Sprint announced this morning through a regulatory filing that its board had authorized management to engage Clearwire in merger discussions where Sprint would acquire the 49% of Clearwire it does not already own for $2.90 per share in cash, or approximately $2.1 billion in aggregate.
The proposed transaction is intended to qualify as a “Qualifying Purchase” under Clearwire Corporation (NASDAQ:CLWR)'s Equityholders’ Agreement. As such, it will need approval of a majority of the directors on Clearwire Corporation (NASDAQ:CLWR)'s board (excluding Sprint’s nominees) and by a majority of the voting shareholders (excluding Sprint's holdings).
Sprint expects any definitive merger agreement would contain language stating that the proposed Softbank Corp (TYO:9984) deal to acquire a majority of Sprint will be consummated first. Sprint has proposed to provide Clearwire Corporation (NASDAQ:CLWR) with up to$800 million of interim financing following the execution of a definitive merger agreement, which Clearwire could then use to accelerate its 4G TDD-LTE network deployment (Good For Towers). The cash infusion is important as some analysts believed that Clearwire would run out of cash by 4Q13 with the LTE overlay ramping up in mid-2013.
Given that Sprint already owns 51% of Clearwire and is the only national carrier that currently utilizes Clearwire’s network (via wholesale arrangement) and Clearwire’s need for additional capital, many investors would not expect any other party to make a bid for the company. While the offer of $2.90 is only a 5% premium above Wednesday’s closing price, it is a 123% premium over the price CLWR traded for on October 10, the day before Sprint announced it was discussing a merger with Softbank (CLWR was up 71% on October 11). The current offer is slightly lower than the $2.97 per share average that Sprint Nextel Corporation (NYSE:S) paid Eagle River (an original Clearwire investor) in a deal that closed on December 11 for its 2% stake in Clearwire, and some analysts expect that CLWR shareholders will push to receive a buyout equal to or greater than that price.
Clearwire’s crown jewel is its deep owned/leased spectrum holdings in the 2500 MHz band (on average 160 MHz in the Top 100 markets). Sprint Nextel Corporation (NYSE:S) has sufficient spectrum depth, especially following the refarming of lower band Nextel iDEN spectrum (iDEN is expected to be shut off by mid-13) for its initial 4G LTE deployment. But, many believe that having access to Clearwire’s ample spectrum will be critical in the long term as mobile data usage continues to skyrocket as smartphone penetration (currently below 60% in the U.S.) increases and more 4G LTE networks are deployed.
Having access to Clearwire’s large spectrum holding with a stronger balance sheet should allow a quicker rollout of a very fast network, but will involve more capex and equipment at cell sites given that Clearwire spectrum is located in a high band.
Ric Prentiss, an analyst at Raymond James, is not surprised that Sprint Nextel Corporation (NYSE:S) wants to own the rest of Clearwire, but he thought a deal would be 12-18 months away as Clearwire will bring negative EBITDA (he estimates it over -$300 million annually after inter company eliminations and synergies) and an escalating level of net debt ($3 billion in 3Q12 and growing).
However, Christopher M. Larsen, CFA, an analyst at Pipper Jaffray has an answer for Ric Prentiss. He notes that if a deal were to go through, Sprint would gain a significant swath of spectrum that can be used to supplement 4G capacity. While it's not the most attractive spectrum out there, the incremental purchase price (above what Sprint already owns) is very attractive and affords Sprint great flexibility in the future.
Investors can ask 'why now?' and wonder if the timing of this proposal means that the possibilities of a DISH Network Corp. (NASDAQ:DISH) partnership are low, but really he thinks that the timing has more to do with the fact that the pending Softbank Corp (TYO:9984) transaction allows Sprint the balance sheet flexibility to resolve this long-standing overhang. A deal for Clearwire likely also gives Sprint a better negotiating position with DISH Network Corp. (NASDAQ:DISH) on any potential spectrum hosting arrangements (i.e., 'you're not our only option').
Disclosure: No position in any securities mentioned