Clearwire's New Deal Sets Launchpad for 2010

Includes: GOOG, S, T, VZ
by: Karen Mulvany

Clearwire (CLWR) recently announced its third quarter results, along with $1.8 - $2.1 billion in new debt and equity transactions that will finance their 4G mobile broadband expansion to cover 120 million POPs.

New financing details:

  • $1.564B in new equity at $7.33 a share from all the most recent strategic investors except Google (NASDAQ:GOOG)
  • up to an additional $250M to be raised in a rights offering from non-strategic (ordinary public) Clearwire shareholders. This is a free option to existing shareholders so they can buy into Clearwire at the same terms as the strategics -- at $7.33 a share -- for the next 6 months (or sell the option, which management said was transferable on the call). The record date has not been set yet.
  • A new high yield bond offering that will replace existing debt from Sprint and Comcast, while also adding an incremental $240M in debt that will add to capital for expansion.

The last piece of the financing, the debt restructuring, is perhaps most significant, as it provides Clearwire with the flexibility to pursue debt financing in the future, including vendor financing or subordinated debt, which had been unavailable due to the restrictive covenants of the existing debt.

Third quarter results reflected continued heavy and accelerating build-out of the 4G network, as the company spent $500M in cash and added 11 new 4G markets, bringing the total to 13. Clearwire added a net of 44,000 customers for a total of 555,000 at quarter end, with ARPU rising slightly to $39.71 but expect to remain flattish through 2010 due to significant additions of new subscribers with 6 month promotions. Churn at 3.1% and CPGA at $563 is trending higher and is expected to increase in 2010 while the company is on the steepest part of its 4G growth ramp.

In Q4, Clearwire will begin to leverage wholesale partners -- today, mostly strategic investors -- whose marketing programs are now kicking into gear. Their combined 100 million customers will be tapped for mobile 4G service, with a strategy to maintain neutral EBITDA margins with Clearwire's direct retail business. With new markets launching that will extend 4G coverage to 30 million POPs by yearend, management forecasts that Q4 subscriber additions will be comparable to those of the first three quarters of 2009 combined. The Clearwire Silicon Valley Innovation Network, free to developers, launched in Q3 with over 400 companies and universities now connected, with a goal of spurring applications development that will leverage Clearwire's faster mobile broadband speeds.

Everybody agrees that mobile data is growing like crazy, but many people are unsure whether any service provider can achieve profitability in broadband mobile, mostly because the major incumbents are seriously challenged in this regard. Such fears plagued the early wireless industry in the 1980s.

Although Clearwire management continues to foresee EBITDA breakeven by market at single digit penetration levels within 18 months of market launch, in line with their pre-WiMax experience, there is still plenty of room for skeptics to remain skeptical.

On the other hand, skepticism and upside travel hand in hand. As CEO Bill Morrow put it, "the Internet is the enabler that resets the landscape of who the market leaders are."

Clearwire and Google

After Clearwire announced the specifics of the new $1.8-$2.1 billion equity and bond financing, several Wall Street stories focused on Google's decision not to participate in the current round, concluding that this meant Clearwire is the "underdog" in the 4G contest and that Google is now voting for AT&T's (NYSE:T) and Verizon's (NYSE:VZ) LTE to "win" over Clearwire's WiMAX. But, such commentary would imply that Google didn't comprehend the dynamics in the wireless industry when they invested $500 million in Clearwire last fall. The evidence, however, is that they are smarter than that.

Let's take a look at Google's objectives in mobile broadband. Are they to be or to own a mobile carrier? Some people might think so -- after all, Google bid on the beachfront spectrum that was ultimately won by Verizon last year. But Google was pleased as punch with the outcome, which was that Verizon "won" the beachfront spectrum, saddled with a net neutrality requirement.

This tells us that Google has plans to leverage mobile broadband, and needs to ensure that apps have enough bandwidth to run. Google wanted this badly enough to bid billions of dollars for the beachfront spectrum last year -- to prod carriers into delivering mobile broadband without applications constraints. The dollars involved speak to the importance of this goal.

Still, net neutrality was only the first step. There was no guarantee that incumbent wireless carriers would actually deploy broadband wireless, since it's a capital intensive activity and disruptive to their existing business models to boot.

Here's where a dose of competition was needed to push the entire industry ahead, preferably in the form of a carrier that was incentivized to deliver a faster broadband mobile experience as rapidly as possible. Enter Clearwire, and Google's extraordinary $500 million investment in the fall of 2008, one of their largest investments to date.

Clearwire is indispensable to the mobile broadband industry rollout, not only because it will be two years ahead of the major wireless incumbents, but also because it is uniquely incentivized to deliver a faster mobile broadband with net neutrality, having the ample spectrum to do so profitably.

A killer Google mobile app that requires lots of wireless bandwidth will make capturing new customers cheaper and easier for Clearwire. It's such symbiotic dynamics that will propel the wireless industry forward.

Disclosure: Author holds a long position in CLWR