DISH Is Making Clearwire-Sprint Deal Unclear: Still Long Sprint

| About: Sprint Corporation (S)

The Clearwire deal is not clear right now. On Jan. 8, 2013, DISH Network Corporation (NASDAQ:DISH) formally approached Clearwire Corporation (CLWR) regarding a potential strategic transaction with terms as generally outlined in the Clearwire release, including an offer to purchase all of the Clearwire common shares at $3.30. Sprint Nextel Corporation (NYSE:S) believes its agreement to acquire Clearwire is superior to the highly conditional DISH proposal.

DISH Proposal Vs. Sprint Response

Clearwire announced the unsolicited, non-binding proposal it received from DISH Network. As stated:

The DISH Proposal, as further summarized below, provides for DISH to purchase certain spectrum assets from Clearwire, enter into a commercial agreement with Clearwire, acquire up to all of Clearwire's common stock for $3.30 per share (subject to minimum ownership of at least 25% and granting of certain governance rights) and provide Clearwire with financing on specified terms.

Below is a side-by-side comparison of the proposal from DISH and Sprint Nextel's response.

DISH's Proposal

Sprint Nextel's Response

Spectrum Purchase

DISH would acquire from Clearwire spectrum covering approximately 11.4 billion MHz-POPs ("Spectrum Assets"), representing approximately 24% of Clearwire's total MHz pops of spectrum, for aggregate net cash proceeds to Clearwire of approximately $2.2 billion (the "Spectrum Purchase Price"). The net cash proceeds are prior to any adjustment for potential tax liabilities which are likely to arise from the sale of spectrum assets even after utilizing the existing net operating losses. At DISH's option, Clearwire would also sell or lease up to an additional 2 MHz of Clearwire's spectrum to DISH from a channel that is adjacent to the Spectrum Assets at a price to be calculated in the same manner as the Spectrum Assets.

Sprint has stated that, under the Sprint Agreement, Clearwire is prohibited from selling the Spectrum Assets without Sprint's consent. In addition, Sprint has stated that Clearwire is further subject to various requirements under its commercial agreements with Sprint and the Equityholders' Agreement applicable to selling Spectrum Assets, even if the Merger Agreement were not in place.

Commercial Agreement

Clearwire would, at DISH's request, provide certain commercial services to DISH, including the construction, operation, maintenance, and management of a wireless network covering AWS-4 spectrum and new deployments of 2.5 GHz spectrum.

Sprint has stated that, under the Merger Agreement, Clearwire is prohibited from entering into the commercial agreement proposed by DISH so long as the Merger Agreement is in place.

Acquisitions of Clearwire Shares; Governance

DISH would make an offer to Clearwire's stockholders to purchase up to all of Clearwire's outstanding shares at a price of $3.30 per share in cash. This tender offer would not be dependent on Sprint's participation, but would be subject to a number of conditions, including DISH: I. acquiring no less than 25% of the fully-diluted shares of Clearwire, II. being granted the right to designate Clearwire board members commensurate with its pro forma ownership percentage, III. receiving certain minority protections, including the right to approve material changes to Clearwire's organizational documents, change of control and material transactions with related parties (unless these transactions were approved by an independent committee of the Clearwire board and, if over a certain threshold, supported by a written fairness opinion from a nationally recognized investment bank) and IV. receiving preemptive rights. In addition, the DISH Proposal would require Clearwire to terminate the note purchase agreement under which Sprint has agreed to provide interim financing to Clearwire and is conditional upon the consummation of the spectrum purchase and Clearwire being in compliance with the commercial agreement (both as described above).

Sprint has stated that the DISH Proposal may constitute a change of control under the Equityholders' Agreement, which would require the affirmative vote of 75% of the issued and outstanding shares of Clearwire's stock. Sprint has stated it would not vote in favor of the proposed transaction with DISH. Sprint has stated that it would be impermissible under Clearwire's current Equityholders' Agreement for Clearwire to agree to nominate DISH's designees to the Clearwire Board, (ii) it would be impermissible under the Equityholders' Agreement for Clearwire to create a new independent committee of the Clearwire Board and under Delaware law, certain governance rights requested by DISH (including the request for proportionate board representation) cannot be granted by Clearwire in a manner that does not require amendment of the certificate of incorporation or consent of Sprint to a shareholder agreement embodying what DISH has requested.


