Seeking Alpha
Long/short equity, long only, short only, growth
Profile| Send Message| ()  

A couple of weeks ago, I wrote about Sprint's (S) attempt to buy Clearwire (CLWR). Sprint already owns a majority stake in Clearwire, and with the capital infusion coming from Sprint's deal with Softbank, Sprint is trying to gain complete access to Clearwire's spectrum as it tries to bolster its network. Sprint originally offered $2.90 for Clearwire, then upped its bid to $2.97, which is the cap Softbank set for such a deal. At the time, Sprint was set for a battle, as some key Clearwire shareholders wanted a significantly higher price. Now, another player has potentially thrown its hat into the ring, which complicates the situation even more for Sprint.

The latest player:

On Tuesday, Dish Network (DISH) announced an unsolicited, non-binding proposal to acquire up to all of Clearwire's common stock for $3.30 per share. The deal is subject to several conditions, and the Wall Street Journal describes what the deal is and is not:

  • It isn't an actual bid: Clearwire calls it "a preliminary indication of interest…subject to numerous, material uncertainties and conditions." Sprint calls it "illusory." Clearwire and Sprint may not have to do anything until they have a formal offer on the table.
  • It isn't without a lot of conditions: Dish says it will offer to buy Clearwire shares at $3.30 apiece (they are trading this morning at $3.15), but only if the following happens: It gets at least 25% of the diluted share total, it gets board seats, and it wins special rights including a veto power over deals with a related party (ie Sprint). Fat chance.
  • It isn't the first time Clearwire has heard this: The company says before it agreed to be bought by Sprint, it was approached by Dish with an offer to buy spectrum at about the same price as in the current offer.

Dish is trying to get access to Clearwire's spectrum. Analysts believe that this could be a chess game by Dish to forge a partnership with Sprint. The following quotes are from the above article, with the first one is from Macquarie Capital analyst Kevin Smithen.

"Dish Network is likely trying to get Sprint to the negotiating table for a spectrum/network joint venture and does not really believe it can gain control of Clearwire."

Jefferies analyst Thomas Seitz has a similar view:

"Dish's move to acquire Clearwire may be related to bringing Sprint to the table to discuss network sharing agreements on more favorable terms, given that Dish wants to minimize the capital expense to build any wireless network," he wrote.

It appears that most views on the street are that Dish's offer really isn't an offer at all. Most believe that Dish cannot actually buy out Clearwire. Thanks to the Softbank deal, a combination between Sprint and Clearwire would substantially help Sprint's effort to build a 4G network. As Sprint becomes a more viable player in the US Telecom industry, Dish might look to jump on with some form of joint venture.

What will Sprint do?

Sprint provided the following statement after the Dish Network news was announced.

"Sprint believes its agreement to acquire Clearwire, which offers Clearwire shareholders certain and attractive value, is superior to the highly conditional DISH proposal."

"In contrast, the DISH proposal includes a series of interdependent commercial agreements, debt and equity purchases and spectrum sales, which together with the other conditions required by DISH to complete the transaction, makes the proposal not viable. In addition, the DISH proposal would require Sprint to voluntarily waive rights that it holds as a stockholder of Clearwire and that it possesses through various vendor and customer contracts that significantly predate Sprint's proposed acquisition of the remainder of Clearwire. Sprint does not intend to waive any of its rights and looks forward to closing the transaction with Clearwire and helping consumers across the country realize the benefits of this combination."

It is unclear at this point what Softbank's reaction to this deal would be. Will Softbank be willing to budge on its $2.97 cap? It just might be if Sprint can get the deal done quickly. Macquarie's Smithen thinks that a $3.50 to $3.75 offer would convince Clearwire shareholders to sell and get Dish Network to back down.

Nomura Securities analyst Mike McCormack also sees Sprint prevailing, but says that it will cost Sprint an incremental $72 million for every 10 cents above its original $2.97/per share bid. So if you think $3.50 is a fair offer, you're looking at roughly another $375 to $400 million to get this deal done. Remember, the Softbank deal will help provide funding that Sprint can use to start repaying some of its debt. If Sprint is forced to pay more for Clearwire, it slows down the timing of those repayments. That means more interest payments and either lower profits (if Sprint becomes profitable eventually) or more losses.

