02.22.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 9:51 am by timfarrar
The question on everyone’s mind after DISH’s results call on Wednesday is of course “when will Charlie Ergen find a partner” to fulfill his wireless ambitions. Ergen was pretty clear that if DISH’s offer to buy spectrum from Clearwire succeeds then Sprint would be backed so far into a corner that it would be forced to partner with DISH (on Ergen’s terms). Conversely, if Sprint won its takeover bid for Clearwire then there is no way that DISH would accept Sprint’s terms for a partnership. The difference between DISH and Sprint’s positions appears to be that Sprint wants a LightSquared-like deal: a large cash payment for the network buildout, and Sprint having the option (but not the obligation) to buy capacity, whereas DISH wants Sprint to take its payment for a network sharing agreement solely in capacity, not in cash.
As an aside, its interesting to note that the relationship between Ergen and Hesse is obviously pretty poor: Sprint’s proxy for the Softbank deal notes that it was Keith Cowan who dealt with Ergen (Company Z) last summer, not Hesse. As a result, if Sprint did lose Clearwire’s spectrum to DISH, I wouldn’t be at all suprised to see the blame placed on Hesse, resulting in him leaving Sprint, and Masayoshi Son and Charlie Ergen could then work out a partnership between themselves.
If DISH’s bid for Clearwire fails, then DISH will at least have made an impressive profit on the deal: according to DISH’s 10-K, its holdings of Clearwire debt are now worth $951M, compared to an adjusted cost as of September 2012 of $745M. That is a profit of over $200M excluding the interest payment made in December 2012, which would have been at least another $50M (assuming the June interest payment is already included in the adjusted cost basis).
However, and more importantly, what is Ergen’s backup plan, if he simply takes his profits in Clearwire? If DISH wants to achieve a partnership this year, then the only realistic offer is to mount a counterbid for MetroPCS. Recall that DISH offered $11 per share for MetroPCS last summer (in parallel with DISH’s bid to buy spectrum from Clearwire) which was rejected as undervaluing the company. Given MetroPCS is now trading at only $10 per share, what does DISH have to lose by making a similar offer? At the very least that would force T-Mobile to the bargaining table, and DISH might be persuaded to withdraw its offer if T-Mobile offered an attractive network sharing deal. Indeed, if Clearwire’s special committee makes a decision next week to draw on the Sprint funding, I would expect DISH to potentially move on MetroPCS immediately thereafter.
If DISH doesn’t succeed with that gambit, then the timeline for a deal moves back at least until the end of this year or sometime next. LightSquared’s exclusivity in its bankruptcy case has been extended to July 15, but alternative offers can be made after that time, with a view to a resolution of the case before the end of this year. As I’ve noted before, if DISH takes a slightly longer time horizon, then a bid for LightSquared, and conversion of the 2GHz spectrum to downlink use would be an obvious value-enhancing maneuver. In addition, it would put DISH in a much better position to challenge Sprint in the auction for the H-block spectrum, which Sprint has admitted it needs to buy.
Finally, DISH’s ultimate fallback option may be to try and sell the spectrum to another company. However, AT&T appears well set for the next several years, having apparently decided not to pursue DISH when Ergen’s waiver request was denied by the FCC last spring. Verizon has also ruled itself out as a buyer and T-Mobile will be tied up integrating MetroPCS for some time (and after that acquisition will own more spectrum per subscriber than either AT&T or Verizon).
As a result, the timeline for that sale (at least if Ergen is to get an attractive price) may be pretty long, probably beyond the resolution of the broadcast incentive auction (scheduled for 2014) and perhaps even extending until after the 2016 Presidential election, if AT&T and Verizon are to be regarded as serious bidders, given the desire of the FCC to let Sprint and T-Mobile catch-up with their bigger rivals. That is even more likely to be the case if the recent slowdown in the growth of wireless data traffic prompts a reassessment of operators’ future spectrum needs and finally buries the supposed “spectrum crunch”.
