that it would be publicly backing Dish’s offer. Sprint, which is Clearwire’s majority shareholder, claims that Dish’s offer is not actionable without the consent of Sprint and other shareholders due to Clearwire’s governance structure.
Clearwire has been an interesting takeover candidate in the past few months with both SoftBank (through Sprint) and Dish looking to use the smaller carrier’s spectrum hoard to further their wireless ambitions and diversify away from their respective stagnant businesses. While Dish wants 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 because Sprint is Clearwire’s majority shareholder with over 50% stake. Dish is therefore looking to acquire at least 25% of Clearwire’s stock through an aggressive bid and make it tougher for Sprint to take full control of the company.
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A negotiation between Sprint and Dish likely
Dish has also placed a competing offer for Sprint but with Sprint’s board as well as its largest shareholder unanimously backing SoftBank’s recently revised bid, it seems as though the door has shut on Dish unless it can come with a vastly improved offer. SoftBank’s new bid however limits Sprint’s ability to make aggressive acquisitions since it will receive about $3 billion less cash than previously – cash that is instead being offered to shareholders to make it more lucrative for them to approve the deal.
The third largest U.S. carrier is also burning a lot of cash on upgrading its network and executing on an aggressive Network Vision Plan. The Network Vision Plan, which is seeing large-scale LTE deployment and the shutdown of iDEN, has already 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 above and following the corresponding impact on its price estimate. It is therefore very important that Sprint acquire additional spectrum from Clearwire which could go a long way in lowering future CapEx spend on capacity increases. However, with Clearwire getting costlier to acquire, Sprint may be forced to negotiate with Dish and acquire only part of Clearwire’s spectrum.
How far Sprint is willing to go on a bidding war with Dish will depend on the operating and capital efficiencies that the carrier believes it will be able to extract by partnering with SoftBank. Sprint and SoftBank said that they revised their original estimates of cost benefits after nine months of due diligence, which is what allowed SoftBank to increase the cash payment to shareholders in the new deal. 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.