Clearwire Rebuffs Dish By Accepting Second Monthly Financing From Sprint

Sprint’s (NYSE:S) takeover attempt of Clearwire looks a lot more likely now that the smaller carrier has decided to accept a second monthly payment of $80 million in April from its largest shareholder. The convertible debt financing is part of the $2.97 per share buyout offer that Sprint had made in December for the remaining 49% of Clearwire’s shares that it doesn’t currently own.

As part of the offer, Sprint then set aside a pool of $800 million that Clearwire could withdraw from in 10 equal monthly installments. Clearwire did not initially access the pool in January and February as it evaluated a higher $3.30 per share counter-bid from Dish Network, but has now yielded for two consecutive months despite Dish’s threat of withdrawing its offer in such a scenario. Dish has so far neither acted upon that threat nor given an update regarding the status of its Clearwire bid.

This however doesn’t guarantee that the wholesale service provider will accept Sprint’s offer given some of the minority shareholders’ concerns that the deal significantly undervalues Clearwire’s spectrum. But since Sprint’s debt will get converted into Clearwire’s shares in case the buyout deal doesn’t go through and help it further increase its stake in the company, it could prove to be a big deterrent for a third-party buyer such as Dish to pursue Clearwire for much longer.

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By completely acquiring Clearwire, Sprint wants to gain access to its vast swathe of 2GHz spectrum which would go a long way in bolstering its LTE network. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average. Moreover, 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. However, a move on Clearwire means that Sprint will also have to absorb the latter’s over $3 billion in net debt and more than $300 million in operating losses every quarter. But considering that the government’s TV spectrum auctions are years away and Sprint now has the financial cushion of Softbank to make this aggressive move, Clearwire’s spectrum does seem like a very attractive option. With Clearwire’s spectrum, Sprint will not only be able to build out a robust LTE network but also compete more effectively with Verizon (NYSE:VZ) and AT&T (NYSE:T), who are farther ahead in their LTE deployment plans.

Sprint’s lagging LTE plans to get a boost

Sprint was the latest of the three to launch a LTE network, and with coverage in all of 67 U.S. markets as of March, the carrier far trails the country’s largest wireless carrier Verizon whose LTE network reaches more than 270 million Americans in over 480 markets across the U.S. AT&T’s lead over Sprint is not as wide, but it still offers LTE in as a many as 161 markets and plans to reach 250 million Americans by the end of this year.

In order to bridge the gap, Sprint is aggressively executing on what it calls its Network Vision strategy to get most of its 4G LTE network ready by the end of 2013. The carrier is trying to phase out iDen gradually and consolidate its network holdings into one 2G/3G/4G network using a combination of CDMA and EV-DO. In order to free up resources for a nationwide LTE network, Sprint is planning to shut down the iDEN network completely by the mid-year and use the freed up iDEN spectrum to boost its LTE network in 2014. (see Sprint To Build LTE Over iDEN’s Grave)

Since Sprint plans to maintain its niche by keeping its plans for LTE unlimited as well, the carrier will need more spectrum to meet the ever increasing demands of its data-hungry smartphone subscribers. At about 75%, Sprint’s postpaid smartphone penetration is the highest among the top three carriers. In order to support the huge long-term data growth, Sprint needs resources on top of the freed up iDEN spectrum which is why it has been looking to play an active role in consolidating the wireless industry. With Softbank’s cash, Sprint finally has the opportunity to do so without piling on more debt, as can be seen by its recent deal with U.S. Cellular. Acquiring Clearwire would be the next step as Sprint looks to increase scale and bolster its competitive standing with additional capacity for 4G LTE.

CapEx spend to decline

Additionally, Clearwire’s spectrum will enable Sprint to lower its long-term CapEx spend on capacity increases following the initial deployment phase which is seeing burgeoning investments on LTE. The Network Vision Plan, which will see large-scale LTE deployment and the shutdown of iDEN, has cost Sprint over $3 billion in the last two quarters alone and will see another $3.8 billion being invested in the first half of this 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 below and following the corresponding impact on its price estimate. Additional spectrum capacity will go a long way to bring these costs down.

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 the 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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