Sprint (NYSE:S) raised its bid for Clearwire Tuesday in a last-ditch attempt to win over the company’s remaining shareholders who have been clamoring for a better deal. The improved bid stands at $3.40 per share – a 14% premium over its previous bid of $2.97 per share. It also beats Dish Network’s competing bid of $3.30 per share offered in January. Sprint said that the sweetened offer was its ‘best and final’ one, implying that it isn’t willing to enter into a protracted bidding war to acquire the remaining nearly 50% of Clearwire that it doesn’t already own. Some of Clearwire’s shareholders such as Crest Financial, who were displeased with the earlier bid, weren’t too impressed with the new one either. However, with majority shareholder Sprint unlikely to vote in favor of any counter-bid for Clearwire, this may be the last chance for the company’s minority shareholders to salvage a deal before an imminent bankruptcy filing in the coming months.
Clearwire filing for bankruptcy protection wouldn’t be in Sprint’s favor either since the former’s spectrum assets would then have to be auctioned off to pay the debtors before the shareholders. Sprint’s majority stake-holding would then count for zilch, and it would have to fight with other deep-pocketed rivals such as Verizon and AT&T for Clearwire’s spectrum, making it even more expensive for the third-placed carrier. And it is the spectrum that Sprint is after with its Clearwire acquisition bid. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average, which would go a long way in bolstering Sprint’s LTE network. 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.
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However, a move on Clearwire means that Sprint will also have to absorb the latter’s almost $3.5 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 88 U.S. markets as of April, the carrier far trails the country’s largest wireless carrier Verizon whose LTE network reaches more than 287 million Americans in almost 500 markets across the U.S. AT&T’s lead over Sprint is not as wide, but it still offers LTE in over 200 U.S. 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 key 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 $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 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 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.