Sprint vs the big boys:

Sprint has its unlimited plan which is the best all around talk, text, and data plan. It is trying to lure away customers from AT&T (T) and Verizon (VZ), but it needs to beef up its network to do so. Sprint's network remains a leg behind its larger rivals, and Sprint only started selling Apple's (AAPL) iPhone in October of 2011. Verizon got the iPhone a number of months earlier, and AT&T is years ahead in the race. The smartphone race continues to heat up, and Sprint needs to keep up with its competitors.

AT&T recently announced that it sold more than 10 million smartphones in Q4, topping its previous record quarter of 9.4 million, set in the prior year's fourth quarter. This included best-ever quarterly sales of Android and Apple smartphones. AT&T boasted that the pace equals an average of 110,000 phones per day during the quarter, and that their 4G network and lightning-fast LTE network can now reach more than 170 million in the US. In November, the company announced a $14 billion plan over three years that they hope can get the 4G LTE network up to 300 million by the end of 2014.

Verizon announced that it sold 9.8 million smartphones in the fourth quarter, with a higher mix of iPhones. That figure is up 29% from the 7.7M smartphones that Verizon sold in Q4 of the prior year. Verizon's year over year growth was much more than AT&T's, but Verizon's quarter over quarter number trailed that of AT&T.

We'll get an idea soon about how fast Sprint is catching up in the iPhone race. Sprint will announce fourth quarter and full year results on February 7th. Through the first three quarters of 2012, Sprint sold roughly 4.5 million iPhones. That seems like a decent amount, but Verizon sold 3.1 million in the third quarter alone, and AT&T sold 4.7 million in Q3. JP Morgan estimates that AT&T will activate 8 million iPhones in Q4 alone, which will probably be more than Sprint does for the entire calendar year of 2012.

Wednesday's market action:

Clearwire shares rallied in the extended hours on Tuesday, and continued those gains on Wednesday. For the day, Clearwire ended up 21 cents to $3.13, a gain of 7.19%. Clearwire shares did not rally up to the $3.30 Dish Network bid as most believe that a deal with Dish is unlikely. Clearwire never traded above $3.15 on Wednesday.

Dish Network shares also rallied on Wednesday, closing up $0.88 to $36.85, a gain of 2.45%. The stock is about a dollar from its 52-week high currently. As you might expect, Sprint shares declined 1.51%, or about $0.09 on Wednesday, to $5.88. Sprint declined as many believe that the Dish "offer" will force Sprint to raise its bid for Clearwire. The good news is that Sprint shares were down about twice as much earlier in the day.

What this all means:

Most people out there don't believe that the Dish Network $3.30 bid was a serious offer. It seems like a strategic move to get Sprint to form some kind of joint venture. Sprint is already facing a battle on this deal from Clearwire shareholders such as Crest Financial, which recently petitioned the FCC to block Sprint's purchase of Clearwire. Crest has also asked that the Sprint-Softbank deal be investigated as well. As I stated in my original article on the Sprint-Clearwire deal, some of these minority shareholders in Clearwire are looking for a much higher deal price. Based on other deals that have occurred, they could be looking for $5 to $8 before they'll accept.

Ultimately, I do think that Sprint will receive approval from Softbank to raise the deal price. I think that both Sprint and Softbank will raise the price to get the deal done sooner, as this is a competitive industry and the longer the deal takes, the further Sprint falls behind. I don't think you'll end up seeing a crazy deal price like that $5 to $8 range, but I don't think $2.97 is the final number. The range the analyst mentioned above may be right, but I think the $3.50 to $3.75 range might be a bit high for Sprint and Softbank's liking. I would think $3.25 to $3.50 might be a better approximation. However, any raise in the deal price would be a negative for shares of Sprint. In addition to the pure financial impact of a raise in offer price, the delay of the deal could be the real negative here.

Source: Sprint's Battle For Clearwire Heats Up

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.