Permalink
02.21.13
Posted in Aeronautical, Financials, Government, Inmarsat, Iridium, Maritime, Operators, Services, VSAT at 1:57 pm by timfarrar
As Inmarsat approaches its end of year results presentation, scheduled for March 7, the company’s stock price has been surging in the expectation of continued strong progress in the maritime market, which is likely to lead to full year wholesale MSS revenue growth for 2012 (excluding LightSquared payments) somewhat above Inmarsat’s 0%-2% target. This has been driven primarily by Inmarsat’s 2012 price rises, which have been so successful that Inmarsat announced further price rises of around 10% for E&E services last month.
I estimate that these new price rises could boost wholesale maritime revenues by a further $10M (roughly 3%) in 2013, on top of the pull-through from the mid year price rises in 2012, and as a result, it is plausible to imagine that Inmarsat’s wholesale MSS maritime revenues might rise by as much as 10% in 2013. Thus, unless there are severe cutbacks in government usage this year, overall revenue growth for 2013 may again come in quite a bit above the 0%-2% target. Our updated profile of Inmarsat provides full details of our forecasts by product, and will be released shortly.
That revenue upside perhaps explains why Inmarsat has become notably more aggressive in recent weeks, for example telling its sales team that commission will no longer be paid for selling Iridium products and services (historically Stratos has sold over $10M of Iridium equipment each year). In addition, the IS-27 launch failure appears to have given Inmarsat more confidence that potential partners will need GX for maritime and aeronautical services, rather than continuing to rely on Ku-band services in what may now become a capacity-constrained North Atlantic Ocean Region over the next couple of years.
One intriguing issue to watch in terms of Inmarsat’s relationships with its distributors is the ongoing dispute in Russia, where I’m told Morsviazsputnik has refused to pay for Inmarsat capacity for a substantial period of time (note that Inmarsat’s trade receivables have been increasing by about $10M per quarter during 2012, excluding LightSquared payments), unless all Inmarsat-equipped vessels going into Russian waters use a Russian SIM. This dispute has apparently extended to the Russians modifying their call routing gateway (which sends all traffic within 200 miles of Russian territory to an intercept point in Russia) to give them the ability to cut off the communications on foreign vessels. I’m told that in response Inmarsat has considered terminating the routing of traffic to the Russian intercept point, which would of course escalate the dispute even further and make it even more difficult to recover the withheld revenues.
Beyond this year, Inmarsat is guiding that its 8%-12% revenue growth in 2014-16 will be backend loaded, and so growth in 2014 will not need to increase sharply (which would be difficult prior to achieving global GX coverage). Indeed, a combination of continued price rises on L-band services and a release of some of the cash previously received from LightSquared (and never spent on installing filters) could help to meet expectations in the next few years, even if GX does not live up to Inmarsat’s projected $500M in wholesale revenue by 2019.
With respect to GX, I have been cautious about the $500M target because I have always assumed that maritime would account for the largest share of the GX business and it is very hard to see how Inmarsat could hope to generate $200M-$300M of wholesale maritime GX revenues by 2019, when Inmarsat itself estimates that only $145M was spent on maritime FSS space segment capacity in 2010.
However, I understand that Inmarsat is now suggesting that the GX government business will generate more revenue than the maritime market. Of course that is much harder to prove or disprove, especially as Inmarsat gave very little insight in the October 2012 investor day into whether the government business is expected to rely mainly on the dedicated HCO beams in military Ka-band frequencies or on the standard wide area coverage beams which only use civil Ka-band frequencies.
An additional GX question that may soon be answered is the potential for a fourth backup satellite to be ordered. Inmarsat certainly has ample justification for placing a near term order, given its reliance on Proton launchers for all three GX satellites, and the run of problems that Russian rockets have had in recent months. Although Inmarsat would presumably portray an order as a sign of increased confidence in the market for GX, this would also add up to $200M of additional capex to the $1.2B GX program, even if no commitment was made to a fourth satellite launch at this stage.
