On Friday morning January 4, Janco Partners hosted a teleconference for Crest Financial Limited's General Counsel, David Schumacher. The purpose was to give Crest an opportunity to outline its objections to the Sprint/Clearwire merger.
Gerard Hallaren:Thank you all for joining us and good morning. I'm Gerard Hallaren, Research Principal at Janco Partners. The topic of today's call is Crest Financials endeavor to see that the minority shareholders are squarely treated in the Sprint Clearwire merger. Our speaker today is Dave Schumacher who is general counsel of Crest Financial Limited.
He's been in that position for not quite a year, before that he was a partner at McDermott Will & Emery and before that a partner at Chadbourne & Parke. Dave has been practicing law for more than 23 years.
While I don't know everything he's going to say I do know that we both firmly agree that Sprint has manipulated the situation for a long time and that it's bid for Clearwire is insufficient.
Before I hand over to Dave I'd like to make a few points about spectrum and spectrum markets and this transaction. First of all this is a fairly leveraged deal. Clearwire has four billion in debt and only half of the shares are in question. So relatively small changes in the value Sprint accords to the spectrum, translate into large dollar values for shareholders.
In all of my appraisal work and our firm's work we've marked Clearwire's 2.5 gigahertz down by 50% or more relative to the last major spectrum auction dating back to early 2008.
At present we generally use a 65% discount to that auction and get a value of roughly $19 billion or about $10 per Clearwire share. Other recent spectrum transactions range from a low of $4.20 for unusable spectrum, that is spectrum that needs to be developed either with FCC approval or other standards bodies to more than $30 per share for well established bands.
Clearwire controls about 46.6 billion megahertz of this 2.5 gigahertz spectrum. While price is clearly one issue, many believe Sprint's bid lacks even the appearance of fairness.
Now I'd like to hand over to David Schumacher, general counsel for Crest, to elaborate on his thoughts about the bid.
Dave Schumacher: I'm Dave Schumacher the general counsel of Crest Financial Limited.
Crest is a Houston based investment company and a long-term investor in Clearwire Corporation. Crest has owned Clearwire's shares since 2004 and in fact has been a serious investor in wireless communications companies since the 1990's.
We believe strongly in Clearwire's future as an independent concern largely because of the untapped value of its chief asset, the deepest portfolio of spectrum available for data services in the United States and specifically for the development of TDD-LTE technology.
As you know Crest has commenced a lawsuit in Delaware's Court of Chancery to block the pending mergers between Sprint and Clearwire and between Sprint and SoftBank.
I think we've made a compelling case that Sprint and Clearwire's board worked in coordination to push forward merger transactions that will unfairly benefit Sprint and its merger partner SoftBank to the detriment of Clearwire's minority stake shareholders like Crest and the public interest.
Crest is optimistic that the court will find merit in our claims. Crest will do whatever it can to protect the rights of Clearwire's shareholders and to maximize the use of Clearwire's spectrum in the public interest.
Now let me summarize the highlights of our arguments made before the Chancery Court. Sprints $2.97 a share bid for Clearwire grossly undervalues Clearwire spectrum.
If the mergers are allowed to go forward Sprint and SoftBank would get Clearwire spectrum at a fraction of its market value. Sprint and Clearwire's board blatantly violated their fiduciary duties by devising and accepting the merger terms to the detriment of Clearwire - of the Clearwire shareholders not related to or affiliated with Sprint.
Sprint's $2.97 a share offer puts Clearwire's value at about $4.3 billion. This amount is far less than the value assigned to Clearwire spectrum by independent analysts.
It is also far less than the value that Clearwire itself assigned to its own assets. As many of you know on February 28, 2012 at the Deutsche Bank media and telecommunications conference Clearwire's own Chief Financial Officer valued Clearwire spectrum at between $11.5 billion and $35 billion based on recent transactions.
