Sprint Going For Clearwire Is Bullish For The Stock

Oct.18.12 | About: Sprint Corporation (S)

In our previous article, we mentioned the Softbank-Sprint (NYSE:S) deal and how it would help Sprint compete with its stronger rivals AT&T (NYSE:T) and Verizon (NYSE:VZ). The Japan-based telecom company, which is attempting to gain exposure to U.S. markets, sees growth potential in the third-largest telecom company in the U.S., while Sprint is availing this opportunity for the capital required for its network overhaul. With the $8 billion capital injection, Sprint will speed up the network upgrade process, and at the same time look at other strategic options like acquisitions. Overall, we concluded that the merger was a positive for Sprint itself, as well as for the concentrated telecom industry in the U.S., as it will open doors to healthy competition and offer for more choices to customers.

We also suggested that with Softbank acquiring a 70% stake in Sprint, which will become the New Sprint post-merger, the new company will probably look toward further strengthening its competitive position in the industry. In particular, we mentioned Clearwire (CLWR), which provides mobile and fixed wireless broadband services to its customers in countries like Belgium, Spain, and the U.S. Companies that have a stake in Clearwire include Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWX), Bright House Networks, Google (NASDAQ:GOOG), Intel (NASDAQ:INTC), and Sprint. However, Sprint is the largest single shareholder with approximately a 48% stake in the company. According to a Bloomberg news report, Sprint also recently acquired Eagle River Holding's stake in Clearwire, effectively giving it control over the company's board. The 4% stake buyout is expected to be announced soon through a regulatory filing. Sprint is also in talks with other stakeholders like Intel and Comcast to buy their stakes in Clearwire; however, how much progress has been made in that regard remains to be seen. But the point remains that even though Sprint obtaining a majority stake in Clearwire is not a prerequisite to the Sprint-Softbank deal, Sprint is aggressively looking to increase the spectrum that it has or doesn't have to give AT&T and Verizon a stronger opposition.

Over a number of years, and through a number of investments, Sprint has gained a significant stake in Clearwire; however, without a further stake, it runs the risk of not being able to exercise control over the company's board, which is why this move is a smart one as far as keeping control over the company is concerned. Moreover, Clearwire, which already serves the majority of Sprint customers for their mobile and data needs, holds wireless spectrum that Sprint would like to hold dearly. Gaining control over the company will prove to help in the development of its LTE Network, which will eventually be better capable of supporting new and upcoming smartphones. Sprint is already well on track with its network vision program, which is expected to yield significant operational and financial benefits, and it is doing well to focus on further improving its standing in the industry by gaining access to more airwaves.

Overall, Sprint acquiring a majority stake in Clearwire as well as the recent Softbank/Sprint deal will help the company bring customer growth and better compete with its rivals.

This deal should give a clear signal to the market that Sprint's turnaround is in place. It should help Sprint to trade at better valuations. We think as the market realizes the turnaround potential (after this capital injection and Clearwire's control) and better competitive positioning of the company, it would be valued at a multiple similar to its rivals AT&T and Verizon. Currently, the stock is trading at pretty cheap valuations: a price/sales multiple of 0.4 times, vs. Verizon's 1.2 times and AT&T's 1.7 times. These cheap valuations present a great entry point for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Telecom Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.