SR Capital

SR Capital
Contributor since: 2011
Excellent write-up on CLWR. For further analysis see my SA post "Sprint Deems Clearwire Too Big Too Fail". Best, Steve
Cloud computing is definitely good for CLWR - it makes it easier for for handheld devices to be used for more applications, which drives wireless bandwidth requirements ever higher.
If 2.5 comes up short and WiMAX didn't take off for CLWR, then how do you explain over 8 million Sprint customers on CLWR's WiMAX network?
CLWR's network has been a smashing success to date - their problems are (1) that the industry is adopting LTE and CLWR needs a compatible network and (2) they couldn't afford to keep adding retail subs as the cost per gross add was draining cash reserves. Stanton has solved both problems and they now have the cash in the bank to keep rolling on.
Doug - in theory the market should have been pricing in the potential for dilution since August when management announced that they needed to raise equity. I would expect the actual pricing to be a positive event as it removes the overhang. That's why the stock is up today.
Dilution needs to take into account Sprint's investment at the same price, not just the public offering. Dilution = newly issued shares / total shares post-offering. $595MM / $2.25 = 264MM new shares, which will be added to the existing 915MM shares. 264/1,179 = 22% dilution. If the overallotment is exercised and Sprint participates pro rata, dilution could reach 25%. This all assumes it prices at $2.25 which remains to be seen.
Stanton bought $5 million worth of CLWR stock in August after meeting with Blackstone (leading restructuring advisor). Clearly he researched the worst case scenario and decided he was protected (i.e. shareholders are entitled to the excess asset value after creditors are paid off, even in bankruptcy). Stanton is not reckless and he bought when everyone else was panicking. He knows what he's doing.
Thanks for making the 2/11 CLWR presentation available - I have it but it's not on their website anymore so it's good to make it available to others.
I don't know why you would value the EBS spectrum at zero just because it requires lease payments. The Company forecasts $156 million of spectrum lease payments in 2011 - hardly a pittance but it pales in comparison to the $31 billion implied spectrum value based on what VZ paid for the SpectrumCo AWS spectrum. I've discounted that by 63% to account for the lease payments and moderately worse physical propagation, and still arrive at a 4x return for investors that buy in at $2. I think my view still looks conservative.
As far as the EBS spectrum being declared a public asset, that issue was settled by the Supreme Court in 2003 when it found that Nextwave was a debtor entitled to bankruptcy protection despite the FCC's claim that it could simply cancel the licenses and reclaim the spectrum because Nextwave failed to make payments required by the terms of the licenses. Last time I checked the Supreme Court cannot be appealed so this issue has been settled definitively.
The retail strategy had no chance of succeeding because they chose the wrong technology (WiMAX) and it's incredibly expensive to add retail subs. McCaw was simply too far ahead of his time. Stanton didn't keep house for S - he completely revamped the strategy, cut costs massively to create some runway, and went to the mattresses with Sprint to extract a usage-based LTE deal that will be extremely valuable as mobile data demand grows 26x over 5 years as forecast by Cisco. If I'm wrong the breakup value is still much higher than $2. I've been in the room with Stanton as well - I helped finance his early efforts. I am highly confident that he will make this work, and even if he doesn't our downside is protected.
You raise some fair points, so I'd like to respond:
- CLWR's spectrum is more expensive to build out (as I pointed out), but not 7x more expensive than AWS. 2500 MHz versus 2100 MHz is significant but not huge. Also, the build cost differential per subscriber is lowest in densely populated markets where most of the industry's revenues are generated (and where bandwidth constraints are greatest).
- The lease payments matter but pale in comparison to the value of the spectrum.
- I agree that AWS spectrum is more valuable to VZ (per MHz-Pop) b/c it's adjacent to existing spectrum, but at the same time it lacks the strategic value of CLWR's massive spectrum position that would enable a carrier to dominate the industry.
- True that CLWR's highest and best use is supplementing existing networks, but (a) that's their business plan and (b) this fact doesn't diminish the value of the spectrum - this logic applies equally to the AWS spectrum that VZ just bought - nobody (not even the rich cable companies that owned it) was ever going to use that spectrum for a stand-alone network and it still fetched $0.68 per MhZ-Pop.
- Your analysis of spectrum value ignores the fact that CLWR has a critical mas of spectrum that is ideally suited for solving the biggest problem the carriers have today - providing enough capacity to meet the exploding demand for bandwidth as the internet goes increasingly mobile (this is not a forecast - it's happening today). This helps offset the limitations that you point out.
