02.04.13

Did AT&T’s spectrum deep dive dump DISH deal?

Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum at 9:42 am by timfarrar

The proxy statement filed by Clearwire on Friday morning made for interesting reading, not least in guessing the identity of some of the companies that Clearwire has talked to over the last couple of years. Some are obvious (A=T-Mobile, B=AT&T, C=MetroPCS, D=China Mobile, F=LightSquared, H=Verizon) and some are more speculative (E=Google? G=one of the hedge funds invested in Clearwire, I=Samsung or Qualcomm?), but what stands out is the lack of bids for Clearwire’s spectrum at an attractive price.

In particular, Clearwire didn’t find the bid from T-Mobile (in fall 2010) to be “compelling” and was unable to reach agreement with MetroPCS (in fall 2011) on the spectrum to be included in any deal (i.e. owned vs leased) or the price. Clearwire notes that even DISH’s bid at a price of $0.19/MHzPOP “related to the acquisition of higher quality spectrum assets of Clearwire and would leave Clearwire with less valuable spectrum assets”, implying that it is mostly for owned and/or contiguous spectrum (as I suspected), and implying that the price for the spectrum that Clearwire would be left with could be rather lower.

However, the fundamental reason for Clearwire to acquiesce to the Sprint bid appears to be that Clearwire has been unable to find a second wholesale customer for its network. That target customer appears to have been AT&T, given the financials for the MCC (Multi-Customer Case) set out in the proxy, which assumed that the second customer would generate approximately 1.5 times the revenue produced by Sprint, or in other words would have had around 90 million customers who could use the Clearwire network.

AT&T certainly took quite a lot of interest in Clearwire, conducting “extensive due diligence” in fall 2010 (though ultimately declining to submit an offer, presumably opting instead to pursue the T-Mobile merger) and then resuming discussions (at AT&T’s initiative) in February 2012:

In February 2012, Party B approached the Company about restarting discussions about a possible spectrum sale and commercial agreement. The conversations between the parties focused on technical issues and the spectrum that the Company could potentially make available for sale. Party B made it clear during the discussions that a transaction with the Company was one of the several options it was pursuing in order to satisfy its spectrum needs. Party B terminated further discussions with the Company in May 2012 after it had determined to pursue one of the other options to satisfy its spectrum needs.

AT&T’s deep dive into “several options” in the first half of 2012 (after rejection of the T-Mobile bid) appears to have been very extensive, and focused largely on options to meet longer term spectrum needs (3+ years out). Of course we know that AT&T ultimately decided to buy NextWave, after approaching NextWave initially at the beginning of April. However, I’m told that AT&T also approached LightSquared in early 2012 with a view to buying the 1670-75MHz spectrum block (when LightSquared indicated it was considering a sale of these spectrum leases), and its inconceivable that AT&T didn’t also discuss with DISH the possibility of buying the 2GHz MSS spectrum (when it actively tried to interfere in DISH’s FCC proceeding).

Was AT&T scared off by the FCC’s denial of DISH’s ATC waiver request in early March, or simply by Charlie Ergen’s high asking price. More than likely it was the latter, given AT&T’s initial low ball $350M offer for NextWave’s spectrum in April 2012 (after the waiver denial, but presumably when discussions with DISH were still ongoing), followed by a decision to offer rather more in early June, after AT&T had reached a decision on its preferred spectrum option. Around the same time DISH also began exploring options with Clearwire and MetroPCS, leading up to its parallel bids to take over MetroPCS and buy spectrum from Clearwire in August 2012.

I’ve often thought that AT&T’s interest in WCS could be independent of a possible purchase of DISH’s spectrum, with WCS providing a “high band” option for dense urban networks (as a direct alternative to Clearwire’s BRS/EBS spectrum), while DISH’s spectrum provides a “mid-band” alternative to PCS or AWS. Indeed, after AT&T gave up a large slice of its AWS spectrum to T-Mobile as part of the break fee, it was plausible to think AT&T would have a potential shortfall in its mid-band spectrum assets, which would make DISH’s spectrum particularly attractive. However, it appears that AT&T may instead have looked at DISH’s spectrum more as “what do we need for 3+ years out”, considering it alongside WCS and BRS/EBS, which would almost certainly lead to a mismatch of valuation expectations with Charlie Ergen.

Instead AT&T now appears to be focused on a combination of its 700MHz LTE network (bulking up with the B block purchase from Verizon) plus smaller amounts of cellular, PCS and AWS spectrum (including the acquisition from ATNI/Alltel and the AWS spectrum included in the NextWave purchase) to meet its near term needs. The 12MHz of Qualcomm 700MHz D/E block spectrum would then be used for supplementary downlink to relatively narrow 5x5MHz cellular, AWS or PCS LTE deployments in urban areas from 2014 (though DISH’s 700MHz E block holdings could spoil any prospects of deployment outside the 5 major metropolitan areas where AT&T owns the entire band). This would explain why AT&T has retained 10MHz of AWS spectrum in Los Angeles, splitting the AWS A block spectrum with Verizon as part of the 700MHz B block deal.

