10.07.11

Sooner, not later…

Posted in Financials, LightSquared, Operators, Spectrum at 4:27 pm by timfarrar

So Sprint’s management team did a great job of living up to Dan Hesse’s introductory admonition in their Network Vision Strategy Update today, when they failed completely to explain either their near term cash requirements (other than to suggest they will be out raising capital “opportunistically”) and how this will be impacted by the iPhone, or how they are going to deploy a competitive LTE network with only 2x5MHz of PCS G-block spectrum (which they admit will run out of capacity by the time the network deployment is complete in 2014). Unsurprisingly, the audience applauded when this plan was described as “ridiculous” by one questioner.

In their presentation, Sprint management took every opportunity to tout their intention to use hosted spectrum from LightSquared over the wholesale access currently available on Clearwire’s network, because of the “better economics” this provides for Sprint shareholders. When pressed on whether they would provide further support to Clearwire, Sprint basically confirmed the hypothesis advanced by Pardus Capital earlier this year, that Sprint intends to drive Clearwire into bankruptcy, in the expectation that Sprint will be able to acquire Clearwire’s spectrum on the cheap. Sprint also refused to address the question of LightSquared’s GPS interference issues, suggesting in one slide that LightSquared was the primary source for incremental capacity beyond the PCS G-block and yet later insisting that LightSquared was “all upside” and they were not assuming that they would get any more money from them.

Of course, other than to indicate that it would not be providing funding to LightSquared (which is hardly surprising since Sprint currently does not have enough money to fund its own network buildout), Sprint had no answer to one perceptive questioner, who asked what would happen if LightSquared failed to raise enough money to pay for the hosting agreement, and highlighted that it is hard to see why anyone would want to invest in LightSquared when they can see what has happened (and by implication what Sprint has done) to Clearwire investors. Indeed one might very well conclude that if LightSquared does get approval from the FCC to move ahead, Sprint expects to do the same to LightSquared and pick up its assets in bankruptcy. Of course, at this point in time such plotting is virtually irrelevant, because LightSquared’s spectrum is not likely to be usable for years to come, if ever.

After this debacle, it is hardly surprising that both Sprint and Clearwire’s stock prices have fallen sharply, and expectations of a Clearwire bankruptcy have heightened significantly. However, though Sprint’s CEO pointedly remarked that “no bankruptcy case involving a wireless company has resulted in a disruption of service”, that has not been true for (fixed) wireless broadband companies such as Teligent and Winstar.

This situation also brings to mind the @Home bankruptcy in the fall of 2001 (my first introduction to US bankruptcy cases), where @Home threatened to turn off its cable modem network, thereby forcing its cable partners to pay a significant premium for “transition services” while they built out their own networks (indeed AT&T’s customers were actually disconnected because no agreement was reached). In addition, AT&T was subsequently sued for its involvement in driving @Home out of business, and settled that suit for $340M in 2005.

3 Comments »

  1. timfarrar said,

    October 9, 2011 at 6:03 am

    honne said,
    October 8, 2011 at 9:01 am

    Since there is precedent in the law that holds predators (smart opportunists) accountable for driving companies out of business (as AT&T did to @Home), don’t you think it would be foolish for Sprint to do the same to Clearwire? Are you saying that Sprint is better off taking on the risk of expensive legal settlements down the road if it can indeed buy Clearwire’s assets cheaply in bankruptcy?

    How valuable is Clearwire’s spectrum in your view? Can Sprint do OK without Clearwire as the company seems to suggest? Or is it less sensible to convert Clearwire’s Wimax to LTE than building out its own network?

    The way Clearwire bonds are trading certainly indicates a high probability of restructuring. The 2040 convertibles have a bid/ask in the low $20’s; the 2017 bonds are in the $50’s.

    Thanks for this post and thanks in advance for your response.

    I think that Sprint is well aware of the @Home precedent, which is why they have tried to distance themselves from involvement in Clearwire’s board and strategic decisions (as emphasized again yesterday). In the @Home case the critical issue was that AT&T had been deeply involved in @Home’s operations, and was accused of stealing its secrets. In reality I think the bigger threat is that (in bankruptcy) Clearwire threatens to turn off the Sprint customers unless they improve the current deal significantly. That threat is only meaningful if they file quite soon, before Sprint has its own LTE network up and running and can migrate customers (albeit at significant expense for phone upgrades).

    The main challenge in valuing Clearwire’s spectrum is that two-thirds of it is leased. This is carried at a much lower value on Clearwire’s books, and may or may not be valuable to a purchaser. If you just count their owned spectrum (~17B MHzPOPs), then it would need to be sold for a comparable or higher price to DBSD and TerreStar in order to cover the debt (depending on whether you include the convertibles or not).

    Sprint obviously needs more spectrum. As they’ve said, owners economics are best, so how do they get ownership of more spectrum, in a situation where they are pretty capital constrained? The issue that wasn’t even touched on yesterday is whether there is still a deal to be had whereby the cable companies inject the SpectrumCo AWS holdings into Sprint (presumably in exchange for equity, though of course at Sprint’s current stock price that would be rather dilutive).

  2. TMF Associates MSS blog » The spectrum bubble, one year on… said,

    October 11, 2011 at 2:16 pm

    [...] potentially spend no more than about $1B in total. This puts the pressure on Clearwire to adopt the @Home strategy, which would mean filing for bankruptcy well before Sprint has a credible alternative network in [...]

  3. TMF Associates MSS blog » DISH plays it cool, Sprint changes its tune… said,

    October 26, 2011 at 11:14 am

    [...] it seems that Sprint has rowed back somewhat on its implied threat on October 7 to force Clearwire into bankruptcy, announcing a “non-binding memorandum of understanding to work together” on ensuring [...]

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