Earlier this week, central banks around the world decided to increase liquidity in the system, as rumors were coming out of the potential failure of a large European financial institution. Lately, there have been rumors that Clearwire (CLWR) was in a similar situation. This morning, we got news that many of us had been expecting for months. Sprint (S) and Clearwire came to a new agreement, providing additional revenues and funding to Clearwire. Sprint, in a sense, has become a central bank to Clearwire, as the latter has relied heavily on the former for survival. Thanks to the news, Clearwire shares rose 14% on Thursday, although they lost more than half of their earlier gains. Sprint ended unchanged, but was all over the place when the market was open.
Here are some of the highlights of the agreement, which can be read in full here:
- Sprint will pay Clearwire a total of $926 million, approximately two-thirds of that in 2012, for unlimited WIMAX retail services during 2012 and 2013.
- Sprint will have access to Clearwire's WIMAX network through 2015, and a pricing system was established for usage of services in 2014 and beyond.
- Sprint will pay Clearwire up to $350 million in a series of prepayments over a period of up to two years for LTE capacity if Clearwire achieves certain build-out targets and network specifications by June 2013.
- Sprint will provide additional equity funding to Clearwire if Clearwire engages in an equity offering. If Clearwire raises between $400 and $700 million of new equity, Sprint will invest up to $347 million pro rata to maintain its 49.6% current voting interest.
Now, we've been talking about this potential agreement for a while. Sprint and Clearwire's previous agreement was scheduled to expire in 2012, and Clearwire had stated a few months ago that they had enough funding to stay in business for the next 12 months. However, beyond that was in question. A few weeks ago, Clearwire's CEO stated that the company might miss its next interest payment, which was due on December 1st. Most saw this as a ploy to gain funding, and an attempt to get Sprint to extend the business agreement. It appears that it worked, as the agreement was released today. While I don't think Clearwire would have defaulted, the news is positive for the firm and will lessen the potential rumors of bankruptcy that have been alleged recently.
For Sprint, the deal was a necessity. First, Sprint needs access to Clearwire's WIMAX network and LTE capacity. If, in a worst case scenario, Clearwire did default and were to go bankrupt, Sprint could lose the access it already had. Second, Sprint already had a large investment in Clearwire, over $2 billion at the end of last quarter. While the investment has been losing money over time, Sprint's new deal and possibly more equity could help that investment turn around. Sprint could lose money on the investment in the short term, but a few years down the road, even if it was at break even, that would be better than a total loss.
A couple of other noteworthy news pieces on Sprint that might not have been picked up recently. Sprint announced that it will retire the $2.25 billion of debt coming due in March 2012 by the end of this year. You can assume that some of the $4 billion recently raised by the company will be paying for that. Some of that $4 billion will also be going to Clearwire. I am very curious to see Sprint's end of year balance sheet, to see how all of these moves have worked out. Between the $4 billion debt raise, the payback of next year's debt due, and anything involving the Clearwire deal, the balance sheet is likely to have some changes. Don't forget that the iPhone went on sale this quarter as well.
Also, in a note Thursday morning, an analyst raised Apple (AAPL) earnings and revenue guidance. This was due to an increase in iPhone sales estimates, but a cut in iPad numbers. The analyst said that he expects the iPhone 4S will not have a plateau effect. Any positive news on the iPhone is good for Sprint, although I don't think Sprint will have any trouble selling the phones. The key issue for Sprint is stealing iPhone customers from AT&T (T) and Verizon (VZ), because each customer poached will add more in incremental revenues than if a current Sprint customer were to upgrade to the iPhone.