DISH Network Corp. (NASDAQ:DISH) made a complex proposal to purchase spectrum and/ or shares in a deal that would value Clearwire Corporation (NASDAQ:CLWR) at $3.30/share. Under the proposal DISH offered to buy approximately 24% of CLWR's spectrum holdings (11.4 billion MHz-POPs) for $2.2 billion, valuing the company's spectrum at 19cents/MHz-POP. DISH would also have the option to purchase or lease an additional 2MHz of spectrum from CLWR.
In addition, DISH Network Corp. (NASDAQ:DISH) would purchase services from CLWR, including construction, operation, maintenance, and management of a wireless network that would use DISH's AWS-4 spectrum, as well as the 2.5 GHz spectrum purchased from CLWR. DISH also offered to buy CLWR stock for $3.30/share subject to conditions including acquiring at least 25% of the fully diluted shares, certain provisions to protect minority shareholders and termination of the Sprint Financing Agreement, which gives Clearwire Corporation (NASDAQ:CLWR) an option to sell to Sprint $80 million per month of exchangeable notes for 10 months.
DISH also offered to provide CLWR an avenue to refinance its existing debt and continue its network build-out. In response to the DISH proposal and at the direction of the Special Committee, it appears CLWR has revoked its initial draw notice on the exchangeable notes Sprint calls DISH Network Corp. (NASDAQ:DISH)'s proposal "illusory" and "inferior". Sprint in its response highlighted several legal hurdles to DISH's proposal, siting the Merger and Equityholder's Agreement. According to Sprint, the Equityholder's agreement may require an affirmative vote of 75% from CLWR's shareholders for DISH to purchase 25% of stock in the company. Sprint also disputed CLWR's right to cancel the $80 million, January 2 tranche of the Financing agreement.
Clearwire Corporation (NASDAQ:CLWR) remains integral to SoftBank's US strategy. Sprint remains the more motivated buyer and is likely to prevail in its attempt to acquire CLWR, which is integral to SoftBank's US strategy. CLWR's vast spectrum holdings provide Softbank Corp (PINK:SFTBF) (TYO:9984) with a potential competitive advantage against AT&T Inc. (NYSE:T) and Verizon Communications Inc.(NYSE:VZ).
Offering unlimited data plans remains a corner stone of Sprint's strategy to attract customers. It is likely to need CLWR's spectrum in order to continue offering unlimited plans in the face of rising usage. In addition, given the size of the Sprint-Softbank deal, the two companies are unlikely to balk at offering another few hundred million dollars to close the deal with CLWR. DISH's move may be motivated to strike network hosting agreement with Sprint.
DISH's move to acquire CLWR may be related to bringing Sprint Nextel Corporation (NYSE:S) to the table to discuss network sharing agreements, on more favorable terms, given that DISH wants to minimize the capital expense to build any wireless network. Prior to the SoftBank investment in Sprint, a Sprint/DISH arrangement was more likely as it allowed cash-strapped Sprint to better monetize its network assets. However, since the cash infusion from SoftBank, Sprint is less motivated to empower a potential competitor by hosting DISH's AWS-4 spectrum on its network. The relationship between the two companies got more acrimonious after the recent spat over the H-block /AWS-4 interference issue. CLWR shareholders likely to be the winners. Given the de minimis impact on both Sprint/SoftBank and DISH, at current levels CLWR shareholders are likely to benefit from DISH's entry into the process, regardless of the victor.
SPRINT’S VIEW’S - Also in the press release was a detailed discussion of Sprint’s response to this proposal. Specifically, Sprint responded to the DISH proposal stating it is inferior to Sprint’s transaction and given both its Commercial (MVNO) Agreement and Equity holder’s Agreement it has in place with Clearwire Corporation (NASDAQ:CLWR) this plan would require Sprint’s approval or waiver (which they do not intend to do or give). Recall, Sprint will own ~63% of CLWR shares (once it completes the purchase of the SIG’s shares) and controls 6 seats and has one independent appointee of the CLWR BOD. DISH’s bid for all the shares, it all but assumes it will not receive approval from the Sprint own shares. If CLWR sells more than 20% of its assets it requires 7 members of the 13 member Board approval. If it sells less than 20% of its assets (note: DISH’s offer is for 24% of its spectrum) it would require Super Majority Approval of the BOD (or 10 of the 13 Board members).
WHAT’S NEXT FOR SPRINT? – One of the main lynchpins in the Sprint/Softbank deal was CLWR. Recall, SoftBank uses 2.5GHz spectrum in Japan and deploys TDD LTE technology (note: CLWR is the only carrier which has the ability to deploy this technology in the US). While Sprint has many strong legal arguments that could block this deal (right of first refusal on spectrum purchases, majority shareholder, etc.), history has shown it is very difficult to fight Charlie Ergen and DISH in court. Sprint likely wants to avoid this and likely wants to also avoid any delay in closing the Sprint/SoftBank deal. So what is Sprint’s next move? It is difficult to say but Sprint has lost some leverage here. As before yesterday’s announcement – it appeared to be highest bidder for this asset, and today it no longer is. One thing is certain- CLWR is instrumental to the Sprint/SoftBank’s forward looking strategy and it is difficult for us to see a scenario where Sprint walks away from this asset.
WHAT’S NEXT FOR CLWR? – Recall, Clearwire Corporation (NASDAQ:CLWR) set up a Special Committee in November which consists of three members of its Board (non-Sprint appointed members). This Committee has been in touch with Sprint since it received this proposal from DISH. In its press release, CLWR stated that it would “pursue the course of action that is in the best interests of the Clearwire’s non-Sprint Class A stockholders.” While Sprint has offered CLWR a loan of $800MM in interim financing – CLWR has been public about the fact it had enough cash to last it for 12 months (as of 9/30/12).
BOTTOM LINE: While it is highly unlikely that DISH Network Corp. (NASDAQ:DISH) would receive shareholder approval of this offer (given that Sprint owns two-thirds of Clearwire Corporation (NASDAQ:CLWR)shares including SIG’s ownership interest), there is no simple or easy resolution. Sprint Nextel Corporation (NYSE:S) knows if they go down the legal path with DISH it will likely get messy and could cause a significant delay in getting the SoftBank deal done. DISH Network Corp. (NASDAQ:DISH) may have now found the leverage it needs to negotiate with Sprint Nextel Corporation (NYSE:S) which could give it favorable terms. Therefore, what Sprint may lose here is the opportunity cost of striking an attractively priced wholesale agreement with DISH. This loss of leverage likely will cause some near-term weakness in S shares. On the CLWR side, the minority shareholders are a KEY issue for CLWR. The Board clearly has a fiduciary responsibility to this group of investors or it too opens itself to significant lawsuits. Some members of this group have already filed lawsuits against Sprint Nextel Corporation (NYSE:S) arguing against the S/CLWR deal.
Disclosure: No position