Playing three dimensional chess…

Posted in Clearwire, DISH, Financials, Operators, Spectrum, Sprint at 5:04 pm by timfarrar

My sources appear convinced that DISH made an informal offer to Clearwire management sometime ago, and that Sprint has been playing catch-up in its recent actions, after assuming for several years that it faced little pressure to buy Clearwire, because no-one else wanted that spectrum. It seems that Sprint reached out to Softbank in the summer, after realizing that it was facing a challenge from DISH, seeking funds to boost its position in the market (and to help acquire spectrum). At that point Sprint also moved to vigorously oppose DISH’s AWS-4 proposal, trying to delay DISH, while it sought an agreement with Softbank.

However, opinions appear to differ about whether Sprint actually wants to buy Clearwire, or is simply trying to spoil DISH’s plans. My guess is that Sprint’s preferred outcome would be for DISH to sell its AWS-4 spectrum to AT&T, allowing Sprint to pick up PCS spectrum that AT&T would have to sell, and Sprint would only later pick up some of Clearwire’s spectrum at an even lower price than is currently being offered. If DISH does achieve a deal with Clearwire then Sprint’s plans would be spoiled on two fronts: it wouldn’t be able to pick up more PCS spectrum (except the H block) in the near term, and Clearwire might not run out of money and fall into Sprint’s arms in the next few years as Sprint apparently hopes. As a result, Clearwire is now playing a central role in an intricate game of three dimensional chess between Ergen and Hesse.

Although we know what Sprint’s current offer to Clearwire consists of (namely up to $2.97 in cash for the remaining equity, assumption of Clearwire’s debt, plus a bridge loan of $800M to accelerate Clearwire’s LTE buildout), it is harder to determine what an offer from Ergen might entail. Nevertheless, considering the objectives of both DISH and Clearwire (in the absence of a compelling take-out bid for the spectrum of either company) may help to narrow down what Ergen’s alternative offer could be.

From Clearwire’s point of view, the near term objectives are to extend the cash runway, find a way to cut down on the costs of the WiMAX network (decommissioning at least half of the existing sites that will never be built out for LTE) and build out the LTE hotspot network at the lowest possible cost. The hope is that by doing all of these things, Clearwire will be able to hold onto (the vast majority of) its spectrum assets, which will become more valuable over the next 3-5 years as an international 2.6GHz band LTE ecosystem emerges.

From DISH’s point of view, the near term objectives are to deploy an AWS-4 network at minimum cost to meet the FCC’s buildout criteria, get into the wireless business sooner rather than later, come up with a residential broadband solution for its satellite TV customers, and perhaps above all persuade AT&T that DISH is serious about moving forward with a buildout (so AT&T will have to purchase DISH or at least pay up for the AWS-4 and 700MHz E block spectrum).

Clearwire and DISH therefore have a clear alignment of interests with regard to Clearwire’s existing WiMAX network: a sale of these assets to DISH would reduce Clearwire’s expenses, raise a significant amount of cash (that wouldn’t have to be used to pay down the first lien debt), provide a network sharing agreement for the LTE buildout, get DISH into the wireless business more quickly and at lower cost, and provide a fixed broadband solution for satellite TV customers (via Clearwire’s original fixed wireless service, perhaps integrated with a satellite TV antenna to extend the range compared to an indoor modem).

My guess is that DISH would likely pay around $1.5B for Clearwire’s WiMAX network (which cost roughly $4B to build), which might therefore fall below the 20% of asset value cutoff point at which a sale would require approval by Clearwire’s board. DISH would likely also acquire Clearwire’s retail WiMAX customer base and presumably also provide service to the wholesale WiMAX customer base (adding another point of leverage over Sprint) – perhaps DISH would pay up to an additional $500M for these customers.

What is more uncertain is what would happen about the spectrum required for DISH to run the network. Clearwire has a strong interest in establishing a high valuation benchmark for its spectrum, likely $0.30 per MHzPOP or above, and DISH would also want to ensure that perceived spectrum prices are high, if it still hopes for a knockout bid from AT&T. DISH likely needs 20-30MHz of spectrum, covering perhaps 200M people, implying that DISH might have to spend at least $1.8B to $2.7B if it was to buy this amount of spectrum from Clearwire. On the other hand, DISH might opt for primarily leased spectrum, reducing the price somewhat, or simply agree say a 5 year lease with Clearwire, perhaps with a fairly significant prepayment.

Overall, I could envisage DISH paying Clearwire anything from $2.5B in the near term (based on a spectrum lease), up to perhaps $4B+ (assuming a reasonably significant spectrum purchase). Part of this payment would presumably be made by contributing the substantial amount of Clearwire debt already owned by DISH (which cost $750M), and going forward Clearwire would then presumably have a network sharing deal with DISH, so that Clearwire could rollout its LTE hotspots in urban areas and DISH could roll out wide area coverage in the AWS-4 band.

I assume the remaining Clearwire debt would be refinanced, allowing the equity holders to pursue their bet that Clearwire’s spectrum will increase in value. Of course that may not be an expectation that Intel, Comcast and Bright House necessarily share, so Sprint obviously hopes it can persuade these strategic investors to block a deal with DISH. If not, then the question remains, will the DISH deal go through, or will it be derailed by a knockout bid from another party: either Sprint paying the $5+ that shareholders are demanding for Clearwire or AT&T buying DISH for $80 per share?

[UPDATE 12/17] So Sprint has convinced the Clearwire board to accept its offer of $2.97, and it looks like Hesse may have come out on top in this round of the chess game. The determining factor appears to have been the lack of confidence from Clearwire’s management and board that there would ever be a second major wholesale customer for its TD-LTE rollout, as Verizon, AT&T and T-Mobile weren’t interested in buying capacity from Clearwire. In the presentation discussing the deal, Clearwire confirmed that there had been another “credible, but preliminary, proposal” in the “past several weeks” presumably from DISH, but all potential options for spectrum sales had “values well below those recently speculated”. Clearwire also noted that the “existing governance arrangements” left the company “unable to secure new partnerships”. Of course, the deal locks up Clearwire pretty well, because the $80M per month of financing that is being advanced by Sprint is convertible to equity at only $1.50 per share, and Sprint is not obligated to go through with the purchase of Intel, Comcast and Bright House’s stakes if the acquisition is rejected in the independent shareholder vote (but might then come back with a lower bid).

So now Ergen appears to have struck out twice in his attempts to enter the wireless market, being rejected by both MetroPCS and Clearwire. Will he follow the FCC’s signal and sell his spectrum to AT&T? If so, the price may not be as attractive as many hope: if there are few other options then my earlier estimate of $0.30 to $0.40 per MHzPOP sounds closer to the mark than the inflated $1 per MHzPOP speculation we saw last week. Those expecting a higher bid for Clearwire were banking on a spectrum crisis forcing other operators to make use of Clearwire’s capacity in the next few years, which Clearwire management clearly didn’t believe would happen. Now the question appears to be whether Ergen still believe his spectrum will become more valuable over time, or if instead he will just take the money as Clearwire did.


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    December 21, 2012 at 7:01 am

    [...] opposition, Sprint’s acquisition of Clearwire is probably a done deal. However, Tim Farrar at TMF Associates is the only one on this beat noting that the company had to play a highly-tactical game of M&A [...]

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