Sprint reduces voting rights in Clearwire to avoid debt issues

Sprint Nextel (NYSE:S) reduced its voting stake in Clearwire  (NASDAQ:CLWR) to below 50 percent in a bid to protect its balance sheet and clear the air with investors over potentially being held liable should Clearwire default on its debt obligations.

According to a filing with the Securities and Exchange Commission, Sprint reduced its voting rights in Clearwire from around 54 percent to 49.8 percent. Importantly, Sprint maintained its 54 percent economic stake in Clearwire. Last year, analysts worried that as Clearwire took on more debt, Sprint might be on the hook if the mobile WiMAX operator defaulted, since Clearwire could be considered a subsidiary.

"By taking this action, Sprint is proactively providing protection and flexibility with respect to its debt agreements and eliminating ongoing investor concerns about any potential cross-default risk," Sprint spokesman Scott Sloat told FierceWireless. "This action only affects Sprint's voting interest as a shareholder of Clearwire and does not affect Sprint's other governance rights, nor does it reduce Sprint's economic interest in Clearwire, which remains the same."

Clearwire raised $1.33 billion in a debt funding round in December, although Sprint, which is Clearwire's largest wholesale customer, decided not to buy more of Clearwire's debt.  Sprint has remained noncommittal about providing more funding to Clearwire, although the relationship between the companies has improved since they inked a revised wholesale pricing deal in which Sprint will pay Clearwire $1 billion over the course of this year and in 2012.

"Sprint's significant increase in capital investment and lack of EBITDA growth are likely to materially reduce free cash flow for the next two years so it makes sense for Sprint to protect the balance sheet further," BTIG analyst Walter Piecyk wrote in a research note. "It might also provide Sprint greater balance sheet flexibility if it elects to make additional large strategic cash payments or acquisitions."

According to Piecyk, Sprint's ability to gain control of Clearwire is "restricted by a standstill agreement that its strategic partners have under the shareholder agreement. That means that Sprint will need the consent of its strategic partners to take control of Clearwire whether they own 54 percent or 49 percent. Today's filing has no impact one way or another on Sprint's ability to purchase Clearwire and does not forfeit any of Sprint's rights."

For more:
- see this SEC filing
- see this BTIG post (registration req.)

Related Articles:
Sprint CFO remains noncommittal on Clearwire funding, hints at LTE
Clearwire COO sees LTE switch on horizon, but details cloudy
Clearwire to outsource WiMAX network to Ericsson
Hesse: Sprint has talked to Clearwire about hosting network traffic
Clearwire discontinues spectrum sale - at least for now
Sprint to pay Clearwire $1B over two years in revised wholesale partnership
Clearwire will halt branded smartphone plans, avoid new debt