Verizon’s Spectrum Purchase Has Mixed Impact on Clearwire, Sprint

Verizon (NYSE:VZ) announced a $3.6 billion deal on Friday whereby the company will buy a significant chunk of wireless spectrum from SpectrumCo, a joint venture formed by Comcast (NASDAQ:CMCSA), Time Warner (NYSE:TWC) and Bright House Networks. ^[1] The deal also gives the cable companies the right to resell Verizon’s wireless services bundled with their own Internet, phone and TV services. This signals the end of their current partnership with Clearwire, whose 4G wireless services they will stop reselling within the next six months. ^[2] Not only does this have repercussions on the ailing Clearwire but also its majority shareholder, Sprint (NYSE:S).

The announcement comes at a time when Clearwire is looking to expand its wholesale business and build additional revenue channels in a bid to raise funding for its LTE plans. 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. Losing customers at this point will not help Clearwire’s chances at securing additional capital.

See our complete analysis for Sprint stock here

Sprint’s dilemma

Comcast and Time Warner also hold equity stakes in Clearwire, but they are very small in comparison to Sprint’s. By signing a deal with Verizon, Comcast and Time Warner have distanced themselves from the Clearwire and in doing so have put Sprint in a dilemma.

Sprint recently agreed to pay Clearwire $350 million for using its LTE network if Clearwire meets certain network targets by June 2013. (see Clearwire Extends Sprint Agreement, Lifting Outlook) So apart from just a financial interest in Clearwire’s well-being, Sprint also has an interest in the company obtaining the funds it requires to build its LTE network. Hurting Clearwire’s chances at securing funds from other sources will put additional pressure solely on Sprint to help out financially with the  LTE network build-out. However, Sprint’s debt-laden balance sheet doesn’t offer it the flexibility to splurge more money on an unprofitable investment like Clearwire.

Clearwire, though, may now be able to sell its unused spectrum at a premium considering that the Verizon deal has made the limited resource that much rarer. The company is sitting on a huge swath of unused spectrum that it could liquidate to address its liquidity crisis. This will also help resolve Sprint’s dilemma about pumping more cash into Clearwire. But selling its spectrum will limit the LTE plans that the company has been banking on to keep it out of bankruptcy after its largely unsuccessful bet on WiMax.

We have a $4.25 price estimate for Sprint’s stock, which is about 57% above market price.

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

1. Comcast, Time Warner Cable, and Bright House Networks Sell Advanced Wireless Spectrum to Verizon Wireless for $3.6 Billion, Company Press Release, December 2nd, 2011 [↩]
2. Comcast, Time Warner preparing to bid farewell to Clearwire, CNET, December 2nd, 2011 [↩]