Report: Sprint could pay $1B to rip out Huawei's kit from Clearwire's network

Tools

If Japan's SoftBank wins control of Sprint Nextel (NYSE:S), it has pledged to remove network gear from Huawei that Clearwire (NASDAQ:CLWR) uses in its network, a step that, according to a Wall Street Journal article, could cost up to $1 billion. The report, citing unnamed sources familiar with the matter, said the U.S. government wants Sprint to remove Chinese gear from Clearwire's network.

Clearwire has said that Huawei's gear is deployed at the edge of its network, while its core network equipment is provided by domestic vendors Cisco and Ciena. Clearwire picked Huawei as one of its RAN vendors after getting approval from the U.S. government.

However, a government report last year found that Huawei and ZTE pose a security risk because their equipment could be used for espionage. The report, from the House Permanent Select Committee on Intelligence, recommended the U.S. block acquisitions and mergers involving the two firms and also recommends that the U.S. government and U.S. companies avoid using equipment from the two Chinese companies. The companies have vehemently denied all of the allegations against them.

A Sprint spokesman declined to comment. Clearwire representatives did not immediately respond to a request for comment.

The Journal report also said that SoftBank has agreed to give the government the right to approve one of the directors it names to Sprint's board, and that director will be responsible for handling national security issues.

Indeed, as Reuters noted, Sprint disclosed in a regulatory filing with the Securities and Exchange Commission on May 1 that Sprint and SoftBank expect to enter into a "network security agreement" with the Departments of Justice, Defense and Homeland Security "to address certain national security, law enforcement, and public safety concerns related to Sprint's wireless and wireline operations." In that filing, Sprint said "it is anticipated that at all times one of the directors designated by SoftBank, subject to U.S. government approval, will serve as the 'Security Director' pursuant to the anticipated Network Security Agreement."

The Committee on Foreign Investment in the United States, an interagency body headed by the Treasury, is conducting its private review of the deal, which is standard practice for when any foreign entity seeks ownership of a U.S. company. SoftBank continues to hold discussions with government officials and agencies about the transaction, and Sprint still plans to hold a shareholder vote on SoftBank's $20.1 billion proposal to purchase 70 percent of Sprint June 12.

In related news, Dish Network (NASDAQ: DISH) set up a website, nationalsecuritymatters.com, to highlight its concerns about national security as part of a public relations campaign aimed at undermining SoftBank's bid. Dish has made a $25.5 billion counterbid for Sprint. 

"If the news reports are accurate, SoftBank's agreement to an extraordinary board structure and the concerns of CFIUS with respect to the use of Chinese-manufactured equipment on a foreign-controlled Clearwire network, which reportedly could add as much as $1 billion to the cost of the proposed SoftBank-Sprint transaction, confirm the serious national security risks of SoftBank acquiring Sprint and its wireless and wireline assets of national strategic importance," Stanton Dodge, Dish's executive vice president and general counsel, said in a statement. "We remain concerned, however, that these reported steps do not adequately protect our national security interests, especially with respect to Sprint's critical fiber backbone network and Sprint's extensive contracts to provide important telecommunications services for government, law enforcement and defense customers."

For more:
- see this WSJ article (sub. req.)
- see this SEC filing
- see this Reuters article
- see this separate Reuters article
- see this Dish site

Related Articles:
Reports: Dish lines up financing for $25.5B Sprint bid
Dish's Ergen: We have backup options in wireless if we lose Sprint deal
SoftBank CEO points to TD-LTE expertise as edge on Sprint deal
Dish continues sparring with SoftBank over competing Sprint bids
It's Dish's Ergen vs. SoftBank's Son in a war of words over Sprint
Report: Worries about Chinese vendors weigh on Sprint/Softbank deal