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Sprint's investment designed to scare off Clearwire suitors

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Sprint Nextel (NYSE:S) may not yet have Clearwire (NASDAQ:CLWR) in the palm of its hand, but its decision to buy Eagle River Holdings' stake might buy Sprint some time by scaring off any other companies pondering a Clearwire takeover.

Sprint's announcement last week that it's purchasing about $100 million worth of Clearwire stock from Eagle River Holdings, the investment firm owned by wireless pioneer Craig McCaw, "is likely another step in an evolutionary process that could eventually result in the company gaining sole control of the wireless network operator," said Fitch Ratings. "At the very least, Sprint's link to Clearwire would be stronger, and therefore complicate things a bit for those companies considering a move to buyout (sic) Clearwire."

The transaction would give Sprint a 50.4 percent majority voting stake in Clearwire, vs. the 48 percent it currently controls. However, the transaction would not increase the seven board seats that Sprint currently controls on Clearwire's 13-member board because the board seat designated by Eagle River will get appointed by Clearwire's Nominating and Governance Committee, not Sprint.

"Sprint believes that their existing seven votes combined with the now three independent votes give them a supermajority voting power. This of course assumes that an independent board members will vote the same way as the Sprint directed board members," said BTIG analyst Walter Piecyk. He noted Sprint now can designate its seventh board seat, currently held by Chairman John Stanton, as an independent designee because there are currently three independent directors.

Yet Sprint CFO Joe Euteneuer has indicated that despite the acquisition of Eagle River's holdings, Sprint would be unable to block a spectrum sale by Clearwire to AT&T (NYSE:T), Dish Network or anyone else that might be interested.

Dish may be the company Sprint most fears getting its hands on Clearwire. Charlie Ergen, Dish's founder and chairman, is rumored to already hold in excess of $900 million of Clearwire's debt, according to Tim Farrar, head of Telecom, Media and Finance Associates.

Fitch and Piecyk both noted that Sprint previously had majority control of Clearwire but reduced its voting interest below 50 percent during June 2011 in order to eliminate potential cross default risk. "Sprint could choose a similar route to reduce only its voting interest if Clearwire struggles more financially," said Fitch.

Similarly, Piecyk said, "We would expect Sprint to surrender Clearwire shares to take their stake back under 50 percent if they are unable to take control or materially fund Clearwire before the closing of the Softbank transaction."

It is widely believed--despite Sprint CEO Dan Hesse's contention that the Eagle River deal was not a condition of its deal with Softbank--that Clearwire and its vast 2.5 GHz spectrum holdings are playing a crucial role in the deal negotiated between Japan's Softbank and Sprint, in which Softbank will invest $20.1 billion for a 70 percent stake in Sprint.

Softbank President Masayoshi Son initiated the investment deal with Sprint about two months ago when he traveled to Kansas City to meet with Hesse, according to Bloomberg. The pending deal was code-named "Swan." Son and Hesse have a long history, given that Son invested $100 million during 2000 in Terabeam Networks, a laser communications company Hesse was running.

Clearwire holds a healthy 120 MHz of spectrum in many markets across the United States. Softbank and Clearwire are both part of the Global TD-LTE Initiative that was formed in February 2011, and there are natural synergies and scale that could be exploited between Softbank's own TD-LTE deployment in Japan and Clearwire's TD-LTE ambitions. Clearwire's spectrum is the key to unlocking growth opportunities for Softbank in the United States, said Chris Nicoll, principal analyst at Analysys Mason.

"The 2.5 GHz spectrum licensed by Clearwire could provide 50-100 Mbps Internet service with the proper technology investments (TD-LTE), and Softbank can provide network expertise in this area. Clearwire has had funding problems, but would be a perfect fit for Softbank's corporate strategy. Sprint re-taking control of Clearwire would be a logical and potentially game-changing step," said Nicoll.

A deal that gives Sprint operating control of Clearwire "would allow Sprint to fully integrate those assets into its network, thus eliminating operating expenses, [allowing them to] control spectrum resources longer term and facilitate execution of its strategic plans," said Fitch.

But throwing a potential wrench into any plan involving Clearwire is the fact that the latter is burning through cash at an annual run rate of about $700 million to $800 million while it works to migrate from WiMAX to TD-LTE.

"Whether the company can improve its cash-generation and develop a sustainable long-term wholesale business model for wireless broadband services is key to sustainability. Clearwire's inability to reach additional material strategic agreements for 4G LTE capacity and spectrum with other operators is a significant cause for investor concern," said Fitch.

For more:
- see this Fitch release
- see this BTIG blog post (reg. req.)
- see this TFM Associates blog post
- see this Bloomberg article
- see this Analysys Mason commentary

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UPDATED: Sprint will play a $20.1B role in Softbank's LTE vision