Will A Sub-$3 Bid Get The Deal Done For Sprint?

By Stephen D. Simpson, CFA | December 17, 2012 AAA

When word came out last week that Sprint (NYSE:S) had approached Clearwire (Nasdaq:CLWR) with a $2.90 per share cash bid, the common reaction was that Sprint would have to do better. Well, Sprint has done better, and the Clearwire board has unanimously agreed, but I suspect that an extra 7 cents per share is not going to thrill Clearwire's investors.

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Sprint Comes Back With a Higher Bid ... but Only Just
Clearwire's stock not only moved up on news that Sprint had unveiled a bid last week, but the stock moved more than 15% beyond the $2.90 bid price on the expectation that Sprint would have to offer more to get non-affiliated shareholders (and the board of Clearwire) to agree to the deal.

Well, Sprint has in fact offered more, but only about 2% more as the bid now stands at $2.97. Although certain Clearwire shareholders had come out claiming that they wouldn't settle for anything close to Sprint's offer, word also came out that Softbank (Sprint's new financing partner) wouldn't permit a bid higher than $2.97.

Sprint's $2.97 bid puts the value of Clearwire's spectrum near the lower end of the range established by recent deals from Dish Network (Nasdaq:DISH) and AT&T (NYSE:T), but not so low that it's an outright robbery. Even still, this should be an easily digestible deal for Sprint, as the company will likely be able to cut at least $500 million in annual Clearwire operating expenses without much difficulty.

SEE: Analyzing An Acquisition Announcement

So Why Did Clearwire Say Yes?
It's worth noting that the board of Clearwire unanimously agreed to this deal, as did Comcast (Nasdaq:CMCSA), Intel (Nasdaq:INTC) and Bright House. The presentation and conference call offered by Sprint and Clearwire with the deal announcement may offer some insight as to why.

Clearwire's CEO stated that the company has been looking at various alternatives for the company over the past two years and saw no real other options. Because of Sprint's holdings, selling the company to a strategic buyer was a non-starter. What's more, and more troubling for shareholders, the company apparently has only limited access to additional debt financing these days.

Assuming that's true, it puts dissenting shareholders in a tough position. Sprint needs to get a "yes" vote from about one-quarter of the unaffiliated shares and there will definitely be plenty of agitation to hold out for a better price. But how much negotiating leverage does Clearwire really have? They can't get another bidder, and if they truly cannot get additional financing Sprint can simply wait for them to run out of money (and then presumably offer even less).

I couldn't ascertain whether or not Clearwire shareholders would be entitled to appraisal rights in this case, but that would likely be dissenters' last best hope. Shareholder suits could make this painful and time-consuming for Sprint (and Softbank), but the lack of options creates some harsh realities. While it might save Sprint some headaches if it could offer a bid in the $3 to $3.25 range, if Softbank is adamantly against that, then Sprint too has few options.

SEE: Mergers And Acquisitions: Understanding Takeovers

The Bottom Line
While Sprint and Clearwire dutifully pointed out the greater-than-100% premium this offer represents relative to Clearwire's price before the Sprint-Softbank tie-up, I highly doubt Clearwire shareholders will care. For years now, Clearwire has been selling a story about how the company had very valuable and almost-impossible-to-replicate spectrum assets, and yet the company is selling out at a price that really doesn't value that spectrum any more highly than anybody else's spectrum.

It's almost impossible to see how this story has a happy ending. Sprint apparently can't offer a higher bid (even if it wanted to) and Clearwire really has nowhere else to go. As a result, this unsatisfying marriage of inconvenience may be as good as the deal gets, even if it does seem to undervalue Clearwire's spectrum assets.

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

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