Sprint, Clearwire and the Cablecos Dance Around a Deal

Clearwire Shares Double on Word of Renewed Talks

Earlier this month I commented on the untenable situation that has developed between Sprint (NYSE:S) and Clearwire (Nasdaq:CLWR), and also wondered about the wisdom of the announcement Sprint made that it had entered into a nine year, $13.5b network deployment deal with startup LTE wholesaler LightSquared. 

Specifically, I pointed out that if Sprint continues to ignore Clearwire’s financial woes, it stands to lose its nearly 50% ownership position should Clearwire end up restructuring via bankruptcy….I also mentioned the fact that LightSquared’s spectrum is still constrained by interference issues with GPS providers.

Well according to a report published by Bloomberg last Friday, Sprint hasn’t completely lost sight of its investment in, not to mention reliance upon, Clearwire. In fact, the two may be in deal discussions as I write, and their cable step-brothers Time Warner Cable (NYSE:TWC) and Comcast (Nasdaq:CMCSA) may also be seated at the table.

Shares in Clearwire skyrocketed on the rumor last Friday, more than doubling from the sub-$2/share level they had fallen to in the wake of the Sprint/LightSquared announcement.  While Clearwire was trading at present levels (around $3/share) just a month or so ago, after tumbling to a low of $1.32 in early August, $3+ per share suddenly looks a lot better.

But what does it imply in terms of Clearwire’s value?  Back in June I wrote a story on Clearwire’s ongoing struggles to raise capital via a spectrum sale or a broader deal.  At the time, Pardus Capital’s Karim Samii had written a letter to interim ceo John Stanton bemoaning the fact that, at $4.60/share, Clearwire’s massive spectrum holdings were valued at less than $0.20 per MHz POP.  Samii urged Stanton to sell off some of Clearwire’s excess spectrum in order to get the company’s business plan back on track.

After Friday’s run-up, Clearwire appears to trade at an even more discounted $0.15/MHz POP, and at its low two weeks ago, Clearwire’s public market cap indicated a value of just $0.12/MHz POP….But according to the FCC, not to mention AT&T in its T-Mobile lobbying efforts, U.S. wireless carriers are facing a serious spectrum shortage!

I’ve been flummoxed by Sprint’s refusal to step up and support Clearwire for some time now…clearly the company’s bet on WiMax technology has proven to be a misstep in hindsight, but in the meantime Sprint keeps adding 4G customers, to the tune of 1.7m net new 4G customers on the Clearwire network in the second quarter.

Sprint needs every advantage it can get its hands on in the face of the AT&T/Verizon Wireless duopoly.  Why bet billions on LightSquared’s fledgling plan when it already bet billions on Clearwire’s 4G plan years ago?  And why haven’t the cable guys stepped up sooner?  They desperately need a wireless strategy—and that’s what their investments in Clearwire was supposed to be…but the partnerships have floundered in recent years; the vast majority of Clearwire’s wholesale customers have come from Sprint.

Clearwire’s 2.5 GHz spectrum isn’t as desirable as the 700 MHz licenses that Verizon and AT&T will use to deploy their 4G systems on, but it has LOTs of it. Furthermore, the FCC is still considering a proposal to raise the out of band emission limits, which would enable Clearwire to use 20 MHz of spectrum and deliver speeds of 90 Mbps.

It just makes sense for Sprint and the cable players to really get behind Clearwire and make it the basis of their next generation wireless strategies. But after the drubbing the stock has taken this year, due largely to Sprint’s relative lack of support, Clearwire’s existing backers may now be in a position to take over for a much lower price than would have been demanded last winter.  Maybe that was the point?

Clearwire Urged to Sell Spectrum

Letter to Ceo Stanton Highlights Clearwire’s Missteps--But Imminent Spectrum Sale Seems Unlikely

Private investment firm Pardus Capital issued a press release last week disclosing the content of a letter sent to Clearwire (Nasdaq:CLWR) interim ceo and chairman of the board John Stanton wherein Pardus president/ ceo Karim Samii outlined in detail Pardus’ concerns that Clearwire is increasingly up against the ropes when it comes to its efforts to raise funding for its business plan, as well as in regards to its negotiating leverage with 54% owner Sprint (NYSE:S).

