Sprint Nextel (NYSE:S) may be worried about potential suitors courting its partner Clearwire (NASDAQ:CLWR), but another investor, Mount Kellet Capital Management, is very worried about Sprint buying out Clearwire for less than it is worth.
WiMAX operator Clearwire only has enough cash to continue its TD-LTE build for about one year, which could enable Sprint to acquire Clearwire "at a price that reflects the company's unnecessary distress rather than the full value the stockholders could achieve if the buildout is finished or is clearly capable of being finished," said Jonathan Fiorello, COO of Mount Kellet, in a letter to Clearwire's board of directors.
The letter, which Mount Kellet submitted to the U.S. Securities and Exchange Commission, suggests that the best way Clearwire can retain its independence is to raise money by selling some of its spectrum. Clearwire possesses spectrum in a single bandwidth--the 2.5 GHz to 2.6 GHz frequency band known as 3GPP Band 41--and holds more than 130 MHz on average, including 160 MHz on average in the top 100 markets.
Mount Kellet estimates Clearwire's spectrum is worth at least $0.38 per MHz POP. The investment firm calculated that Clearwire could raise gross proceeds of $6 billion to $9 billion by selling what it terms "excess spectrum." The firm cited Clearwire CFO Hope Cochran's comments during the operator's fourth-quarter 2011 conference call, when she indicated that the company only needs 80-100 MHz per market for its operations, which Mount Kellet took to mean that the rest of Clearwire's spectrum holdings are expendable.
"Holding onto excess spectrum and letting that value accrue to Sprint, so that Sprint can purchase the company's excess spectrum cheaply would be an egregious violation of stockholder interests," said Mount Kellet.
The investment firm claims to own 53.2 million shares, or 7.3 percent of Clearwire's outstanding voting stock that is not controlled by Sprint Nextel, pro-forma for Sprint's acquisition of shares from Eagle River Holdings. The Wall Street Journal reported that Mount Kellett has owned shares of Clearwire for nearly a year, but recently switched to 13D, or "beneficial ownership," status under SEC rules so it could publicly harangue Clearwire.
Sprint recently increased its ownership in Clearwire from 48 percent to 50.8 percent by purchasing about $100 million worth of Clearwire stock from Eagle River Holdings, the investment firm owned by wireless pioneer Craig McCaw. Yet Sprint has been emphatic that its majority stake does not give it control over Clearwire.
Nonetheless, numerous analysts have called the investment a likely step in a process that could eventually result in Sprint controlling Clearwire. Fitch Ratings also indicated Sprint's increased stake could be a preemptive move to complicate matters for any other companies pondering a Clearwire takeover.
Mount Kellet noted in its letter that a so-called standstill agreement preventing Sprint from acquiring 100 percent of Clearwire, unless approved by a majority of both the board and shareholders unaffiliated with Sprint, expires at close to the same time next year that Clearwire's funds will likely be depleted.
Clearwire recently slashed the number of TD-LTE sites it plans to deploy by mid-year 2013 to 2,000 sites from 5,000 sites, resulting in full-year 2012 capital expenditures of $125 million to $175 million, a decline of more than half from previous capex guidance of $350 million to $400 million. For 2012's third quarter, Clearwire, which has more than $4 billion in long-term debt, reported an operating loss of nearly $333 million, an improvement over the $399 million lost one year earlier.
Mount Kellet's call for Clearwire to sell its spectrum comes at a time when the 2.5 GHz band is looking considerably more attractive as operators around the world are beginning to use it for new wireless broadband networks.
In discussing the operator's third-quarter results, Clearwire CEO and President Erik Prusch noted that China recently allocated 190 MHz of 2.5 GHz spectrum to Clearwire's preferred spectrum band, 3GPP Band 41, for deployment of TD-LTE networks. Softbank of Japan, which is buying a 70 percent stake in Sprint for $20.1 billion, has deployed TD-LTE in Band 41 as well. As more TD-LTE networks are deployed globally in the 2.5GHz band Clearwire expects to "realize significant economies of scale and provide a valuable competitive advantage," Prusch said.
Though now might be the most opportune time for Clearwire to raise money from a spectrum sale, the operator is unlikely to want to divest itself of any frequencies, given that spectrum is widely seen as the struggling company's most valuable asset and one that could be fully utilized sooner rather than later given mobile data traffic trends.
Prusch said last week at an industry conference that 60 percent of the traffic on Clearwire's network is video, and he expects growing demand for video will create more retail business for the operator because it offers less-expensive data plans than many of its competitors. "We offer $45 per month for unlimited data," Prusch said. "No other operator can do that."
A recent report from IDC said Clearwire's vast spectrum holdings position it "to generate much greater capacity and better network performance by virtue of a significantly fatter pipe vis-à-vis competitors."
For more:
- see this Mount Kellet letter
- see this Mobile Business Briefing article
- see this Kansas City Business Journal article
- see this Network World article
- see this Wall Street Journal article (sub. req.)
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