Clearwire Playing For Time It Doesn't Have

| About: Clearwater Paper (CLW)

Sprint Nextel (NYSE:S) has decided to acquire the rest of Clearwire (CLWR) for $2.2 billion at $2.97 per share. This is considerably more than Sprint's previous takeover offer priced at $2.60 per share and should dissolve the last bits of resistance from Clearwire's shareholders. Clearwire's board quickly accepted the new offer but a majority vote of minority shareholders is still required. Sprint Nextel already owns half of Clearwire. The current offer gives Clearwire's shareholders a 128% premium over its pre-takeover-revelation price in October.

Sprint has been trying to turn itself around this year after Japan's SoftBank (OTCPK:SFTBY) acquired a controlling interest in the American telecom operator. Softbank and Sprint are looking to challenge the dominance of Verizon (NYSE:VZ) and AT&T (NYSE:T) in the U.S., and the $20 billion cash injection from Japan gave Sprint the resources to buyout the rest of Clearwire. Industry pundits have been speculating for more than a year about how the consolidation of the lower-end of the U.S. wireless market would play itself out. With T-Mobile (OTCQX:DTEGY) buying MetroPCS (PCS) and acquiring a number of towers from Crown Castle (NYSE:CCI), it looks like we have our answers.

There is still the case of convincing Clearwire's shareholders who, despite the attractive premium, might still believe that the bid is too low after some minority shareholders have argued for more than $6 per share. There have been various valuations of Clearwire's spectrum leases by some of its minority shareholders that range from $9 billion to $30 billion. But, Clearwire is laboring under a heavy debt burden and running short of cash with reserves falling from $3.1 billion in December 2008 to $1.2 billion in September 2012. During this period, its total debt has risen from $1.36 billion to $4.27 billion. Essentially, it doesn't matter what your assets are worth in the aggregate. The value for these leases to Clearwire are no different than an expiring option and the closer the company gets to bankruptcy, the less they will be worth. This is a clear case of Sprint taking excellent advantage of Clearwire's mismanagement of its assets. It has not registered a profit in years while in its most recent quarter ending September 2012, reported a 13.2% fall in quarterly revenues to $313.8 million.

So Clearwire's shareholders are looking at the following situation, they can stay operational for one more year and wait for the inevitable bankruptcy, or accept Sprint's offer, which also includes $800 million in financing. Again, waiting for a better deal does not necessarily increase the value of the assets when they are locked in the wrong vehicle. Some of Clearwire's early investors-- which include Google (NASDAQ:GOOG) and Time Warner Cable --have already left the company after continual underperformance. Google felt taking a loss of $453 million on its investment was better than sticking with Clearwire until it completely ran out of cash. Similarly, Time Warner has also recorded a loss of nearly $480 million on its investment. However, other investors such as Comcast (NASDAQ:CMCSA), Bright House Network and Intel (NASDAQ:INTC) are hanging in with their 13% total stake. The three have given their nod to Sprint's offer.

On the other hand, other minority shareholders, such as Crest Financials (which owns 6.6% of the company(, wants Clearwire to sell its spectrum at a higher price to other buyers rather than be taken over by Sprint. Crest wants to block Sprint's bid through a court order.

For Sprint, the deal would translate into higher access to airwaves and improved data speeds. Traditionally, Sprint has relied on Clearwire for its "Sprint-4G" service, but LTE is making obsolete conventional 4G service.. Sprint is working on its own LTE network. Clearwire also wants to develop LTE but it doesn't have the cash. And even if it did somehow manage to finance LTE operations, it would just then turn around and sell it to Sprint, its only long time loyal customer. It should also be noted that despite Clearwire's dwindling market cap of just $4.26 billion, reflecting an 80% decline in share prices since early 2008, no other serious buyer - besides Sprint - has approached the company, even for just its spectrum leases. This indicates that its spectrum licenses are not as attractive as some of the minority shareholders would like to think. In effect, these shareholders are valuing these assets with a Picasso Premium based on either outdated information, nostalgia or their own need to get higher value to clear their own struggles.





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The whole idea of a Sprint / Clearwire hookup at this point is loved by the market, with both stocks performing really well this year. Sprint needs this deal to continue growing its subscriber base in the growing pre-paid wireless segment in the U.S. It is this demographic which is seeing the most growth in smartphone adoption and, frankly, where all of the value is for the consumer. But there timing here is important and Clearwire's shareholders are playing for money when time is what is against them.

T-Mobile is getting more aggressive with its pricing and has moved even more explicitly towards the no-contract/pre-paid model. With T-Mobile adding MetroPCS's LTE network, it is making a serious bid to become the #3 wireless player in the U.S. The longer this Sprint / Clearwire deal takes to complete, the bigger lead in rolling out an LTE network T-Mobile/MetroPCS will have. This is why T-Mobile is playing for market share in this demographic as it completes the integration of the 1900 MHz AT&T 3G network. These are subscribers they will be able to retain as LTE gets rolled out.

If you're a shareholder, I'd be leery of holding on looking for a better offer at this point. Take profits before year end and look to get back in if you like the story after the deal is completed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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