With Clearwire siding with Dish Network (NASDAQ:DISH), Sprint (NYSE:S) has filed a lawsuit against the two seeking to block the satellite-TV provider’s proposed offer for Clearwire’s shares. The third-largest wireless carrier in the U.S. said that Dish’s tender offer is a violation of not only the corporate law in Delaware where Sprint is situated, but also of its own as well as other shareholders’ corporate governance rights in Clearwire. It also contends that Dish’s offer cannot go through without the approval of at least 75% of Clearwire’s voting shareholders and Comcast – neither of which has been obtained yet. The lawsuit comes just days before Clearwire’s shareholder meeting scheduled for June 24, and is likely a response to the unanimous backing that Clearwire’s board has provided to Dish’s offer.
At the outset, dragging Dish and Clearwire to court seems a smart way to get Clearwire’s board to approve a Sprint merger without going into a bidding war. The fact that the lawsuit concerns a complex corporate governance agreement means that a court resolution of the conflict could take months or even years — time that Clearwire doesn’t have. Without a financing agreement or a takeover, Clearwire has announced that it could run out of cash early next year. Bankruptcy proceedings have seldom been in favor of public shareholders, something that Clearwire’s minority shareholders are well aware of. Sprint seems to be counting on the fact that the certainty and immediacy of the deal that it brings to the table, in the wake of its recently filed lawsuit, might tilt the scales in its favor.
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Cash Crunch For Sprint Makes Bidding War Unlikely
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.
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 up 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. (see SoftBank Nears Deal For Sprint But Clearwire’s Fate Still Uncertain)
CapEx Reduction and Margin Improvement Key For Sprint
At the same time, Sprint is trying to conserve cash for its Network Vision Plan, which is seeing large-scale LTE deployment and the shutdown of iDEN. The project 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 higher 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 acquires additional spectrum from Clearwire, which could go a long way in lowering future CapEx spend on capacity increases.
Clearwire’s spectrum will also allow a SoftBank-backed Sprint to leverage the cost efficiencies of running similar networks in two different countries. Clearwire is using its spectrum to lay out a TD-LTE network (as opposed to the FD-LTE network that is widely used in the U.S.) – the same variety of LTE technology that powers Softbank’s 4G network in Japan. This will allow the new Sprint to negotiate not only better mobile device deals with manufacturers but also better bulk equipment deals with wireless networking vendors, thereby improving margins and CapEx requirements 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 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.