Few companies spend as much time in the press spotlight as Clearwire (CLWR). And much of the time, it has nothing to do with product/service announcements, or even quarterly results. Clearwire, by virtue of its position in the American wireless marketplace and its complex relationship with Sprint (S), has an outsized amount of press coverage. There have been several recent developments involving Clearwire that we feel should be telegraphed to readers.
Clearwire's vast spectrum holdings allow the company to offer a multitude of partners access to wholesale wireless services for much cheaper than it would cost to build them to build their own network. Aside from Sprint, the company has inked deals with companies that include Leap Wireless (LEAP), FreedomPop, and Simplexity. And on June 5, Clearwire inked another wholesale deal with Jolt, a prepaid wireless subsidiary of NET. On its own, that deal, while a positive, does not have huge implications for Clearwire. What does have huge implications for Clearwire is who was Jolt's previous wholesale partner: LightSquared. Jolt is just one of the many companies that signed deals with LightSquared, only to see them collapse when LightSquared was blocked by the FCC from launching its network and filed for bankruptcy. For months, LightSquared was seen as a threat to Clearwire because of that company's potential to steal customers from Clearwire. With LightSquared now in bankruptcy, that threat has passed. In addition to Jolt, Leap, FreedomPop, and Simplexity were also LightSquared customers, and in the coming months, it is very likely that Clearwire will ink deals with more and more of LightSquared's old customers in need of wholesale wireless services. Other major LightSquared customers likely to be added include Sharp, C Spire, and Best Buy (BBY). These deals show that Clearwire can gradually diversify its revenue base away from Sprint, and we look forward to the next earnings conference call to hear more color on Clearwire's plans to sign up more customers.
It would be wise not to forget that there are other investors in Clearwire besides Sprint. Crest Financial is one of those investors, and it has niw become one of Clearwire's largest minority investors, with a stake of 7.88%. Various media reports have said that Crest had taken a stake of 5.9%, but Crest has officially refuted those reports, and put out a press release stating that it has been an investor in Clearwire since 2004, and that its stake was in fact 7.88% as of May 31, 2012, and not 5.9%. In a recent SEC filing disclosing a boost to its stake, Crest stated that it believes that shares of Clearwire are undervalued, and that it wants to discuss adding directors to Clearwire's board, as well as discuss the company's overall strategy.
The fact that Crest's investment has been brought to the spotlight is a positive one not only because it shows Crest's long-term commitment to Clearwire. It is positive because Crest could nudge Clearwire to consider spectrum sales more quickly than it would otherwise. Clearwire's management team, from CEO Erik Prusch on down, has been extremely coy in regards to spectrum sales, and a push by Crest to rethink their position could prove to be a catalyst for the stock.
Drama at the SEC
Clearwire has also been the subject of some drama regarding a specific filing the company made with the SEC on May 29. That filing was a prospectus supplement pursuant to Rule 424, which requires companies to file supplement prospectuses with the SEC if there have been material changes that investors should be made aware of.
On the surface, that filing made it seem that Sprint was slashing its stake in Clearwire from 58.9% to 6.5%. If that were true, that would certainly be an important event, as it could pave the way for Clearwire to be acquired. However, the true meaning of this filing is much more mundane, and we clarify it below.
The May 29 filing is an update to a Cleariwre prospectus dated December 21, 2009 in which the company offers to sell over 836 million Class A shares. In that 2009 prospectus, Sprint HoldCo (the shell company through which Sprint holds its Clearwire shares) is listed as offering up to524,732,533 of its shares.
(click to enlarge)On the surface, this makes it seem as if Sprint had disposed of its entire stake in Clearwire in 2009, something we know is not the case. Similar figures appear in the May 29, 2012 update to that prospectus.
(click to enlarge)It is important to remember that these filings do not state outright that the holders listed will be cashing out of Clearwire. As stated in the May 29 filing, "the selling stockholders from time to time may offer and sell the shares held by them directly or through agents or broker-dealers on terms to be determined at the time of sale, as described in more detail in the prospectus." This filing does not state that Sprint, or any other holder will be selling their entire stakes [although Comcast (CMCSA) and Time Warner Cable (TWC) will likely be selling at some point this year, due to their deals with Verizon (VZ)].
We have received multiple messages from readers concerning this May 29 filing, for if Sprint sells its Clearwire stake, it would be much easier to takeover the company. But Sprint is unlikely to sell. Its 4G strategy is too intertwined with Clearwire to lose control of its wholesale partner. Sprint needs access to Clearwire's spectrum, and selling its stake could put that access in jeopardy. Could Sprint unwind its Clearwire stake in the future? Of course. But we feel that for such an event to occur, Sprint would have to first outline a comprehensive 4G strategy that does not involve Clearwire, and that would be a long and complex process. In addition, with AT&T (T) and Verizon looking to buy up as much spectrum as they can, Sprint needs to cement its relationship with Clearwire, not end it. Sprint does not have the financial ability to compete on an equal footing with AT&T and Verizon in the open spectrum market, and therefore needs Clearwire. There may be a future where Sprint and Clearwire do not have the kind of relationship that they have today, but that future is likely at least a few years away.
We continue to be bullish on Clearwire, and have been accumulating shares in the past few days. Clearwire is signing more and more wholesale customers, and there are still many LightSquared customers left. The company's investor base, including Crest Financial, is slowly pushing the board to shake things up. In addition, Crest has stated that it views the shares as undervalued and has demonstrated its commitment to Clearwire by increasing its stake to almost 8% of the company. We think that the next year will be an important one for Clearwire, as the company continues to diversify its revenue base and slowly but surely strengthens its financials.
Additional disclosure: We are long shares of T and VZ via the SPDR Dow Jones Industrial Average ETF.