I'll explain in a minute how we think this happened and how these transactions hurt Clearwire's shareholders and the public but first I want to say that Crest is optimistic that the Federal Communications commission will take a hard look at whether the Sprint SoftBank and Sprint Clearwire transactions threaten the public interest. We'll soon be filing a petition with the FCC to block the mergers for that reason. One issue that the commission will seriously consider is how these transactions will negatively impact the U.S. taxpayer.
By artificially pushing down the price of Clearwire spectrum to below market rates Sprint and Clearwire threaten to devalue future government auctions of spectrum. If spectrum prices are deflated the Federal Government will get less revenue. The end result is that the losers in these transactions are Clearwire's minority shareholders, the U.S. taxpayers and the public interest and the vibrant mobile telecommunications market place.
Now back to my explanation of what we believe happened here. In May of last year Clearwire was moving ahead to build out its network and improve its financial condition in accordance with its stated business plan. It hired an investment bank to sell $300 million in shares to fund a much needed build out. But in July one month after merger talks between SoftBank and Sprint reportedly began and two months after Clearwire started its stock offering the Clearwire board abruptly canceled the stock offering.
Why? Crest asserts that Sprint using its power as the largest Clearwire shareholder and using its control over the Clearwire board launched a scheme at around that time to deliver control of Clearwire and its coveted spectrum to SoftBank on the cheap while unfairly extracting maximum benefit for itself to the detriment of the Clearwire shareholders unaffiliated with Sprint.
Sprint's scheme to take control of Clearwire's valuable spectrum was formally launched when Sprint agreed to purchase the Clearwire shares held by Craig McCaw's Eagle River Holdings.
Sprint's purchase of this stock gave Sprint a majority of Clearwire's voting shares. We contend that this transaction will enable Sprint to deliver to SoftBank unfettered control of Clearwire again to the disadvantage of Clearwire's minority shareholders when the merger between Sprint and SoftBank is completed.
In fact SoftBank's control of Clearwire was critical to Sprint and SoftBank entering into their merger agreement in the first place as it was reported that the lenders financing SoftBank's acquisition of Sprint wanted assurances that SoftBank would ultimately control Clearwire's valuable spectrum. Crest also believes that Sprint manipulated the terms of the Eagle River transaction to make it appear that Clearwire's publicly traded Class A shares were worth less than their actual value. In addition as it turns out Sprint's acquisition of Eagle River's Clearwire shares set the upper range of the price that Sprint would pay for Clearwire shares not owned by Sprint, namely $2.97.
Crest believes that the Sprint Eagle River transaction was the first step to clear the way for SoftBank to acquire Clearwire at a below market price. After the SoftBank Sprint merger was announced in October Clearwire significantly scaled back its build out plans. Another move clearly designed to assist Sprint in its efforts to buyout Clearwire's minority stockholders at an artificial discount. Clearwire is sitting on spectrum worth billions of dollars yet Sprint in conjunction with SoftBank and Clearwire's own board has curtailed the company's ability to take advantage of that value.
Crest like other minority Clearwire shareholders, continues to believe that Clearwire could raise the additional capital it needs to succeed as an independent company. This could be accomplished by selling additional equity as planned or by simply selling excess spectrum, the spectrum that goes beyond the build out of its network.
Instead Clearwire now faces a financial crisis, which Sprint's merger offer only exacerbates. This is because Sprint's merger offer includes Sprint's agreement to purchase $800 million of convertible notes from Clearwire. Sprint and the Sprint controlled Clearwire board maintained that this debt financing is beneficial to Clearwire because it will provide Clearwire access to much needed capital to complete its planned network build out.
In fact the structure of this $800 million debt transaction harms Clearwire and its shareholders by loading more debt onto Clearwire's balance sheet in the near term and at the same time providing Sprint with a low cost means to convert this debt to additional shares that will further dilute Clearwire's minority shareholders.
The conversion rate is $1.50 a share, roughly half of the already overly low price that Sprint is offering to pay for the Clearwire shares it does not own. Let me make a couple of other points.