The letter raises numerous valid points, but the most pertinent one in my mind is the question of who has the upper hand between Sprint and Clearwire today.  Clearly Sprint believes that it does—and it may be right, for now anyway, although I’m not fully convinced. And despite Pardus' many arguments for a "small spectrum sale" now, I don't see it happening in the near-term.

Sprint’s Network Vision plan to reconfigure its network over the next several years will decommission its Nextel/iDEN network and repurpose the spectrum and network assets for CDMA service; presumably there is also a path-to-LTE element in the planning which would reduce Sprint’s reliance upon the Clearwire WiMax network. But the project is expected to last for three to five years and that’s an eternity in the wireless marketplace.  Without Clearwire and pre-Network Vision completion, Sprint doesn’t HAVE a 4G strategy.  Meanwhile, Verizon (NYSE:VZ) introduced a handset for its LTE 4G network in mid-March and reported 250k sales of the device in just two weeks before the quarter ended. 

Customers—the high-value ones anyway—want 4G services.  AT&T (NYSE:T) doesn’t have it, MetroPCS (NYSE:PCS) has it in just a few markets and others, most notably Leap Wireless (Nasdaq:LEAP), are looking to LightSquared to provide it.  At this point, however, I see LightSquared as a red herring.  Not only because the pure wholesale business model has never succeeded before, but because it now says it might lean on AT&T for early LTE capacity, because the interference issues it has with global positioning services (GPS) have not been resolved, because its capacity will be limited as a result of that interference and because, “Service will be available in the second half of this year,” is the most detail I’ve seen on the actual buildout…LightSquared is reportedly now in talks with Sprint too…it’s all getting very incestuous but the fact is, for now anyway, the only up and running 4G networks with measurable coverage are Clearwire’s and Verizon’s.

Which brings me to subscriber growth.  Sprint has turned its sub growth around admirably compared with the serious losses it was experiencing a few years back.  But if you look at the detail of Sprint’s most recent quarter, of the 1.1m in net adds, they were ALL either prepaid subs (not likely to be heavy spenders or data users) or they were added by Sprint’s wholesale partners and affiliates.  On the postpaid, retail side of the business, Sprint lost 114k customers.  Obviously the Verizon iPhone and AT&T’s competitive response had an impact on its ability to retain high-value postpaid customers.

Now take a look at Clearwire’s results in the same quarter.  The company added 1.6m new wholesale subscribers—those are essentially all Sprint customers.  My interpretation of these data points would be that Clearwire’s 1.6m new wholesale customers are 1.6m customers who would have moved from Sprint to Verizon if the 4G product that Sprint offers—over Clearwire’s network—wasn’t available.  Had that happened, Sprint would have been reporting a loss of half a million subscribers, even with the prepaid growth. Yes, this is probably an oversimplification, but the point is, I think Sprint needs that 4G network, for its marketing and for its status as a carrier and to ensure that its entire subscriber base isn’t comprised of $28/month prepaid subscribers in a few years.

Clearwire on the other hand, has a different set of woes.  First, it’s gone out and invested billions in a next-generation wireless data network that runs on a technology that increasingly appears to be the Betamax of 4G wireless data technology. 

Now it’s nearly run out of money, has had to suspend its retail strategy and is scrambling to cover costs, while Daddy (Sprint) has refused to up its allowance.  In fact, it cut the allowance if you buy into Pardus’ argument that the new wholesale agreement came in 30% low:

“The market also took as a negative the ultimate resolution of the Sprint pricing dispute.  We expected the deal would yield around a penny per megahertz for Clearwire. It appears to have come in closer to $0.007/MHz. Another way to look at it: instead of yielding $7.60 per in-market subscribers in more mature markets, Clearwire should be making $10.00 per sub. The market took this as a “sweetheart” deal for Sprint.”

