No matter how low shares of Clearwire (CLWR) dropped, or how grim the outlook appeared, there is one catalyst that longs have proclaimed for the last two years: They have always said that Sprint (S) would buy the company. Now, on Thursday, Sprint made its first bid, of $2.90 to acquire the shares that it does not already own. But investors felt this first offer had room to grow, and shares of Clearwire immediately popped over $3.00. However, the big question is if Sprint will counteroffer and will it be an easy negotiation process?
The $2.90 a share offer from Sprint was disclosed in an SEC filing, and also includes interim financing of up to $800 million. Over the last couple years many have believed that this acquisition would occur, and that it would make Sprint a better company. Yet one fact that Clearwire longs must consider is that Sprint is not in the financial position to pay too much of a premium for the company, and with Clearwire's financial troubles it might not have as much negotiating power as some might want to believe.
If Sprint's bid was to hold, then it would be acquiring Clearwire at just $0.17/MHz-pop for its 2500 MHz spectrum. Wells Fargo pointed out that this is considerably cheaper than other spectrum deals over the last year such as Verizon's (VZ) purchase cost of $0.68/MHz-pop for its 1700/2100 MHz spectrum. This implies that Clearwire might actually be worth far more than Sprint is offering, however, investors must remember that lower spectrums are more valuable due to lower frequencies and better signals. Yet the difference between the two spectrums should not be so significant that it warrants such a large difference in the price paid. This means that Sprint is taking into consideration far more than just its spectrum, and because of the low offer it might be an indication that it plans to hold out or drag this process over a long period of time.
The problem with the spectrum acquisition comparison and the price that Clearwire might want has to do with demand, and the fact that if it was in demand then it would've had more offers by now. The company has been cheap for over a year, yet no one stepped up to the plate to make a serious bid for the company. Then, there's the fact that no two-spectrum companies are created the same; a higher premium might be paid for a more efficient business and a company such as Clearwire might not have much leverage in negotiations.
Clearwire as a company has returned a net loss of $602.39 million over the last 12 months, has negative operating and free cash flow, and has debt in excess of $4.2 billion. The company has seen a slight decline in revenue and its operating margin is a staggering (95.24%). Looking at those numbers it is hard to see why anyone would want to acquire this company, but we must remember than Sprint is desperate and needs a spectrum.
Just last week it was reported that Sprint approached Dish Networks (DISH) about a deal that would give Sprint access to its 4G spectrum, and Dish would gain mobile services leveraging Sprint's network. The deal was believed to create a revenue-sharing agreement, however with Dish remaining at odds with the FCC regarding how its spectrum can be used, Sprint appears to have reverted back to its final option. This fact also adds to the discussion, because it shows that Sprint has exercised all other options and is now willing to purchase Clearwire, but maybe not for the price Clearwire investors seek.
When you look at all of the known information, including both Sprint and Clearwire's desperation, the financial shortcomings of both companies, and the initial offer, it does appear that the negotiations could become lengthy and complex. Sprint does have the money following an $8 billion cash infusion as a result of the Softbank investment. However, Sprint must remain cautious about how it spends this money due to its financial problems and the increasing presence of companies gaining rights to sell the iPhone.
Overall, there are a lot of factors at play. Sprint could have made an offer for Clearwire several times in the past, and could've paid a much smaller premium. Therefore, because of Clearwire's financials I don't think Sprint will be willing to pay much of a premium on its current offer. However, at the same time, Sprint needs Clearwire because of its spectrum, and has run out of options. Therefore, the two companies could find themselves at a standoff as both need each other, but neither will want to meet in the middle. When you think about it, it's kind of similar to the fiscal cliff discussions between republicans and democrats. It sounds crazy, but I think it could have more similarities than investors would want to believe.