Given Inmarsat’s more assertive stance in the market, it will now be particularly interesting to see whether Inmarsat can persuade distributors to share its positive view of the overall GX opportunity, and make revenue commitments similar to the $500M that Intelsat has achieved from Caprock, MTN and Panasonic for its EPIC system. Time will tell, but at least so far, my assertion last October that we had reached a turning point in MSS history has come only partly true: while it certainly appears that the next few years will bring regular price rises, an improvement in Inmarsat’s relationships with its distributors still seems like a distant prospect.
Permalink
02.07.13
Posted in Regulatory, Spectrum at 12:50 pm by timfarrar
After discovering the retrospective revisions made to 2011 data traffic in Cisco’s Feb 2013 mobile VNI forecast yesterday, I wondered if this was something new, or if it was simply that no-one had ever noticed this issue before. Because some of the 2012 mobile VNI data is still accessible through the fixed VNI tool, it’s possible to do the same set of calculations for last year’s mobile VNI, and conclude that Cisco did in fact retrospectively change the 2010 data in Feb 2012 (on a global basis making an 8% increase for 2010 compared to the 13% decrease for 2011 seen in this week’s figures), as shown below:
The revisions to 2011 have the effect of enhancing Cisco’s announced data growth number for 2012 (now stated to be 70% on a global basis), because the estimated Dec 2012 traffic is only 48% higher than the 597PB/month for Dec 2011 traffic that Cisco estimated last year, and less than half the expected growth of 110% that Cisco forecast last year for 2012. Of course no-one is stepping up to admit that in fact Cisco’s new figures imply global traffic growth in 2011 was only 103%, rather than the 133% growth that was trumpeted originally as exceeding their own projections (and ironically this year’s press release doesn’t even mention that data growth was 70% in 2012).
It’s even more revealing to compare some of Cisco’s numbers to CTIA’s October 2012 statistics on mobile data traffic in the US. After all, even though CTIA has a blinkered focus on pushing the “spectrum crisis” (seen once again today in an op-ed quoting a statistic invented apparently out of thin air, that “Cisco forecasts mobile data traffic in the United States will be 20 times greater in 2015 than it is today”), at least their statistics are based on direct reporting by carriers accounting for 97% of wireless connections in the US, and so in this realm they ought to be king.
Given that wireless operators have no interest whatsoever in understating their traffic, its hard to see how US mobile data traffic could be higher than the CTIA statistics, yet that is precisely what Cisco’s estimates imply. Indeed Cisco have revised their Dec 2011 traffic estimate for the US upwards, to 127PB/mo, compared to the 108PB/mo estimate given in last year’s VNI forecast. However, CTIA’s statistics indicate that US mobile data traffic in the first 6 months of 2012 was 633PB, or an average of 105.5PB per month, and so if Cisco were accurate, then monthly data traffic would have had to decline between Dec 2011 and Jun 2012. Similarly, if Cisco’s Dec 2012 estimate of 207PB/mo of mobile data traffic in the US was accurate, then monthly traffic would have had to roughly double since Jun 2012, again an inconceivable shift (especially if traffic had supposedly fallen between Dec 2011 and Jun 2012).
Overall, based on CTIA’s statistics, I estimate that US mobile data traffic was roughly 96PB/mo in Dec 2011, and assuming consistent growth in the second half of 2012, the total for Dec 2012 should be around 134PB/mo, which is equal to a 40% traffic growth rate for monthly traffic during 2012. Of course that’s much lower than the 59% growth in total traffic between all of 2011 and all of 2012 that is implied by my extrapolation of the 2012H1 data, because the much smaller amount of traffic in the first half of 2011 pulls down the 2011 total. However, the 40% growth is the relevant figure to be used for comparison with Cisco’s numbers, and would have massive implications for the five year outlook: even a continuation of this 40% growth rate would represent only five-fold growth in monthly US mobile data traffic between Dec 2012 and Dec 2017, not the ten-fold growth that Cisco projects. The absolute gap would be even greater: roughly 720PB/mo in Dec 2017 vs 1963PB/mo forecast by Cisco.
