Clearwire Extends Sprint Agreement, Lifting Outlook

Clearwire announced Thursday that it had reached a network sharing agreement with Sprint (NYSE:S) just in time for it to meet its $237 million debt interest payment due, sending its shares up almost 14% at the day close. ^[1] The deal requires Sprint to pay up to $1.6 billion over a four year period in network fees and possible equity investments, and eases investor concerns about an imminent Clearwire bankruptcy. Sprint has a 54% non-controlling stake in Clearwire, so any positive Clearwire stock movement is good for Sprint as well. ^[2] However, Sprint’s stock may continue to be volatile as it struggles to compete against rivals such as Verizon (NYSE:VZ) and AT&T (NYSE:T) in the U.S. telecom market.

The deal helped resolve Clearwire’s dilemma about meeting its debt obligation or not. If Clearwire had failed to meet its debt obligation, the subsequent restructuring would have given its creditors control of some of its spectrum assets that Sprint currently depends on for its WiMax customers. (see Sprint Update: Clearwire Plays Chicken With Sprint on Debt Payments)

Our $4.25 price estimate for Sprint stock is about 57% above market price.

See our complete analysis for Sprint stock here

Sprint’s LTE plans will get a boost

Sprint and Clearwire have both been in dire straits of late after their bet on WiMax failed to pose any threat to AT&T and Verizon, who have now also taken a lead in rolling out their next-generation LTE networks. Though late to the party, Sprint is trying to aggressively build its LTE network to make up for lost time and is also looking to augment its network with Clearwire’s in the future. However, Clearwire needs cash to put its LTE plans to work. The ailing wireless provider has only $700 million in cash and short-term investments, which is barely enough for the company to meet its operational costs for the next year. As part of this deal, Sprint will pay Clearwire $350 million for using its LTE network if Clearwire meets certain network targets by June 2013. Alone, Sprint may not have been able to build a LTE network robust enough to compete with its larger rivals in time but together with Clearwire, Sprint will have a chance.

Deal will help Sprint reduce costs

Sprint has its own debt concerns, though they are not as serious as Clearwire’s. The company had to recently raise about $4 billion in the bond market to meet a maturing debt obligation and finance its LTE upgrade plans. This is in addition to the already existing net debt of $11.9 billion, which compares poorly to to a market cap of $8.6 billion. So much debt on the balance sheet means reduced flexibility as the company has to be very careful with what it does with its cash.

This made it imperative for Sprint to get a good deal out of Clearwire in return for extending its network-sharing agreement. In an earlier article, Sprint Taps Bond Market, May Help Fund Ailing Clearwire, we talked about how cheaper rates would allow Sprint to increase its margins and manage its increasing network costs as it builds out its own LTE network. Under this new agreement, Sprint has managed to do just that by adjusting their existing agreement to allow unlimited data usage on their WiMax network. It will also be able to dictate the places where it wants Clearwire to develop its LTE infrastructure, which will bolster Sprint’s strength in high data usage areas without adding to its capital expenditures.

If we tweak the Trefis model for Sprint to include increasing capital expenditures in the next five years, we can see that the stock price forecast plummets, showing a high sensitivity to increasing network costs.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Sprint offers Clearwire $1.6 billion “lifeline”, December 1st, 2011 [↩]
2. Information on Clearwire stake available in Sprint’s SEC filings [↩]