In the wake of Dish’s counterbid for Clearwire, most attention has been focused on trying to discern Charlie Ergen’s objective: does he actually want to buy Clearwire or not? Many seem to think his intention is actually to secure a network sharing partnership with Sprint. However, this doesn’t seem very likely, in view of Ergen’s comments last year about how he looks at “business relationships”, and Sprint’s attempts to talk up a deal with Dish (rather than vice versa).
If Dish’s offer is going to prompt a near term deal with someone else, then it still seems the most likely options would be AT&T or DirecTV: the spectrum cap would create more problems for AT&T if Dish owned additional BRS spectrum (and as discussed below, it is likely that much if not all of the spectrum that Dish has offered to buy from Clearwire would be subject to the spectrum cap), while DirecTV probably would find Dish a less attractive merger partner if major wireless buildout commitments were already in place. As a result, I think if Dish appeared to be making progress with a Clearwire deal, then that might prompt AT&T to act more quickly than it would otherwise do. With Ergen reiterating his lack of desire to sell spectrum, it also seems like the message to AT&T is that a knockout bid for the whole of Dish is the only acceptable option.
As I noted on Tuesday, Dish’s potential offer for Clearwire does seem like a good deal for Dish, especially if the bid is mostly or all for owned BRS spectrum. Dish has offered to buy 11.4B MHzPOPs, which equates to about 38-39MHz on a near national basis, with the option to buy or lease another 2MHz from an adjacent channel to bring the total holding up to 40MHz (presumably to support two 20MHz or four 10MHz TDD channels). It seems likely that Dish would want contiguous spectrum for maximum flexibility, and if Dish was able to buy spectrum from “an adjacent channel” then that channel boundary must be in the BRS band. Thus the most plausible channels may be either the 6MHz BRS-2 channel plus the 6 adjacent 5.5MHz E1-E3 and F1-F3 channels (39MHz in aggregate running from 2618MHz to 2647MHz, all of which is in the BRS block and subject to the spectrum screen) or channels F3, H1-H3 and G1-G3 (38.5MHz in aggregate running from 2651.5MHz to 2690MHz, 22MHz of which is in the BRS block and subject to the spectrum screen).
Most observers would consider this part of the BRS spectrum to be the most valuable part of Clearwire’s holdings, and if particularly if the 2618-2647MHz block of spectrum was sold to Dish, then Clearwire’s remaining spectrum holdings could be substantially less useful to Sprint (or anyone else) in the future. Moreover, if Dish could then take posession of the shared network infrastructure in the event of a Clearwire bankruptcy, there might be very few pieces left for Sprint to pick up.
Why then would Dish be offering to buy up to 100% of Clearwire’s equity as well? Remember that an offer to buy the equity wasn’t part of Dish’s offer back in November, and now appears to have been included simply to trigger the “fiduciary out” to the “no shop” in the Sprint merger agreement. Ergen wouldn’t expect Sprint to sell its shares to Dish, and many of those equity holders like Crest who are betting that the Clearwire equity ought to be worth $5+ per share might not take a $3.30 offer either. Thus it is far from certain that Dish would in the end purchase a large slice of Clearwire equity whose value might be impaired by the spectrum sale.
What is most intriguing is that Clearwire’s executives (as opposed to the board) are apparently very keen on a Dish deal, describing it as “doable but complicated”. That’s perhaps unsurprising because in many cases their interests are significantly different to those of the Clearwire board (and shareholders): with Ergen they would keep their jobs and be responsible for a new independent LTE network build, whereas under Sprint ownership they would likely all be fired.
I understand that Clearwire executives may have been working on a deal with Dish since last summer (I mentioned it in a blog post in September), and note that MetroPCS’s proxy in November indicated that someone (likely Dish) had suggested splitting Clearwire between themselves and MetroPCS back in June 2012, while Dish started acquiring significant quantities of Clearwire debt in the second quarter of 2012. In addition, I’m told that Clearwire renegotiated a significant quantity of spectrum leases (covering more than 1.4B MHzPOPs) between September and November 2012, suggesting that they were preparing for the disposal of significant amounts of their spectrum, either bringing more leased spectrum into use, or selling those leases to Dish.
Given Sprint’s arguments that Dish’s current proposal will go through because they will vote against it, Clearwire management presumably have been working to structure a transaction that could be undertaken without board or shareholder approval, perhaps in the form of the spectrum sale desired by Dish (which could well fall below the 20% of assets requiring approval) plus either a modest tender offer for some of Clearwire’s shares, without any board representation, or no equity purchase by Dish at all.
This leaves open the possibility that if Clearwire’s minority shareholders reject Sprint’s bid, then a spectrum sale and network sharing agreement with Dish would be the only offer left on the table. Of course, that might also prove to be a pyrrhic victory for Crest, if the end result is a Clearwire with significantly diminished spectrum assets (possibly with little easily saleable spectrum) and a network that Dish could simply take over in the event of a bankruptcy.