- This critical mass would represent a very powerful strategic weapon for either VZ or T - it would enable them to truly dominate in terms of the services and pricing they could provide. 20 MHz of AWS lacks this strategic value - it is an incremental attempt to play catch-up to existing network demands.
- The 2500 MHz band is shared by many national wireless carriers around the world (including China Mobile - which last time I checked had a pretty large addressable market). Handsets and infrastructure will not be an issue.
- I think I've taken your concerns into account more than adequately by valuing CLWR's spectrum at a 63% discount to the AWS spectrum to arrive at $8/share.
- I agree that a building in Manhattan is worth more than a building in Hoboken, but I'd rather own the entire city of Hoboken at $500/sq foot than a single Manhattan building at $1,500/sq foot.
- If you like the bonds but not the stock then you must have incredibly precise information as to what the spectrum is worth. The bonds represent about 9 cents per MHz-Pop at face. The stock at $2 represents about 13 cents. My view is that if you believe in the thesis at all then you're safe buying stock at $2 per share and have much greater upside. If you don't believe the thesis then it's impossible to value the spectrum and you should stay away from the company completely.
I received the following e-mail from a reader that had some good questions - I wanted to share the questions and my responses:
I am very dubious of your analysis
I have questions:
Isn't S in a precarious financial position too? How can S be relied on to deem something too big to fail?
McCaw is a rich guy but are his public companies profitable endeavors for common stock holders? Nextlink? XO?
I don't like this holding at all. Could easily file and common worthless IMO
My Response:
Great questions - my responses are as follow:
S has enough liquidity to get CLWR the financing they need to build the LTE network, after which CLWR will be able to stand on its own two feet. Even if S files at some point in the future - it will keep operating while the balance sheet is restructured, and will keep paying CLWR for the use of its network (otherwise many millions of customers go dark, which will not happen - American Airlines is still flying planes despite their recent filing, e.g.).
And even if CLWR were to file at some point, the spectrum is worth far more than the debt, and that excess value would still go the shareholders.
I agree that McCaw is not perfect - but his long-held belief in wireless growth and rising spectrum value has held true for 25+ years and still holds true. I would also point out that I have not relied on McCaw's involvement or judgment in any of my analysis - I have focused on certain data points and the logical implications of that data.
Great question - the answer is no because Clearwire's spectrum position is so much greater than VZ and T's (even after VZ's recent acquisition of AWS spectrum from SpectrumCo - see my other post on this deal), that Clearwire's cost per bit will be the lowest in the industry by far. This will allow them to sell bandwidth to S at a price that generates a nice profit for Clearwire but still allows S to make money. As usage continues to outpace all forecasts (as it has for 25 years in the wireless sector), Clearwire will have to adjust the price per bit downward to keep S profitable, but it can easily afford to do so (and revenue will still grow, because usage will grow faster than the price per bit declines). Putting in place usage-based pricing today through 2015 will give Clearwire the upper hand in any price renegotiation. Remember - you want to grow revenues from your best customers - not put them out of business.
If you're going to suggest that Stanton is a placeholder, make sure he's not in the room. He is the quintessential hands-on entrepreneur. He took over this year as interim CEO when Bill Morrow left and completely revamped the strategy, pointing the company in the right direction. He is now a very active Chairman. Stanton cares very much about his legacy regardless of the financial rewards. He has gone on record with the financial community in the strongest possible way voicing his support for the company. He will be there for the shareholders. He had to go the mattresses with Sprint to get a reasonable deal done - that's simply how Sprint operates. The deal is struck and the healing process is underway. I think his strategy and execution have been quite impressive under the circumstances, and I expect that to continue.
You're referring to the old Specialized Mobile Radio (SMR) networks - some of which are still around. Most SMR spectrum was gobbled up by wireless pioneers in the 90's and rolled into Nextel, which Craig McCaw bought and then sold to Sprint - imagine that!
Thanks Cale - looking forward to seeing more people grasp the CLWR story!
Thanks Josh - given your background I really appreciate the feedback.
Like many stocks, BKCC was unfairly pummeled during the crisis and created massive gains for investors that ignored market volatility and bought the stock based on the fundamentals. They slashed the dividend temporarily to conserve cash in a highly uncertain environment. BKCC's stock remains volatile (I recently added to my holdings at $6.50 and am glad I did) but performance has been steady. BKCC's portfolio growth YTD strongly suggests that they will cover the dividend with adjusted NOI (which is the key metric - not EPS) in 2012, and with the portfolio heavily weighted toward senior debt and deals screened by a blue-chip investment committee I believe downside is limited. If the stock gets beaten down again by rumors out of Europe I wouldn't panic - I would buy more.