DISH would pre-fund the Spectrum Purchase Price within three business days of signing through a senior Unsecured PIK Debenture (the "PIK Debenture") bearing PIK interest at a rate of 6% per annum in the event the Spectrum Assets are sold to DISH or 12% per annum otherwise. Clearwire would be obligated to either apply the proceeds of the pre-funding to reduce outstanding long-term debt through the redemption or repurchase of the 2015 Senior Secured Notes and 2016 Senior Secured Notes of Clearwire Communications LLC or, in the event that a portion of the Network Build Financing described below is unavailable due to the failure to receive shareholder approval, to use an equivalent portion of the proceeds of the PIK Debenture to fund network build-out costs; in that case, any future make up draws on the Network Build Financing following shareholder approval would be applied to reduce debt as provided in this sentence. If Spectrum Assets are not acquired due to a failure to obtain required regulatory approvals, Clearwire would, within 30 days following termination of the spectrum purchase agreement, repay the PIK Debenture plus interest at 6% per annum. If Clearwire is unable to repay the PIK Debenture during this 30 day period, it would be entitled to convert the principal amount and accrued interest on the PIK Debenture into a note on terms comparable to the 2015 Senior Secured Notes previously repaid, having a maturity of December 1, 2015.

Among other arguments, Sprint has stated that the complex financing provisions of the DISH Proposal must also be considered in light of the existing Clearwire contractual arrangements (including debt arrangements) and that it is not clear from Sprint's review that such financing is permitted by or would comply with Clearwire's existing arrangements. In addition, Sprint has stated that Sprint and the other parties to the Equityholders' Agreement would have preemptive rights with respect to any issuance of exchangeable notes by Clearwire as contemplated by the DISH Proposal, and any issuance of such notes may also require Clearwire stockholder approval in accordance with the NASDAQ listing requirements.

Sprint Financing

DISH has indicated that the proposal will be withdrawn if Clearwire draws on the financing under the Sprint Financing Agreements.

Sprint has stated that it is concerned with Clearwire's failure to consummate the January 2 tranche of funding under the Sprint Financing Agreements, that it does not believe Clearwire's initial draw notice was revocable and that it has reserved its rights relating thereto.

Network Building Financing

DISH proposes to provide additional capital to fund a portion of Clearwire's network build-out through a credit facility for the purchase of exchangeable notes on substantially similar terms to those which Sprint has agreed to provide, subject to cancellation of the Sprint Financing Agreements

Deal Protection

DISH expects appropriate deal protections, including a 5-day match right, similar to those included in the Sprint Agreement. DISH would match Clearwire's termination rights as provided for in the Sprint transaction (including the possible forgiveness of a portion of the exchangeable notes upon certain termination events).

Source: Globe Newswire.

FCC Uncertainties

On Jan. 4, 2013, Crest Financial, which owns 8.3% of the non-Sprint shares in Clearwire, said it plans to file a formal complaint with the FCC before the Jan. 28 comment deadline and ask the FCC to halt both Sprint Nextel's proposed $2.2 billion acquisition of Clearwire as well as Softbank's $20.1 billion deal to acquire 70% of Sprint. As reported by Reuters, "in going to the FCC, Crest will argue that the Clearwire deal artificially undervalues the company's spectrum holdings. That in turn potentially devalues future revenue for the U.S. government when it auctions off spectrum licenses. The merger is therefore a bad deal all around for Clearwire shareholders and also for the public at large."

Crest has sued Clearwire in the Court of Chancery in Delaware, where the company is incorporated, to permanently block the deal. However, Clearwire's chief executive, Erik Prusch, has said the company does not have attractive alternatives as it seeks funding to continue to upgrade its own network and could risk bankruptcy if the Sprint deal does not succeed.

The deal needs approval by a majority of Clearwire's minority shareholders. Sprint indicated it has the support of three large Clearwire investors: Comcast Corp. (NASDAQ:CMCSA), Intel Corp. (NASDAQ:INTC), and Bright House Networks LLC, which hold 13% of Clearwire stock.

Sprint's Own Issues

Sprint's request for an early dismissal of a lawsuit by a union pension fund that holds Sprint stock was declined. The lawsuit alleged that Sprint's chief executive, Daniel Hesse, rushed merge talks with Softbank and did not get a fair price. The ruling will allow the pension fund to begin to demand documents and witnesses as it tries to prove its case. Sprint indicated that the ruling only addressed the technical adequacy of the pension fund's pleading and did not address the merits of the case and Sprint continued to believe the case was without merit.

Outcome Speculation and Conclusion

The DISH's funding deal is indeed complicated. The DISH deal requires the affirmative vote of 75% of the issued and outstanding shares of Clearwire's stock. Sprint has stated it would not vote in favor of the proposed transaction with DISH. Sprint also has support from CMCSA, INTC, and Bright House Networks, holding 13% Clearwire stock as minority shareholders. The FCC might delay the deal; however, any further delay may not be in the best interest of Clearwire shareholders in the long term. Considering the international partnership with SoftBank for the TD-LTE market, the Sprint deal does have a long-term edge. For investors bullish on Sprint, it may be a good time to buy on the dip. My view on Sprint remains the same: It is a great buy, and investors can review the credit put options strategy to acquire Sprint stock with a lower price while gaining some upside potential.

Note: All prices are quoted from the close of trading on Jan. 8, 2013, and all calculations are before fees and expenses.

Disclosure: I am long S, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Investors and traders should do their own due diligence and research before making any trading/investing decisions.