It’s been a turbulent October for wireless carriers. Industry giant Verizon (NYSE:VZ) has fallen nearly 2 percent for the month. Softbank buys a 70 percent share in Sprint (NYSE:S) and the stock price is up nearly 8 percent. AT&T (NYSE:T) is down over 7 percent for the month. Shares of MetroPCS (NYSE:PCS) are down nearly 10 percent, while Clearwire (NASDAQ:CLWR) has rocketed up over 60 percent.
Pointing out that wireless carriers are fighting to re-position themselves in the face of changing consumer habits and a rapidly evolving technological landscape would be like pointing out that water is wet. That being said, water is wet.
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The Softbank acquisition of Sprint in particular has attracted a lot of attention from investors. Sprint took a $20 billion cash infusion as part of the deal, and will be building out its wireless network and paying down its debt with the money. One of Softbank’s concerns in the deal regarded Sprint’s access to adequate spectrum. To squash any uncertainty, Sprint paid $100 million to Clearwire founder Craig McCaw for for an additional 5 percent stake in the smaller carrier, bringing Sprint’s share to a controlling 50.8 percent.
It’s important to note that this does not give Sprint operational control of Clearwire. However, Sprint does get to appoint seven out of 13 board members, one of whom is independent. The move raised a few eyebrows, but a total buyout remains off the table given the Softbank deal is still going through the works. Sprint’s arguable control of the board, though, does pump some confidence into the company’s ability to control access to Clearwire’s generous wireless spectrum holdings.
According to Bloomberg, Sprint CEO Dan Hesse said that Sprint doesn’t need to pursue a buyout of Clearwire because, “we have a commercial arrangement with Clearwire, we have a contract and they provide us with WiMax 4G service and they are beginning to build out LTE 4G services.”
However, more recently Hesse has been eyeing other Clearwire investors. “Any time there’s an opportunity at the right price to take out a strategic investor, we will.” Other corporate investors include Intel (NASDAQ:INTC), Comcast (NASDAQ:CMCSA), and Time Warner Cable (NYSE:TWC). But Hesse doesn’t think these companies want to hold onto their stakes much longer.
“The cable companies were thinking of a mobile strategy, times have changed and they don’t have an interest in that anymore. Intel was interested in putting WiMax 4G chips in all sorts of devices, they don’t have that interest anymore. We are really the only strategic investor.”
If that’s so, he’s certainly not the only Clearwire investor deeply interested in the future of the company.
Mount Kellett Capital Management, which owns about 7.3 percent of Clearwire’s voting shares, sent a letter to the company on November 1 detailing its concerns about the Sprint acquisition, and its vision for the future.
The letter makes for good reading, and the point is pretty clear: we don’t think Sprint is going to act in the best interest of shareholders.
To paraphrase, Mount Kellett points out that Clearwire’s build-out program faces an estimated funding gap of $1 billion, and the company will run out of cash for the program in about a year. “Perhaps not coincidentally,” Sprint’s standstill agreement prohibits from outright buying Clearwire without majority approval of both the board and stockholders that are unaffiliated with Sprint expires at about the same time.
Given this, Mount Kellett suspects that Sprint is going to wait for the year — and Clearwire’s cash — to run out, which will put the company in distress, before it swoops in with a buyout proposal that would value the company below what it’s really worth.
Mount Kellett proposed that, in order to avoid distress and provide funding for Clearwire’s build-out plan, the company sell some of its excess spectrum capacity at a benchmark price of $0.38 MHz POP, netting the company billions in cash. (We have not confirmed the value of Clearwire’s excess wireless holdings.)
“Once the Company’s liquidity situation is resolved, not only will the value of the Company’s remaining spectrum be properly highlighted, but also the Company will have a multitude of options on how to proceed,” reads the letter.
Mount Kellett goes on to suggest that the business arrangement between the two companies reflects a conflict of interest for Sprint. The letter concludes: “We are hopeful that the Board already recognizes its duties, and that the Board can and will do the right thing.”
An interesting argument, at the very least. The stock is up 4.5 percent in late afternoon trading, presumably on the news.
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