The Long Awaited Sprint-Clearwire Deal Is Closer Than Ever

By Stephen D. Simpson, CFA | December 12, 2012 AAA

Given large ongoing losses and sizable funding needs, most investors have considered it a given that Clearwire (Nasdaq:CLWR) will be acquired. With its approximate 50.5% ownership stake, meaningful high-end spectrum needs and a recent influx of capital from Japan's Softbank, Sprint (NYSE:S) was seen as the most likely candidate. Now it seems like Sprint is finally making its move, but the market reaction and relative valuation suggest Sprint may have some work left to do.

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A Deal At Last
Based on a regulatory filing, Sprint has indicated that it wants to acquire the remaining 49.5% of Clearwire at $2.90 per share in cash. In addition to the buyout bid, the Sprint offer included an offering for interim financing on the order of $800 million.

But Probably Not a Done Deal
Clearwire shares have moved up from sub-$1 lows this summer on expectations of a buyout, which mitigates the seemingly small 6% premium that Sprint's offer represented over Wednesday's closing price. Even still, this is not an especially robust offer.

At this price, Sprint seems to be offering Clearwire about 20 cents to 22 cents per MHz-POP (Mhz-POP reflects the amount of spectrum owned by a company, multiplied by the population covered). That makes this a relative bargain compared to what Dish Network (Nasdaq:DISH) paid for DBSD (about 24 cents) and Terrestar (21 cents) or what AT&T (NYSE:T) paid for NextWave (36 cents).

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Perhaps not surprisingly, the market expects Sprint to do better, and the share price has already moved beyond the implied value of the deal. At a minimum, it would seem like a 10% premium to this initial offer (close to parity with the Dish deals) would be reasonable for Clearwire shareholders. What's more, given that this deal requires a majority of shares to be voted in favor (excluding Sprint's holdings), I wouldn't underestimate the potential for activist shareholders agitating for a higher price.

Remember, too, that Sprint paid a blended average of $2.97 per share for Eagle River's stake (the stake owned by Craig McCaw). While this is not a like-for-like deal given the mix of Class A shares (for which Sprint paid $2) and Class B shares (for which Sprint paid $13.98), I expect shareholders to never the less consider that an argument for a higher price.

At a Better Price, Everybody Wins
I continue to believe that Sprint needs some sort of deal to become a more viable competitor to AT&T and Verizon's (NYSE:VZ) Verizon Wireless. Whether that is a deal for Clearwire or MetroPCS (NYSE:PCS) it doesn't make as much of a difference to me, though I think Clearwire is the logical way to go given Sprint's spectrum needs, Clearwire's financing needs and the potential equipment-buying synergies with Softbank's other mobile phone assets.

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The Bottom Line
That said, that's no reason for Clearwire shareholders to get bullied into a deal that undervalues the company's assets. I believe Sprint could go meaningfully higher with its bid without destroying the synergies or logic of the deal, so I would think that $3.25 to $3.50 could ultimately be the place where a deal could get done.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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