Shares of Clearwire Corporation (CLWR) fell 13.6% in Monday's trading session. The provider of fourth generation wireless broadband services agreed to be taken over by Sprint (S) at a price which disappointed some investors.
Shares of Sprint Nextel ended Monday's session unchanged after the firm announced to acquire a 100% ownership stake in Clearwire. Sprint already owned 50% in the firm, and will acquire the remaining 50% stake for $2.97 per share, or $2.2 billion. Sprint will furthermore assume $5.5 billion in net debt and spectrum lease obligations, valuing the entire firm at roughly $10 billion.
Shareholders in Clearwire had hoped for more as shares closed at $3.37 on Friday. Sprint notes that the deal represents a 128% premium compared to Clearwire's closing price before the SoftBank discussions were confirmed.
Combined, Sprint will own an enhanced spectrum portfolio which increases its competitiveness in the US wireless industry. The Network Vision architecture will allow for a better utilization of Clearwire's complementary assets.
CEO Dan Hesse commented on the deal, "Today's transaction marks yet another significant step in Sprint's improved competitive position and ability to offer customers better products, more choices and better services. Sprint is uniquely positioned to maximize the value of Clearwire's spectrum and efficiently deploy it to increase Sprint's network capacity. We believe this transaction, particularly when leverage with SoftBank relationship, is further validation of our strategy and allows Sprint to control its network destiny."
For the full year of 2012, Clearwire expects to generate revenues of $1.25 billion. The company expects to report full year EBITDA losses of $150 to $200 million. Based on a $10 billion total deal value, the firm is valued at 8 times annual revenues.
The transaction has been unanimously approved by the board of directors of Clearwire. Comcast (CMCSA), Intel (INTC) and Bright House Networks who combined own 13% of Clearwire's shares have agreed to tender their shares. The deal is subject to normal closing conditions including regulatory and shareholder approval. The deal is furthermore subject to the closure of the deal between Sprint and SoftBank. The deal is expected to be closed in mid-2013.
Sprint Nextel ended its third quarter of 2012 with $6.3 billion in cash, equivalents and short term investments. The company operates with $21.3 billion in short and long term debt for a net debt position of $15 billion.
For the first nine months of 2012, Sprint generated revenues of $26.3 billion. The company reported a net loss of $3.0 billion, or $1.00 per diluted share. Operating cash flows came in at $2.8 billion. The company is on track to report annual revenues of $35 billion, on which the company could lose $4 billion.
The firm is currently valued at $16.7 billion. This values the firm at less than 0.5 times annual revenues.
Some Historical Perspective
Year to date, shares of Sprint Nextel have more than doubled, trading with gains of 138%. Shares rose from lows of $2 in the first half of the year, peaking at $6 in recent months. Shares fell back, currently exchanging hands at $5.56 per share.
After trading as high as $25 in 2006, shares have continued to fall. Over the past years the company has consolidated its annual revenues around the $35 billion mark, posting multi-billion losses each year. Operating cash flows have been positive in recent years.
The acquisition of Clearwire has been widely anticipated, especially after Sprint entered into its agreement with SoftBank. Earlier this year, Sprint was selling a 70% stake of itself in a $20 billion deal with the Japanese firm. As a result of the purchase of Clearwire, and the consolidation of Clearwire's balance sheet, the net debt position will increase to roughly $23 billion. This should be no problem given that Softbank will indirectly take up most of the check.
Clearwire has been focused to take advantage of wireless technology, called WiMax, which promises higher speeds and lower costs than the conventional cellular technology. Sprint worked on similar technologies and merged the operations with Clearwire back in 2008, thereby obtaining a roughly 50% stake in the firm.
I was surprised to see the modest reaction in Sprint's shares Monday. Many commentators argued that Sprint had to pay more to acquire the remaining shares in Clearwire. The 13.6% decline in Clearwire's shares is a good thing for Sprint. For every dollar which Sprint would pay more for Clearwire, shares would be impacted by roughly 50 cents.
The latest deal reinforces Sprint's position as third largest US carrier. Sprint has roughly 48 million subscribers and will acquire another 10.5 million subscribers with the acquisition. AT&T(T) and Verizon Wireless remain the market leaders, by a comfortable margin. To close the gap with its larger competitors, Sprint will try to get its 4G LTE network ready by next year.
I remain on the sidelines as I wonder whether the industry consolidation phase will create shareholder value. I remain on the sidelines, given the questionable long term track record of the firm.