Sprint yesterday announced it will purchase the remaining 47 percent of Clearwire it does not already own for $2.97 per share or $2.2 billion. This values Clearwire at $10 billion, $4.5 billion in equity and $5.5 billion in assumed debt. Interestingly, $2.97 per share is the exact price that Sprint paid in the previous transaction with Eagle River, Craig McCaw's company, for its shares in Clearwire.
The transaction is expected to be closed after the acquisition of Sprint by Softbank. In the interim, Sprint is providing financing for Clearwire so that Clearwire can continue to build out its TD-LTE network while the transactions are being evaluated by the FCC.
The FCC should look at the Softbank, Eagle River and Clearwire transactions at the same time and in one proceeding as they are intricately linked. Without Softbank financing and the financial muscle of the third largest Japanese operator, Sprint would not be able to conclude the transaction at this time, but would have had to wait until the financial health of Sprint would have recovered on its own, which could have been quite a long time. When we compare what Sprint is paying for Clearwire to other recent transactions we have to admire Dan Hesse's art of the deal--others paid twice as much plus Sprint is rid of a cantankerous partner.
If the FCC approves this transaction, Sprint will be the largest spectrum holder in the United States with an average of just over 200 MHz of spectrum across the country. According to the National Broadband Plan, there is 547 MHz of spectrum useable for wireless broadband. If this transaction is approved, Sprint will own more than a third of the available spectrum allocated by the U.S. government, but with with less than one sixth of U.S. customers. That gives Sprint (on average 200 MHz and 56 million subscribers) the chance to use roughly 3.57 MHz of spectrum to support each of their subs. Compare that to a Verizon (on average 105 MHz and roughly 100 million subscribers) which has only 1.05 MHz of spectrum to support each customer's uses. More spectrum means faster speeds, more capacity, and a stronger competitive position.
It will be interesting to see if the FCC evaluates all of the spectrum licensed to Clearwire as the agency reviews the transaction. It will also be interesting to see if the largely irrelevant and arbitrary discussion going on inside the beltway about the relative value and utility of above and below 1 GHz spectrum will continue. As Dr. Saw, the CTO of Clearwire, often said, in an urban environment, a wireless network using 700 MHz and 2.4 GHz will look almost identical. Furthermore, a 2.4 GHz network will have the advantage of less interference compared to one operating on 700 MHz. Yes, in rural markets 2.4 GHz is more expensive to build out than lower bands but once built out, has equivalent carrying capacity. Further, using 2.4 GHz in conjunction with other spectrum such as 800 MHz or 1900 MHz in rural markets makes the perceived weakness of 2.4GHz in rural markets moot. Indeed, with this acquisition, Sprint could rival AT&T's VIP program by bringing high-speed data to rural customers. Sprint will certainly have the spectrum to do so and its Japanese parents have the financial means to do so.
By being by far the largest spectrum owner in the United States, owning roughly as much spectrum as AT&T and Verizon combined, while having a quarter of the subscribers, Sprint will have fare more flexibility to develop its network and business plans to compete with Verizon and AT&T than even T-Mobile, which will have about the same amount of spectrum as Verizon and AT&T with half the subscribers. As spectrum is the fuel on which these operators are running, the change in the competitive landscape can be truly transformational. With so much idle spectrum, Sprint can build an LTE Advanced network the right way as it has considerably less traffic on its network. Having more spectrum than its competitors will allow Sprint to offer a potentially killer combo to consumers--lower prices and faster speeds.
Softbank is taking over a radically different and streamlined operation from the stand-alone Sprint. The spectrum situation with an often obstinate and almost self-destructive Clearwire has been resolved by this transaction. There are no more excuses for Sprint. A deep-pocketed Japanese parent that is willing to invest and put its money where its mouth is, a spectrum situation that is the envy of every other carrier, positions Sprint to succeed.
This week's market developments highlight that the need for spectrum is real and not unique to Verizon or AT&T. The developments also highlight that the U.S. government is late to the game in providing the fuel needed to power the mobile revolution. While hearings are held to debate whether or how the broadcast incentive auctions should work, companies with customers to serve have to find alternate pathways to more spectrum. Were government action to occur as quickly as the market evolves, the United States would not only be ahead of their global competitors with respect to spectrum-based innovation, the country would be much closer to realizing the administration's vision of a digitally connected electorate.
The table has turned: While Verizon and AT&T have the advantage of having more customers on their networks today compared to Sprint, they also face fewer opportunities for huge infusions of more spectrum while at the same time supporting more data-intensive users. Sprint and T-Mobile have the future on their side--if only they execute well.
2013 will be an exciting year for broadband, especially wireless broadband. Stay tuned.
Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.