First, the terms of the Sprint Clearwire merger are coercive. The agreement promises much needed capital to Clearwire but the full amount of the $800 million convertible notes is available only if Clearwire shareholders approve the Sprint Clearwire merger.
Second, as I've already explained the terms of the $800 million convertible notes leave the minority shareholders with a stark choice. Either sell to Sprint or depending on choices Sprint makes continue to own shares that are either further diluted or that are issued by a company the balance sheet of which is further encumbered by debt.
The merger is therefore a bad deal all around for Clearwire shareholders and also for the public at large, which would benefit most if Clearwire was financially healthy, a result that is impeded by this $800 million convertible debt transaction.
And here's one more point worth noting. For the Sprint Clearwire merger to win approval a majority of Clearwire shareholders unaffiliated with Sprint must give their assent.
Crest is asking the Delaware Court to declare that Comcast, Intel and Bright House are in fact affiliated with Sprint for purposes of this vote because these companies, which together own 13% of Clearwire's voting shares have a side agreement with Sprint to vote for the merger.
If that 13% is counted as affiliated with Sprint, Sprint and Clearwire will have a hard time winning the majority of the minority vote they need to complete their merge.
For that reason among others Crest thinks it has a very good chance of blocking the mergers. We have a compelling case that the transactions unfairly hurt shareholders, U.S. taxpayers and the public interest.
We're optimistic that in the end we'll succeed. I'm now happy to answer your questions, thanks.
Gerard Hallaren: before we go to the Q&A, could you take a moment, and give us Crest's thoughts on price?
Dave Schumacher:Our goal is and always has been to ensure that or to see that Clearwire continues as an independent company that is unimpeded by Sprints undue actions.
So honestly we have not taken the steps to undertake a full analysis of what a proper price for Clearwire may be. However as you know and you yourself stated a number of analysts such as yourself have undertaken that analysis.
And from all that we have seen any price that has been given to Clearwire shares far exceeds the offer that Sprint has made perhaps by as much as three times if not more and I think you yourself just said that your calculated that there's - it could be as high as $30 per share.
So, you know, our interest right now is to make sure that or to see that Clearwire continues as an independent company with no undue interference from Sprint.
Gerard Hallaren:Could you outline the next steps and events you expect to occur.
Dave Schumacher:Right, so the next steps are we have commenced our case before the Delaware Chancery court. We will soon hear from the Court whether our motion for an expedited trial will be granted, we expect that to happen next week.
Soon we will be filing a petition with the Federal Communications Commission seeking to block the mergers. The Commission has set January 28 as the deadline for filing those petitions. We believe that we'll be filing much earlier than that.
Gerard Hallaren:We have people in the queue now. I should have mentioned that during Q&A we will call you by your first name and it will be up to you to provide further introduction information for those who wish to stay fairly anonymous.
Donna:I was just curious if - what sort of credibility Dave you give to the fact that management tried to sell spectrum to other parties and tried to get wholesale agreements?
And the board has a number of really reputable people on it, so do you not believe their claim that they couldn't find any buyers for the spectrum or any wholesale arrangements?
Dave Schumacher:We think that the board has not done its job and the special committee was formed in the middle of November and we don't see how they could have legitimately gone out and looked for other buyers either of Clearwire or spectrum.
We also believe that the board is under Sprint's control and therefore the actions taken by the board have to date only benefited Sprint and perhaps ultimately SoftBank.
Donna: And you don't think the management team before the special committee was formed was active in the market trying to seek spectrum buyers or wholesale buyers?
Dave Schumacher: Well what we do know is that at least until the third quarter of this year management was pursuing a business plan geared towards building out its network and that was a business plan that we believed in and that we invested in.
And at some point that activity stopped and we believe that it was stopped because of the pending Sprint SoftBank merger.
Igor:I was just wondering why do you think that McCaw and the other equity holders, Comcast, Bright House et cetera are agreeing to this price?