Although its not been widely recognized, AT&T has already started to deploy LTE within its AWS spectrum in a few markets, and is now emphasizing the capacity enhancements available from small cell technology. Indeed, given the backlash against just the two modestly sized spectrum purchases from Verizon and ATNI, its hardly conceivable that AT&T could be planning to buy DISH’s spectrum in the near term as well. However, if AT&T was going to do another spectrum deal in the near term (which may now be unlikely), I’d bet that using Leap or US Cellular’s spectrum (perhaps even selling their customers to Sprint or T-Mobile?) would be more in line with AT&T’s current spectrum strategy than a deal with DISH.

So where does that leave Charlie Ergen? Perhaps he really does need to secure a deal with Clearwire not just to make it impossible for Sprint to get control of Clearwire’s spectrum, but also so DISH has a way forward to a near term deployment? Alternatively, moving towards a deal with LightSquared and a reorganization of the AWS-4 band to create additional downlink spectrum (as I suggested in December) could continue to create problems for Sprint (given its desire to purchase the H block) without committing DISH to a near term buildout. Either way, it seems that in the near term, Ergen might be more likely to be a buyer than a seller of spectrum.

01.10.13

Who wants what?

Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 4:49 pm by timfarrar

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.

01.08.13

Payback time…

Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 5:11 pm by timfarrar

So DISH has now made a (preliminary) public offer to acquire up to 100% of Clearwire’s shares at a price of $3.30, as part of a complicated transaction to acquire 25% of Clearwire’s spectrum (11.4B MHzPOPs for $2.2B, i.e. $0.20 per MHzPOP) and enter into a network sharing agreement for a buildout of both this 2.5GHz and DISH’s existing AWS-4 spectrum.

As indicated in Clearwire’s press release, last fall, before the Sprint Agreement, DISH had expressed interest in acquiring these spectrum assets and entering into the network sharing agreement, largely confirming my analysis, but with Clearwire responsible for the network buildout, not DISH (though I assume DISH would ensure that the buildout agreement allowed it to take over the network if Clearwire went under). It still seems like a reasonable guess that 2.5GHz could have been used to provide a solution for fixed broadband access, especially given DISH’s recent assertions that “it won’t just be about wireless”.

Its notable that the price offered for this spectrum (which is likely the best slice of Clearwire’s spectrum, presumably almost entirely the owned BRS spectrum, not the leased EBS spectrum) is only $0.20 per MHzPOP, far below the valuation of up to $30B ($0.70/MHzPOP) put on the spectrum by Clearwire’s minority shareholders, and only in line with the book value of around $0.19/MHzPOP used for owned spectrum in Clearwire’s 2011 10-K. Given that the book value for Clearwire’s leased spectrum is less than a third of the level of the owned spectrum (on a per MHzPOP basis), and the NPV of the spectrum lease payments is of order $0.05/MHzPOP, Ergen’s proposed acquisition might leave Clearwire with much diminished value for its remaining spectrum holdings.

Of course much of the money that DISH offers for this spectrum would simply return to DISH via repurchase of Clearwire’s first lien debt (which DISH has spent $750M on acquiring). DISH’s new offer at least provides a potential exit for Clearwire’s shareholders, but that’s a modest incremental cost to get Clearwire’s most valuable spectrum and what is most likely a cheap AWS-4 network buildout.

While Ergen’s offer therefore seems like a deal that would be good for DISH, its hard to see that DISH could realistically expect to succeed, given Sprint’s majority ownership of Clearwire’s equity and expressed intention to block this deal. However, what Ergen will certainly achieve is to give Crest and Mount Kellett far more ammunition in their fight against the Sprint takeover, potentially tying up the proposed Sprint buyout for months. Its hard to tell what the Delaware courts will say, though it seems rather implausible that the FCC would block Sprint’s takeover of Clearwire.

If Clearwire turns down the Sprint bridge funding, but is unable to accept DISH’s offer, then Clearwire’s financial position will grow weaker, increasing Sprint’s leverage as time goes on. I’d therefore expect Sprint to refuse to budge on its offer, in the absence of a reversal in the Delaware courts, and though Softbank might want all this to simply go away, the gap between what the Clearwire minority shareholders are demanding ($5 per share) and what Softbank is prepared to pay might just be too big to paper over.

As a result, it seems this battle will continue to provide entertainment (at least to outside observers) for months to come and show Sprint that if you mess with Ergen (via Sprint’s intervention in the AWS-4 proceeding at the FCC) then you should expect to get a taste of your own medicine.

12.15.12

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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