SoftBank-Sprint Fend Off Dish Takeover But Clearwire Deal Is A Jump Ball

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With Dish Network (NASDAQ:DISH) declining to make a fresh bid for Sprint (NYSE:S), SoftBank seems to have cleared a very important hurdle in its attempt to buy the third largest wireless carrier in the U.S. In a fresh update issued Tuesday, Dish said that SoftBank’s revised offer for Sprint has made it ‘impracticable’ for it to submit a new bid before the June 18 deadline, and that it will now focus all its ‘efforts and resources’ towards closing the Clearwire deal.

The decision comes after Sprint’s board as well as one of its largest shareholders, Paulson & Co, unanimously backed SoftBank’s revised offer last week, leaving Dish with little option but to abandon the deal or come up with a much superior bid. SoftBank is now left with two more approvals to seek, one from Sprint’s shareholders and another from the FCC, both of which seem very likely given that there are no other suitors left and that the merger has already received national security clearance from the government.

See our complete analysis for Sprint


Clearwire deal in doldrums though

However, Dish could still botch Sprint’s attempt to buy out Clearwire, whose valuable spectrum holdings are key to the third-placed carrier’s turnaround efforts. Dish’s tender offer of $4.40 per share, which is a premium of about 30% over Sprint’s, has received backing from Clearwire’s board. At the same time, the new SoftBank deal gives Sprint $3 billion less cash than previously negotiated (cash that is instead being offered to its shareholders), making it unlikely that Sprint would go for aggressive acquisitions. This however doesn’t mean that Dish will be able to acquire Clearwire completely since Sprint, which is Clearwire’s majority shareholder with over 50% stake, remains an unwilling seller. Dish is therefore looking to become a big minority shareholder in the company, giving it enough bargaining power to negotiate a deal with Sprint either to buy part of Clearwire’s spectrum or forge a network-sharing agreement.

In order to stop the tender offer from going through, Sprint has filed a lawsuit, alleging that Dish’s offer is illegal and violates not only the corporate law in Delaware but also its own as well as other shareholders’ corporate governance rights in Clearwire. By doing so, Sprint is hoping to get Clearwire’s board to its side without entering into a long and costly 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. With bankruptcy proceedings seldom going in favor of public shareholders, Sprint is hoping 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 away from Dish.

CapEx Reduction and Margin Improvement Key For Sprint

The reason why Sprint wants the rest of Clearwire so badly is its vast swathe of nationwide 2GHz spectrum, which could go a long way in bolstering its LTE prospects and helping it compete more effectively with the duopoly of AT&T and Verizon. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average. Sprint has been splurging on network upgrades and transitioning to 4G LTE, and additional spectrum from Clearwire could go a long way in lowering future CapEx spend on capacity increases. 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. Owing to its highly leveraged capital structure, Sprint is highly sensitive to CapEx, and any decrease in CapEx spend could provide a significant boost to its stock value.

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.

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