10.16.12

Out of the box?

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 8:44 am by timfarrar

Despite considerable efforts by Charlie Ergen, it looks like the Softbank deal may now have enabled Sprint to escape from the box of constrained capital, limited spectrum and a second rate network that Sprint could have been confined to, if it had failed to gain access to either usable H block spectrum or Clearwire’s network on economically advantageous terms. Many thought that Sprint would move to purchase Clearwire immediately after the Softbank investment, but today sources are denying that is the intention, stating that Sprint has no intention of taking part in mergers or acquisitions until the Softbank deal is finalized in mid-2013. This timeline also implies that Sprint will not move to disrupt the T-Mobile/MetroPCS merger, which is expected to close in 2013Q2.

So the obvious question is why did Sprint need to issue a $3B convertible bond to Softbank right now? I think that can only be intended to warn off others from doing a deal with Clearwire in the interim, by offering John Stanton the carrot of improved economics and/or further investment from Sprint. Of course there are not many options for Clearwire to sell spectrum, now that T-Mobile and MetroPCS, the two operators most frequently rumored to have designs on Clearwire’s spectrum, are getting together.

As a result, I think Sprint’s actions appear to confirm that Clearwire was about to pull the trigger on a deal with Ergen, as I suggested last month, involving an asset sale and/or WiMAX customer transfer, in exchange for a combination of cash and debt. Notably, receipts from a sale of network assets (as opposed to a spectrum sale) would not have to be used to repurchase Clearwire’s first lien debt, suggesting that this could be a preferred way for Clearwire to raise funds. In addition, I’m told Ergen now holds in excess of $900M of Clearwire’s debt (not all first lien), and some of that could potentially have been traded for Clearwire spectrum.

Reports on the Sprint/Softbank deal have also suggested that both Carlos Slim and SK Telecom have considered investments in Sprint, and it is worth noting that SK Telecom invested $60M in LightSquared back in 2010, while Slim is rumored to be buying LightSquared debt. In fact I’m told that further significant purchases of LightSquared debt have taken place in recent weeks. If one or both of those two players therefore continue to maintain their interest in US telecom assets (which has obviously included MSS-ATC spectrum similar to that held by DISH), then Ergen may be the last, best potential partner available.

So has Sprint now prevented Ergen from achieving a deal with Clearwire? I’m told that (at least with the current ownership situation) Sprint would have no ability to veto such a transaction, so presumably Stanton will now be trying to extract vastly improved economics from the existing capacity agreement with Sprint in order to forego a DISH deal. What concessions will Sprint be prepared to make, and if it does give ground, where does that leave DISH? After all, it doesn’t seem that AT&T is prepared to pay Ergen’s asking price (perhaps as high as $80-$90 per share?) to purchase the whole of DISH anytime soon. Ergen must certainly be fuming at how FCC delays have prevented him from moving forward, while potential partners seem to be rapidly exiting the dance floor. At least he appears to have made a profit on his investment in Clearwire, but that may be little consolation if it now proves more difficult to find a way to monetize DISH’s other, much larger, spectrum investments.

6 Comments »

  1. telcominvestor said,

    October 22, 2012 at 6:46 am

    Tim-
    Any additional thoughts on Dish/Clearwire after all the dust has settled. Seems to me that Sprint merely moved the economic needle slightly above 50% from 48% by purchasing McCaw’s interest… Or was this entirely about blocking Ergen? From my understanding, Clearwire remains independent as has the flexibility to continue to structure deals with their spectrum, but I am assuming Sprint did not just pay $100 million to acquire a small incremental percentage because they had nothing better to do with that capital… what gives?

    I should point out that Eagle River first notified the other shareholders on the 13th, which means they were a party to the Sprint/Softbank deal getting done.

  2. clytle33 said,

    October 22, 2012 at 7:13 am

    Tim,

    Any thoughts on DISH purchase of remaining Top 40 market MVDDS spectrum from AMCX/Cablevision. With control of top 40 markets and path to ownership on other markets, can this downlink capacity be used with DISH existing spectrum? Or since all the interference issues were with DISH/DTV (if it really was an issue), do you see potential two-way usage. I also heard that FCC was looking at using MVDDS spectrum for wireless backhaul. Thanks for your comments.

    Chris

  3. timfarrar said,

    October 22, 2012 at 8:49 am

    Given that Eagle River did a back room deal with Ergen that enabled DISH to snatch DBSD away from Harbinger and MetroPCS back in March 2011, it seems plausible that they could have also have been playing a role in any prospective Clearwire-DISH deal (remember also that Pendrell, formerly ICO, is focused on IP rights for DRM/mobile video distribution, which would potentially play a major role in a DISH LTE network deployment).

    It seems hard to imagine that Sprint would buy McCaw’s CLWR equity so quickly unless it was to derail an impending DISH-CLWR deal (which would have been waiting for what is presumably an imminent FCC AWS-4 approval – and if that had been secured earlier the deal would perhaps have been announced by Ergen at PCIA).

    Could Clearwire still go ahead and do a deal with DISH if FCC approval comes through shortly? That is perhaps theoretically possible (because Sprint won’t actually be nominating a majority of board seats), but if Sprint is holding out the prospect of buying Intel and Comcast’s stakes within the next 30 days, then that seems to be a pretty good way to ensure that Clearwire’s other board members don’t go against Sprint’s wishes.

    With respect to MVDDS, perhaps this could provide additional capacity for wireless backhaul (or distribution of streaming video?) in a DISH network deployment (after all, much of Clearwire’s network currently uses wireless backhaul).

    But now the question is more likely how/whether a DISH network deployment can be done at all without the Clearwire assets, and if anyone is prepared to back a new entrant if the four existing national players are all in relatively good financial shape.

  4. Sprint’s investment designed to scare off Clearwire suitors » India Telecom Tracker said,

    October 22, 2012 at 6:47 pm

    [...] 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 [...]

  5. TMF Associates MSS blog » Things to do in Denver when your deal’s dead… said,

    October 24, 2012 at 11:41 am

    [...] only has the Softbank deal enabled Sprint to escape from the box DISH had been trying to put it in, but by buying McCaw’s stake in Clearwire, and indicating [...]

  6. TMF Associates MSS blog » It’s complicated… said,

    December 13, 2012 at 1:31 pm

    [...] put this spectrum to use for the benefit of consumers”. After all DISH appears to have had a potential deal with Clearwire on the table for several months, held up only by delays in the FCC’s approval (which were [...]

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