In October last year I wrote about the supposed spectrum “crisis” and how the FCC’s Spectrum Summit likely marked the point at which the spectrum bubble began to unwind. A year later, many of those predictions appear to be coming true, with most people now writing off LightSquared (and ridiculing Sprint for selecting them as their “preferred” provider of additional capacity).
Indeed I’ve been surprised how investors’ focus is now much more on Clearwire and DISH, whose spectrum holdings are perceived to have some long term value, and its almost become received wisdom that LightSquared’s spectrum holdings may not provide any recovery in bankruptcy, because the FCC is unlikely to grant approval for terrestrial use of the L-band spectrum (at least ahead of the election, and even then, at best, with a long transition period to update or replace precision devices).
Clearwire’s bonds are also trading at levels that assume they will have to file for bankruptcy, and that their spectrum assets will be sold at a significant discount. I was told that the $2.95B of senior secured notes were trading as low as 50 cents on the dollar, with the $500M second lien at around 30 cents and the $730M of exchangeable notes at around 20 cents, which would put the implied value of Clearwire at $1.5B-$1.8B, despite holding more than 40B MHzPOPs of spectrum.
UPDATE: Prices for Clearwire’s first lien debt are now in the mid-70s, putting a value on the company of closer to $2.5B. While the first billion dollars or so of spectrum sales in a liquidation seems fairly assured, the second billion would be less straightfoward and a third billion even more challenging. Clearwire also faces a large upcoming interest payment in December which will likely represent a key decision point for how it should move forward.
Of course, about 60% of Clearwire’s spectrum is leased, and so may not be in much demand from potential purchasers, while the 17.5B MHzPOPs of owned spectrum is not all contiguous. More importantly, the majority of Clearwire’s owned spectrum comes within the FCC’s spectrum screen, and so it is hard to see why a carrier like Verizon would choose to buy Clearwire’s spectrum and thereby potentially impair its ability to acquire more lower frequency spectrum like SpectrumCo’s AWS-1 block in the future.
However, other than Sprint, virtually the only obvious alternative buyer for Clearwire’s spectrum is MetroPCS, which would probably not want to buy more than 2-4B MHzPOPs of spectrum (i.e. 20-40MHz across its existing 100M POP footprint) and would therefore 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 place and threatening to cut off Sprint’s customers unless Sprint pays them a great deal more for capacity in the near term. Sprint would then either have to make a much better offer for Clearwire’s spectrum, or pay for transition services until it could transfer the EVO 4G customers to its own LTE network (allowing Clearwire to make money for its debtholders both from offering service to Sprint and from later selling at least part of its spectrum holdings to another player like MetroPCS).