The street is predictably and understandably reacting negatively to today’s news that Clearwire Corp. (CLWR) increased its offering from $300 to $350 million, and perhaps more importantly priced it below the market at $2 per share. However, we believe that after the temporary weakness from the offering news abates, CLWR is set to resume the uptrend that started November 30th after shares bottomed out in the $1.50 range. The near doubling of its shares to its $2.64 peak in the past few days is triggered by a string of positive news that to us clearly state that the company is out of the doghouse. Furthermore, based on today’s price action after the gap-down open, we believe that value and growth investors may have already started jumping into the stock headlong now that the threat of bankruptcy is near-gone and the company is unfettered to execute on its strategic vision.
So, first let’s recap where CLWR was just prior to November 30th, and the string of positive news that brings us here. The first sign of problems emerged at the beginning of the year when, with CLWR trading in the $6-$7 range, its partner and majority owner Sprint Nextel Corp. (S) elected not to opt-in on the notes issuance of over $1.1 billion. Then on July 29th, shares plunged when Sprint announced a 15-year $9 billion spectrum hosting and network services agreement with LightSquared that effectively bypassed CLWR (that we wrote about here). Subsequently, on October 7th, events decidedly took a turn for the worst as Sprint surprised everyone by publicly disowning CLWR, announcing a switch from CLWR’s WiMAX to an LTE network that it would build itself to power its 4G network. Furthermore, adding salt to CLWR’s wounds, Sprint announced that it would soon stop selling CLWR compatible devices, prompting calls from the investment community that CLWR needed to nab a big fish like AT&T Inc. (T) or Verizon Communications (VZ) to save itself. And finally, on November 18th CLWR stock sank to a $1.28 low after a WSJ headline suggested that the company was thinking about the unusual strategy of missing the $237 million interest payment due December 1st, which would be tantamount to declaring bankruptcy.
Now, let’s jump forward to the end of November. On last Wednesday November 30th, the stock spiked up on a news leak that was confirmed the next day that CLWR and Sprint announced agreements potentially worth up to $1.6 billion over the next four years in payments for WiMAX services. Included in the $1.6 billion was a $926 million payment for unlimited WiMAX retail service during 2012 and 2013, $350 million in a series of prepayments over a period of up to two years for LTE capacity if CLWR achieves certain build-out targets and network specifications by 2013, and up to $347 million in pre-emptive equity offering participation if CLWR raises new equity. And then on December 5th, CLWR announced that it would offer up to $300 million in stock, which was received positively as the stock rallied almost 20% to its intra-day highs. This was followed by yesterday’s news on increasing the equity offering size and pricing it at $2, that resulted in a gap-down opening, but consolidation and strength following that lower opening.
So effectively CLWR has gone from a company teetering towards bankruptcy with a dysfunctional relationship with its partner, majority owner, and largest customer Sprint to now having a working relationship with Sprint, and adequate funding to not just maintain operations but fulfilling its strategic vision of deploying mobile 4G LTE technology alongside the mobile 4G WiMAX technology. Furthermore, the company owns attractive spectrum assets that some believe can fetch as much as $20 billion in an auction. At a current enterprise value of less than $4 billion, CLWR is clearly selling at a steep discount to that, making it an attractive buy at current levels for the speculative investor. Also, the company recently unveiled a streamlined retail offering that has promising potential.
We believe that as the pessimism surrounding the stock abates, investors will wake up to the fact that this company is now out of the dog house, prompting funds and other long-term investors to re-evaluate its valuation, this time pricing in less or no risk of default, which should lead to a higher valuation than it trades at currently. Alternatively, there is also the possibility the company could get acquired at a premium by Sprint or another strategic buyer, or even that it auctions off some of its spectrum assets for a neat sum.
Majority owner Sprint should also benefit from these developments as besides the increase in the value of its ownership in CLWR, Sprint also retains access to CLWR’s network that has a lot of excess capacity that Sprint will soon need with the rollout of Apple Inc.’s (AAPL) iPhone, thereby enabling it to compete effectively with rivals AT&T and VZ.
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