Permalink
02.06.13
Posted in Regulatory, Spectrum at 9:53 am by timfarrar
Last year when Cisco released the 2012 mobile VNI forecast, I noted that they had been building castles in the air, and needed to put foundations under them. In particular I was concerned about substantial changes in the assumed share of offloaded traffic, which had changed dramatically between the 2011 and 2012 reports. Specifically, in 2011 Cisco had estimated that in 2010 21% of US smartphone and tablet traffic was offloaded (from mobile-connected devices, i.e. apparently excluding WiFi-only tablets) and that would increase to 30% by 2015. In 2012 they estimated that 49% of this traffic was offloaded in 2011 and that would decrease to 46% in 2016. Now in the latest report (actually in the VNI tool stats, not the report itself), Cisco estimate that:
47% of the United States’s mobile data traffic was offloaded in 2012.
66% of the United States’s mobile data traffic will be offloaded in 2017.
The amount of traffic offloaded from smartphones will be 64% in 2017, compared to 59% at the end of 2012.
The amount of traffic offloaded from tablets will be 78% in 2017, compared to 77% at the end of 2012.
So yet again we’ve had a dramatic change in assumptions about offloading, without much explanation or any retrospective view of whether the prior estimates were remotely accurate. Indeed, if the true amount of offload traffic (from smartphones and tablets combined) has increased from 21% at the end of 2010 to 49% at the end of 2011 to something over 60% at the end of 2012, it is far from clear that the share of offloaded traffic on these devices will hardly grow at all (1% p.a.) in the next five years. (Note that the large projected growth in overall offloaded traffic is an artifact of the change in mix, with total traffic becoming dominated by smartphones and tablets, so laptops play a much less important role).
In reality, users of Cisco’s own Data Meter Application already offload more than 80% of their traffic and may be rather more representative of the longer term smartphone market, at least in North America. One consequence of Cisco’s assumption that offload growth will slow, is that data traffic growth is projected to accelerate once again in 2013 compared to 2012 (e.g. North American traffic growth is projected to be 70% in 2013 compared to 64% estimated in 2012, and on a global basis growth of 78% is projected in 2013 compared to 70% estimated in 2012), which seems rather unlikely.
Even more perplexing are some of the individual changes in estimates between 2011 and 2012, which appear to relate to totally undocumented retrospective revisions to the 2011 data (which can be extracted by use of the VNI tool).
In North America, Cisco estimated last year that traffic would grow from 118,972 TB/mo in Dec 2011 to 259,253 TB/mo in Dec 2012 (a growth rate of 118%). Now Cisco estimates that traffic in North America was only 222,378 TB/mo in Dec 2012, with growth of 64% (per the VNI tool), so in other words, Cisco’s estimated 2011 traffic was ~136,000 TB/mo (14% more than the original estimated).
Incidentally, traffic in the US was estimated to have grown by only 62% (almost exactly as I predicted from the CTIA data last October) to 206,854 TB/mo in Dec 2012. However, in absolute terms Cisco’s number for the US appears far too high: extrapolating CTIA’s 6 month statistics (based on real data from almost all US mobile operators) indicates there should be no more than 150,000 TB/mo of mobile data traffic in the US by Dec 2012.
Similarly, the Cisco numbers for Western Europe indicate growth of 44% between Dec 2011 and Dec 2012 (to 181,397 TB/mo), compared to an original projection of 103% growth, but the 2011 estimate has been retrospectively revised to about 126,000 TB/mo, or 31% lower than the 180,370 TB/mo originally given in the 2011 report.
