Seeking Alpha
Profile| Send Message| ()  

Sprint Nextel Corp. (S) has reached an agreement with the Clearwire Corporation (CLWR) Board of Directors to acquire all outstanding shares for $2.97/share. CLWR management made it clear that, after working on strategic alternatives, it believes this transaction is its best alternative and the failure to close this deal may lead to a restructuring. Both the Softbank-Sprint deal and the Sprint-Clearwire deal (contingent on the Softbank deal) are expected to close in the middle of the next year. In January, Sprint will begin loaning Clearwire $80M per month up to a maximum of $800M. The loan is exchangeable into CLWR shares at $1.50 per share, giving Sprint another 320M shares if the deal closes by mid next year.

Financial aspects of the deal

Sprint is spending $2.2B in cash to acquire the shares. Moreover, it will also be adding $4.5B in gross debt, bringing net debt to $15.8 billion. This does not include spectrum lease capitalization of roughly $1.5 billion. Sprint's management gave a brief overview of the synergies it expects to derive from the deal, which is estimated to be approximately $1 billion. However, analysts are suggesting that there is an upside to the estimated synergies as the company will save even more through cuts in the costs of sales as well as general and administrative expenses. Even though the company did not give out any details on how it will integrate the two networks as well as the capital expenditures it would have to incur to develop its network, it is very likely that the spending would certainly be higher in the coming years. 2013 CAPEX was expected to be in the range of $5 billion to $5.5 billion, however, with the company's renewed financial strength, thanks to the SoftBank deal, the spending on its network could go even higher as it puts a network in place that can compete more effectively.

Operational aspects of the deal

Sprint is currently in Phase 2 of its LTE network roll out which revolves around the construction of the H-Block, with plans to roll out TD-LTE in the next phase that would allow for faster speeds. As far as Clearwire is concerned, the company is expected to have 2000 LTE sites on air by June of next year, according to its latest earnings release. Now, with the capital injection by Sprint, this rollout by Clearwire is likely to go even faster. Sprint's network vision program is also well on track, which will ensure that most of its LTE network is ready by the end of next year. Moreover, the shutting down of its incompatible Nextel Network will result in significant operational synergies for the company.

Industry

Given the SoftBank deal, U.S. Cellular spectrum purchase and now the Clearwire acquisition, Sprint has enough spectrum on its hands and it is highly unlikely that the company will get involved in further industry consolidation. For the time being, It is likely to hold off on making a counter bid offer for the MetroPCS and T-Mobile deal.

To sum up, the recently announced Sprint Clearwire deal marks a very significant change in the company's financial and competitive position and is another milestone achieved by Sprint. However, sprint must also thank SoftBank for making this all possible because without its capital injection the acquisition of Clearwire would not have been possible. Combined with the new spectrum holdings, this would enable the company to compete more effectively and aggressively from next year onwards when its LTE network is fully functional and comes online. Even though its margins are likely to remain under pressure due to heavy capital spending, the completion of the deal at $2.97 will be a positive for the shares of the company as well as its long-term health. Moreover, after the acquisition of Clearwire, Sprint's increased spectrum depth increases the likelihood of it emerging as a very strong rival to AT&T and Verizon by the end of next year.

Valuations and Conclusion

In a previous report on Sprint, I mentioned its cheap valuations. The stock is up 135% since the start of the year. Even though the company has a long way to go to match its bigger rivals, it has taken the right steps to give itself a chance of competing more effectively. Improved spectrum position, liquidity and better operations can be expected to reflect positively in its share performance in the coming days. Currently, the mean price target for the stock is $6.35 which is an upside of approximately 15%, based on the current share price. However, in my opinion, investors are likely to be rewarded with higher returns based on the recent developments. I reiterate my long stance on the stock

Source: Buy Sprint: Significant Upside After Clearwire Acquisition