Clearwire’s failure to sell excess spectrum last fall, before T-Mobile was taken out of the picture as a potential buyer, means that it has an even smaller potential buyer pool today, which translates generally to lower values, despite the widely espoused view that the country is heading for a major spectrum crunch.  And herein lies Clearwire’s biggest problem with regards to an immediate spectrum sale.

As Pardus Capital points out in its letter to Stanton, Clearwire’s current equity value implies a value per MHz POP of less than $0.20.  Assuming that some value should be assigned to the subscriber base and network assets (admittedly fairly low), the implied public spectrum value falls even further.

Clearwire’s spectrum is comprised of 2.5 GHz BRS/EBS licenses, which does not have the attractive propagation characteristics of lower band spectrum like 700 MHz.  But it has  a LOT of it; the company’s 10-K reports 46 billion MHz POPs and more than 150 MHz in top markets.  Its deployed network covers 70 markets nationwide, or about 130m POPs.

Of interest regarding BRS/EBS spectrum is a recent FCC release where the Commission asks for comments on proposed changes to the out-of-band emission limits for BRS/EBS service.  Proponents, including Clearwire, have suggested that the change would allow WiMax-based networks to use channel bandwidths of 20 MHz rather than the 10 MHz used today, and Clearwire suggests that it would then be able to deliver data speeds of 90 Mbps, which it cannot do today. Satellite concern Globalstar has opposed the proposal saying that it would result in interference with its service, but other engineering studies refute that claim.  The FCC is taking comments on the matter but it seems clear to me that should the out-of-band emission limits be raised, the relative value of Clearwire’s spectrum holdings would rise--yet another possible reason to wait for a sale. 

At the end of the day, Clearwire remains challenged in many respects, but so too does Sprint.  And the spectrum assets Clearwire holds, assuming it can keep its head above the water, could, in my opinion, be worth a little more than Wall Street is acknowledging.  That’s Pardus Capital’s opinion too, though the investment firm is clearly losing patience.

But John Stanton didn’t become a wireless billionaire simply by virtue of being in the right place at the right time.  As he pointed out on the company’s last earnings call, “Every time a kid downloads a video onto his phone or a company arranges for a video conference call via their iPads, you're in effect seeing the value of spectrum rise. And I think that it would be prudent for us to be in a position to hold that spectrum, all the spectrum, even that which is beyond what we immediately need.”  I tend to agree. As long as Sprint continues to load the Clearwire network with customers, the company should have enough cash flow to survive this year and on into a period where its excess spectrum assets may be more highly coveted.

Sprint and T-Mobile in Talks (Again)

It Just Doesn’t Seem Likely

With AT&T (NYSE:T) and Verizon Wireless (NYSE:VZ) increasingly dominant in the wireless sector, rumors of talks between Sprint (NYSE:S) and Deutsche Telekom regarding a combination of #3 Sprint and #4 T-Mobile USA (and maybe Clearwire (Nasdaq:CLWR) too) have caused a stir before…today the Wall Street Journal and news wire service Bloomberg both reported that the two are back (still?) at the table, though a deal doesn’t appear imminent.

It’s been about eight months since the last time such a combination was the topic of heated speculation, but now, as then, I just can’t see it happening.  The reasons are many, but perhaps most important is the fact that Sprint has just now started to recover from its calamitous Nextel acquisition.  The company managed to grow subscribers in 2010 for the first time in years and ceo Dan Hesse seems to be working his magic to bring Sprint back to growth and (eventually) positive earnings.

Meanwhile, T-Mobile USA just reported its own 2010 results and the headline was a loss of 318k postpaid subscribers in the fourth quarter, for a nearly 400k loss in the year.   Revenue and cash flow held pretty steady, but the company lost about a total of 56,000 customers for the year overall, and many of the new subscribers are less profitable MVNO subs.  So they’re replacing high margin postpaid subs with lower margin prepaid and wholesale customers.  