In addition, the previous assessment that significant traffic would be generated by “home gateways” has been completely erased and significant changes have been made to all of the regional traffic totals for 2011, as given in the table below.
UPDATE: Apparently a later version of the February 2012 Mobile VNI forecast (not that linked below) corrected a typo in the Middle East & Africa regional total, so that the discrepancy between the sum of the regional traffic and the global total traffic (597,264 TB/mo) was eliminated. The chart above has been updated to incorporate this modification.
Thus, though Cisco tries to direct our attention to future growth potential (not least by deleting access to previous reports – for your benefit, here are copies of the reports published in February 2010, 2011, 2012 and 2013 respectively), I’m hugely concerned about whether the traffic data that is supposed to be covering historic periods is at all reliable, given the enormous scale of unstated retrospective revisions to these numbers, and the lack of correlation with much more detailed studies such as that by CTIA. If the current data isn’t accurate, then its hard to see how much reliance can be placed on Cisco’s forecasts for future periods.
Nevertheless, Cisco appears to have bowed at least partially to reality, acknowledging that 2012 growth was “slower than expected in some regions” and side-stepping its prior claims of a “data deluge“. I wonder if those, including the FCC Chairman, who have made so much fuss about the “spectrum crisis”, and have repeatedly cited Cisco’s over-optimistic projections to justify their argument, will now do likewise. Perhaps they might even give less credence to these numbers, especially given the apparent inaccuracies in Cisco’s estimates.
Permalink
02.04.13
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.
Permalink
01.10.13
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.
Permalink
01.08.13
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.
Permalink
12.27.12
Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum, Sprint at 3:20 am by timfarrar
Now that DISH’s attempts to bid for MetroPCS and do a deal with Clearwire appear to have been stymied by T-Mobile and Sprint respectively, the obvious question is what is Charlie Ergen’s Plan C? After all, last week DISH raised another $1.5B in a debt offering, “to be used for general corporate purposes, which may include spectrum-related strategic transactions”.
I’ve wondered if DISH has many options left other than to sell to AT&T, but it now appears that Ergen may have other plans, which are likely to be revealed within the next three weeks. After all, DISH asked the FCC to extend the comment period on the Sprint-Softbank deal until January 21, and DISH has 30 days from the publication of the AWS-4 Order on December 17 to decide whether to protest the proposed license modification.
While it is possible that Ergen could use the $1.5B that DISH has raised to mount a counterbid to either Sprint’s takeover of Clearwire, or T-Mobile’s takeover of MetroPCS, others think he is contemplating use of the money for a potential H-block bid, in order to persuade Sprint to enter into a more attractive hosting agreement. However, there is a far more intriguing possibility, which could explain why Sound Point started buying up more LightSquared debt at precisely the time when Clearwire decided to go with Sprint instead of DISH’s offer. That is an attempt to buy up all of LightSquared’s first lien debt, followed by a battle to oust Falcone when LightSquared current exclusivity (to propose a plan for emergence from bankruptcy) expires at the end of January.
Then DISH could propose in mid January that the AWS-4 uplink spectrum is instead converted to downlink spectrum (in line with a suggestion made by the FCC back in March), and LightSquared’s uplink spectrum would be used to provide an alternative uplink.
That would be logical, because it will be years before LightSquared is able to use its L-band downlinks, and the 1675-80MHz band is unlikely to be given away to LightSquared for nothing (as opposed to being auctioned). It would also make the full 20MHz of AWS-4 uplink spectrum usable for downlinks, and make an H-block counterbid by DISH far more plausible, because the H-block downlink (1995-2000MHz) could be combined with the AWS-4 spectrum between 2000-2020MHz, putting Sprint under further pressure. The FCC might also like to see the risk of litigation with LightSquared being taken off the table, as well as the prospect of higher bids for the H-block, even if the end result was a further delay in deployment of the AWS-4 spectrum.