Dave Schumacher We honestly can't speak for their motivations but what we do know is that we as minority shareholders believe that the Sprint offer is grossly unfair, it's coercive and ultimately is not in the public interest.
Joan:Yes I'm wondering if you would explain - I mean you've filed your suit, now you've also taken action to have it become a class action suit. What are the implications of that? Are you finding any support when you called around to find out how people are voting do they seem to be receptive to your entreaties or not really care?
Dave Schumacher:Right, first on the class action suit, there have been other suits filed and we believe that our position was a strong enough one to take what will hopefully be the lead of the class.
We think as I've said that the offer on the table is grossly unfair to all of the minority shareholders and therefore are aggressively moving forward to do whatever it takes to prevent an unfair offer from going forward.
We have spoken to some of the larger shareholders and the universal response from them has been that they are disappointed and dissatisfied with the offer. We understand that there has been some meetings between Clearwire and some of the shareholders. Our intelligence tells us that it didn't go very well.
Joan:Not go very well?
Dave Schumacher:All those meetings did not go very - those meetings did not go particularly well but what we do know is that all of the shareholders that we have talked to are very disappointed in the offer that's on the table.
Joan:Okay so in that issue of full disclosure it would appear that they are talking to some people but not to other people and giving their song and dance.
Dave Schumacher:Yes we don't know what Clearwire is doing or is not doing so I really can't comment on that.
Joan: Like they're not returning my phone calls.
Dave Schumacher: Yes well - yes well we haven't spoken to them either although I'm sure they're well aware of our position but - and we don't know which stockholders they have talked to or have not talked to.
Joan:So how do you know the meetings haven't gone well if you know - if you don't know who they've spoken with?
Dave Schumacher:From those that we have spoken to they have heard from other sources themselves that not all of the meetings have gone particularly well.
Joan:And what does - can you define what that means, they haven't gone well? I mean what is the song and dance they've given that people have rejected?
Dave Schumacher:Yes I don't know all of the details so I really can't comment beyond what I have already said "not all of the meetings have gone particularly well".
Joan:What are the odds we'll be successful in having this become an expedited action in the Delaware Court?
Dave Schumacher:We think our chances are very good.
Gerard Hallaren:You are about to file with the FCC. Could you take a moment and tell us what you think the FCC stance might be or what you hope to accomplish with them?
Dave Schumacher:Right, well I think there's a couple of arguments that we'll make and that the - that lead us to believe that the FCC will take a hard look at these transactions.
The first is that we happen to believe that this transaction will not benefit competition but will in fact harm competition by effectively moving - removing a potential competitor from the market, so that's point one.
Point two is that we believe that the Sprint offer will set a price for spectrum that is so far below the current market price that it could adversely impact future auctions of spectrum by the Federal Government because we believe that it is possible that future bidders on for that spectrum will bid a price keyed off of this very low Sprint offer, which if that occurs will result in lower purchase prices realized by the Federal Government and harmful to the taxpayers, which ultimately could be contrary to some of the current policy goals of the FCC, which is to allocate spectrum to the users that require it.
So we think that the FCC is going to take a hard look at the adverse impact that this particular transaction could have on the U.S. taxpayers.
Wrap up/Call Summary :
Gerard Hallaren: David Schumacher, Crest's general counsel outlined his case and concerns regarding the fairness and the coercion of Sprint's financing options for Clearwire.
Crest, Janco, and many shareholders are very disappointed by this deal and would argue for a higher price or a fair process.
Part of that fair process would treat Intel, Bright House Networks and Comcast as if they were Sprint affiliates and remove them from the voting pool, which would be the - which would take 13% off the table.
I'm not sure, is there anything you would like to add to that David?
David Schumacher:Hopefully people have benefited from our explanation of Crest Financial's position in this potential take over.
Gerard Hallaren:Well thank you David for your time and thank you to everyone else for attending.
Additional disclosure: Janco Partners has no business affiliation with Crest Financial, Clearwire, or Sprint and received no compensation from any of them for this call or anything else.