Investor wants Clearwire to sell spectrum, prevent a Sprint buyout
Clearwire's frequencies are worth $6 billion to $9 billion, more than the current value of the company, the investment company says
Fri, November 02, 2012
IDG News Service (San Francisco Bureau) — A major investor in WiMax operator Clearwire told the company's board on Thursday to sell its excess spectrum for up to US$9 billion to prevent Sprint Nextel from buying out the company at a discount.
Sprint, which formed Clearwire in 2008 through a joint venture with Clearwire's predecessor, earlier this month increased its ownership of the company to 50.8 percent. That restored Sprint's majority ownership, which it had stepped back from in recent years. Sprint is also Clearwire's main wholesale customer, relying on the carrier's WiMax network for much of its current 4G data service.
In a letter to Clearwire's board of directors on Thursday, investor Mount Kellet Capital Management said it feared Sprint was trying to force Clearwire into a position where Sprint could buy the company outright at a depressed stock price. The board should prevent that move by selling off some of its vast wireless spectrum holdings that it doesn't need, wrote Jonathan Fiorello, Mount Kellet's chief operating officer.
Clearwire is planning to build an LTE network in addition to its WiMax system, with LTE service going live in some cities next year. But the company has an estimated funding gap of $1 billion, and only enough cash to keep building the network for approximately one year, Fiorello wrote.
That pending cash shortage is holding Clearwire's price down, and Sprint may be looking to prolong the company's financial woes until it can buy Clearwire at a discount, Fiorello said. At the moment, a standstill agreement prevents Sprint from buying out the rest of the company without broader approval. Once it expires, Clearwire could be faced with no alternative but to sell out to Sprint at a depressed price, he wrote.
Instead, Clearwire should solve its own funding shortage by selling spectrum licenses it doesn't need, Fiorello wrote. The company has about 160MHz of spectrum in most of the markets where it operates, and has said it only needs 80MHz to 100MHz, according to the letter. (By way of comparison, AT&T and Verizon Wireless both operate their LTE networks on 20MHz of spectrum in most areas.)
In the current market for spectrum, Clearwire's unused spectrum could bring in between $6 billion and $9 billion, "an amount that exceeds the current enterprise value of the company," Fiorello wrote.
Sprint and Clearwire declined to comment on the letter.
Last week Clearwire posted an operating loss of $333 million for the third quarter, on revenue that was roughly flat from a year earlier. The company has more than $4 billion in long-term debt. Its stock closed at $2.18 on Friday, up $0.07 on the day but at about the same price it commanded a year ago.
Such a sale would be shortsighted for Clearwire, according to Roger Entner, an analyst at Recon Analytics. All spectrum is getting more valuable, he said.
"If you have any choice, you're not selling it," Entner said. "In the long run, everybody will need all the spectrum they have, twice over."
Clearwire has tried to sell its spectrum before and couldn't find buyers, because its frequencies are outside the bands most U.S. carriers use. But more advanced versions of LTE will let carriers combine different frequencies together, making it easier to take advantage of the Clearwire licenses, Entner said.
Sprint is more likely to be Clearwire's savior than its doom, though it won't be able to buy Clearwire unless Softbank's recently proposed US$20 billion investment in Sprint is approved, Entner said.
However, a spectrum sale might be the best option from the perspective of an investor that wants to earn a return on its money soon, he added.
If Clearwire's finances reach the breaking point, Sprint may get what it needs anyway, according to Gartner analyst Phillip Redman. The most valuable spectrum licenses in Clearwire's portfolio came from Sprint and might just go back to Sprint if the company were dissolved, he said. "I think Sprint would like to unwind its spectrum--may be easier to do after bankruptcy," Redman said in an email interview.
Whatever happens to Clearwire and its spectrum, consumers are likely to win out in the end, Recon's Entner said. The spectrum will still be there, and whatever service provider owns it will make use of it, he said. "One way or another, they'll be fine."