T-Mobile also has a need for spectrum in order to remain competitive as 4G services proliferate. The company believes its ongoing upgrade to the HSPA+ system will allow it to remain competitive through this year at least, but consumers clearly didn’t buy its holiday season campaign touting “America’s Largest 4G Network.”  

Clearwire, which Sprint owns 54% of, has lots of spectrum and T-Mobile and Clearwire have reportedly been in talks as well.  Alternatively, T-Mobile may opt to resell LightSquared’s LTE service when it launches later this year.

But the bottom line is really one of valuation.  Sprint still has a hefty debt load and when we run a discounted future income model on T-Mobile, based on its recent performance, we can’t get the enterprise value above $20b.  T-Mobile carries its equity alone on the balance sheet at more than $20b and there’s also $15b in debt there…

Not that it couldn’t happen, but there are a lot of moving parts and we’re thinking Sprint probably wants to stick to its own knitting, overhaul its network, clean up its murky relationship with Clearwire and keep moving forward without the added burden of another major combination.

I have to acknowledge, however, that Wall Streeters apparently don't take my Doubting Thomas view.  Shares in Sprint surged as much as 7.4% today before closing up nearly 5% on the "news."  After what happened with Nextel, you'd think investors would be slightly more suspicious of a major transaction.

Clearwire Likely to Sell Spectrum to T-Mobile

Lack of Negotiating Leverage May Limit Clearwire's Proceeds

After months of negotiations and speculation, T-Mobile is apparently the last man standing at Clearwire’s (Nasdaq:CLWR) spectrum auction—and given the relative negotiating leverage of the two, we’re betting that any deal for Clearwire’s excess spectrum gets done closer to the low end of the previously discussed $0.20 - $0.40 per MHz POP price level.

Here’s why:  First, according to a report last Friday by Bloomberg, two people “familiar with the matter” said that T-Mobile is the only remaining service provider at the table.  Back when word first leaked last fall that Clearwire was exploring its options to raise funding, including a sale of spectrum, AT&T (NYSE:T), Verizon (NYSE:VZ), Sprint (NYSE:S) and Clearwire minority investor Time Warner Cable (NYSE:TWC) were all named as potentially interested parties.

Second, T-Mobile parent Deutsche Telekom has given its U.S. subsidiary, which accounts for approximately 25% of DT turnover, until the end of the first quarter to establish a next-gen strategy.  While T-Mobile has suffered in recent years due to a delay in its 3G deployment relative to the competition, it deployed HSPA+ technology across most major markets last year and is implementing a “dual cell” upgrade in 2011 which will reportedly offer peak speeds of 42 Mbps—easily competitive with Clearwire’s WiMAX offering and even Verizon Wireless’ LTE service.  So, while T-Mobile isn’t yet in panic mode, Clearwire has already admitted publicly that it will require additional funding by mid-2011.  It raised about $1.3b in a bond offering last December, but the company said last fall it needed between $2.5b and $5b.

Furthermore, T-Mobile has reportedly also been in talks with LightSquared, which is developing a nationwide hybrid satellite/terrestrial LTE service and plans a wholesale-only business model.  LightSquared, which is backed by Harbinger Capital, received an important waiver from the FCC last month, allowing its resellers to provide subscribers with terrestrial-only handsets.  The company announced last week that it is accelerating its spectrum lease arrangement with Inmarsat.

Finally, speaking of satellite providers, DISH Network (Nasdaq:DISH) stepped up last week with a $1b offer for bankrupt satellite operator DBSD in a deal that valued the company’s S-band satellite spectrum at about $0.17 per MHz POP.  DISH affiliate Echostar (Nasdaq:SATS), also controlled by DISH Network founder Charlie Ergen, has also been maneuvering to take over bankrupt Terrestar, which also owns 20 MHz of S-band satellite spectrum.

