Sprint’s (NYSE:S) latest move to raise its bid for Clearwire (CLWR) may finally clinch the deal in its favor and end a months-long bidding war with Dish Network (NASDAQ:DISH). The third largest wireless carrier in the U.S. made a revised offer of $5 per share for Clearwire, a deal that will value the smaller carrier at $14 billion and is almost 50% higher than its previous bid.
Although just 14% higher than Dish’s $4.40 per share bid, the offer seems to have permanently won over a key group of dissenting Clearwire investors who were unhappy with Sprint’s previous bids. The four big shareholders who have a combined shareholding of 9% in Clearwire have now agreed to sell their stake to Sprint even if the deal doesn’t go through. That, along with previously secured deals with strategic investors such as Comcast and Intel and Clearwire’s employees, means that Sprint now has the support of stockholders holding almost 45% of the remaining shares. With Clearwire’s minority shareholders hard pressed for time in the face of an imminent bankruptcy, it seems very likely that Sprint will secure the majority it needs for the deal to go through.
The reason Sprint has gone aggressively after Clearwire is because of its huge spectrum holdings which would have had to be auctioned off to pay the debtors in case of bankruptcy. Sprint’s majority stake-holding would have then counted for zilch, and it would have had to fight with other deep-pocketed rivals such as Verizon (NYSE:VZ) and AT&T (NYSE:T) for Clearwire’s spectrum, making it even more expensive for the third-placed carrier. In the top 100 markets in the U.S., Clearwire has around 160 MHz of spectrum on average, which would go a long way in bolstering Sprint’s LTE network. Moreover, the two companies already have a deal in place, according to which Sprint will be able to offload 4G LTE traffic onto Clearwire’s planned TD-LTE network.
However, acquiring Clearwire means that Sprint will also have to absorb the latter’s almost $3.5 billion in net debt and more than $300 million in operating losses every quarter. But considering that the government’s TV spectrum auctions are years away and Sprint now has the financial cushion of Softbank to make this aggressive move, Clearwire’s spectrum does seem like a very attractive option. With Clearwire’s spectrum, Sprint will not only be able to build out a robust LTE network but also compete more effectively with Verizon and AT&T, who are farther ahead in their LTE deployment plans.
Sprint’s lagging LTE plans to get a boost
Sprint was the latest of the three to launch a LTE network. And with coverage in all of 110 U.S. markets, the carrier far trails the country’s largest wireless carrier Verizon whose LTE network reaches more than 287 million Americans in almost 500 markets across the U.S. AT&T’s lead over Sprint is not as wide, but it still offers LTE in almost 280 U.S. markets and plans to reach 250 million Americans by the end of this year.
In order to bridge the gap, Sprint is aggressively executing on what it calls its Network Vision strategy to get most of its 4G LTE network ready by the end of 2013. The carrier is trying to phase out iDen gradually and consolidate its network holdings into one 2G/3G/4G network using a combination of CDMA and EV-DO. In order to free up resources for a nationwide LTE network, Sprint has nearly completed its shutdown of the outdated iDEN network. It will now use the freed up iDEN spectrum to boost its LTE network in 2014. (see Sprint To Build LTE Over iDEN’s Grave)
Since Sprint plans to maintain its niche by keeping its plans for LTE unlimited as well, the carrier will need more spectrum to meet the ever increasing demands of its data-hungry smartphone subscribers. At about 75%, Sprint’s postpaid smartphone penetration is the highest among the top three carriers. In order to support the huge long-term data growth, Sprint needs resources on top of the freed up iDEN spectrum, which is why it has been looking to play an active role in consolidating the wireless industry. With Softbank’s cash, Sprint finally has the opportunity to do so without piling on more debt, as can be seen by its recent deal with U.S. Cellular. Acquiring Clearwire would be the key next step as Sprint looks to increase scale and bolster its competitive standing with additional capacity for 4G LTE.
CapEx spend to decline
Additionally, Clearwire’s spectrum will enable Sprint to lower its long-term CapEx spend on capacity increases following the initial deployment phase which is seeing burgeoning investments on LTE. The Network Vision Plan, which will see large-scale LTE deployment and the shutdown of iDEN, has cost Sprint over $4.4 billion in the last three quarters and will see another almost $6 billion being invested in the rest of the year. As can be seen below, these capital expenditures are much more than what Sprint has historically spent. Moreover, Sprint is highly sensitive to CapEx increases, which can be seen by moving the trend line in the forecast chart below and following the corresponding impact on its price estimate. Additional spectrum capacity will go a long way to bring these costs down.
Margin improvement is also one of the key goals of Sprint’s Network Vision plan – a successful implementation of which will help reduce operating expenses substantially by eliminating duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN will now be available for the CDMA/LTE network. Also, since 4G LTE is more efficient at handling data, Sprint will be able to realize the margin benefits as it rolls out in new LTE markets and more people adopt the high-speed technology.
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