All in all, our money is on a spectrum sale to T-Mobile—as opposed to a T-Mobile/Clearwire wholesale arrangement or equity investment—and given that T-Mobile’s got its tower portfolio on the market, we figure it won’t spend any more than the $2.5b that we've estimated its tower portfolio to be worth.  In fact, it might spend a good deal less than that.

Clearwire to Sell 2.5 GHz Spectrum

WiMax Service Provider Looking to Raise Up to $5B in Spectrum Auction

According to reports by Bloomberg, The Wall Street Journal and others, 4G wireless service provider Clearwire (Nasdaq:CLWR) is presently in the second round of an auction which will divest up to 40 MHz of its BRS/EBS (2.5-2.6 GHz) spectrum, in an effort to raise several billion dollars.  CLWR, which is majority-owned by Sprint Nextel (NYSE:S, “Sprint”), also counts Google (Nasdaq:GOOG), Time Warner Cable (NYSE:TWC), Comcast (Nasdaq:CMCSA), Bright House Networks and Intel (Nasdaq:INTC) among its investors. 

CLWR was the first to launch 4G services in the U.S., using WiMAX technology, and at the end of the second quarter was serving 55.7m POPs with 4G in markets including Atlanta, Baltimore, Charlotte, Chicago, Dallas, Honolulu, Houston, Kansas City, Las Vegas, Philadelphia, Portland, Oregon, Salt Lake City, San Antonio, Seattle, St. Louis and Washington D.C.  Of its 1.7m subscribers as of June 30, 940k were retail subs and 742k were wholesale subscribers acquired primarily by Sprint, TWC, and CMCSA.  In the second quarter, nearly 600k of 722k net adds were wholesale customers.  When it reported 2Q results, CLWR raised its guidance for year-end subscribers from 2m to 3m. 

Recently, company executives have confirmed that it will also be testing the Long Term Evolution, or LTE, standard that Verizon Wireless (NYSE:VZ, “VzW”), AT&T Mobility (NYSE:T, “AT&T”) and most other U.S. wireless providers have embraced.  Its plans to add LTE technology, along with the need to continue to rapidly deploy WiMAX—CLWR intends to increase its 4G coverage to 120m POPs by year-end—means that it needs additional capital heading into 2011, perhaps as much as $2b. 

The company confirmed recently that it has had talks with Deutsche Telekom’s T-Mobile USA unit, and that a wholesale deal with the rival carrier was possible.  In its latest 10-Q, CLWR said, “Based on our current projections we believe that we will be required to raise additional capital in the near term in order to maintain our current business plans, or we will be required to materially revise our plans for such period. Our need for additional capital is primarily due to additional capital expenditures we expect to make in the near term to increase the capacity of our network in certain markets.”  Sale of spectrum assets was mentioned as one possibility for raising the needed capital. 

CLWR says it has an impressive 46 billion MHz POPs worth of spectrum, or an average of 120 MHz per market—well more than most of its rivals.  Its fat spectrum position means that it is able to deliver higher data speeds in practice than its more spectrum-challenged competitors, although the higher spectrum position is less effective at in-building penetration than the lower 700 MHz spectrum position most major carriers will be using for 4G.  Ceo Bill Morrow said during the company’s second quarter conference call that he expects in LTE tests to get speeds between 20 to 70 mbps vs. the 5 to 12 mbps reported by others. 

The spectrum slices are expected to go for between $0.20 - $0.40 per MHz POP, although analysts are divided over the wisdom of CLWR selling its valuable airwaves.  But, with both Sprint and CMCSA on the record saying they aren’t interested in upping their investment in CLWR at this time, it may not have a choice.  Analyst Monica Paolini said, “Even if the company is wildly successful, it has more spectrum than it will ever need…They have a huge advantage, but they have to be realistic. They have to have the money to continue their plans. They probably looked at the other options, and from a network perspective they can afford to sell spectrum and still have enough for what they plan to do.”