Why would Ergen choose this risky path, with its inherent delays in buildout, rather than a simple sale of spectrum to AT&T at this point in time? Presumably AT&T has not yet made a knockout bid to buy the AWS-4 spectrum, while if DISH gained additional downlink spectrum adjacent to the G and H blocks, it would be far better positioned to strike a deal with Softbank to provide auxiliary downlinks for Sprint’s LTE network if AT&T doesn’t come to the table.
In addition, because Sprint is tied up with Softbank (and Clearwire) and T-Mobile with MetroPCS, there are few good partnership options available that would enable DISH to pursue a network buildout at the moment. The FCC has given Ergen 4 years for the initial AWS-4 deployment and even if that deadline is missed, the full buildout (to 70% of the population) can be undertaken in 6 years.
As a result, DISH has little to lose by taking some time to explore alternatives, seek to build up even more valuable spectrum assets, and hope that an attractive deal emerges for either a sale or network buildout in a year’s time. If DISH does go down this path, then LightSquared’s bankruptcy case, which has largely fallen off the radar screen in recent months, could be about to get very interesting.
Permalink
12.15.12
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.
Permalink
12.13.12
Posted in DISH, Financials, Operators, Regulatory, Spectrum at 1:31 pm by timfarrar
Today Sprint made an SEC filing stating that it had offered to buy the remaining shares in Clearwire for $2.90 per share, far below the $5+ that some think Sprint will have to pay to buy out the hedge funds that have invested in Clearwire with an expectation that the company’s spectrum is hugely valuable. Of course, as many have noted, Clearwire’s spectrum is seen as very desirable by Softbank, and could enable Sprint to rollout a much higher capacity urban LTE network, given the huge amounts of spectrum that Clearwire holds.
However, the underlying story here is far more complicated: why has Sprint made such a low offer, and why now? After all, even if the remaining strategic investors (Comcast, Intel and Bright House) are willing to take the $2.90 and run, they wouldn’t be able to command the majority of non-Sprint-affiliated holders of Clearwire’s equity needed to approve the deal. It appears that one (possibly the key) motivation is that if the strategic investors do accept Sprint’s offer then this would potentially block any alternative deals by Clearwire for several months (until the Softbank deal closes), as according to Sprint’s filing:
“Under the terms of the Sprint Proposal, each of Comcast, the BHN Entities and the Intel Entities would enter into a voting and support agreement with Clearwire with respect to the Proposed Transaction, which will provide that such Equityholders will vote (i) all voting shares of Clearwire owned by such Equityholders in favor of adopting the definitive merger agreement and approving the transactions contemplated thereby and (ii) against other acquisition proposals. These voting obligations would apply whether or not the Proposed Transaction is recommended by the Board of Directors of Clearwire. The voting and support agreement would also provide that such Equityholders would provide any waivers and consents needed to effectuate the Proposed Transaction.”
It’s surely not a coincidence that this offer came on the same day that Charlie Ergen received approval from the FCC for terrestrial use of his AWS-4 spectrum, with DISH stating that it “will consider its strategic options and the optimal approach to 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 largely caused by Sprint’s intervention via efforts to gain access to the H-block), and has bought $750M of Clearwire’s debt. The existence of other offers also seems to be confirmed, at least obliquely, by Clearwire’s indication that the Special Committee of the Clearwire Board of Directors, was “previously formed to review potential indications or proposals, including from Sprint”. However, DISH’s offer to buy some of Clearwire’s network and spectrum assets may not provide much if any near term value for the equity investors, perhaps making the strategic investors think that Sprint’s “bird in the hand” will be a better bet.
So what is Ergen up to? Rumors have persisted that Carlos Slim is allied with Ergen and that he has also been looking closely at Clearwire in recent weeks, while I’m told that today Sound Point has suddenly started moving aggressively to buy up more of LightSquared’s debt. Could Ergen and Slim be trying to acquire spectrum across multiple bands, by purchasing assets from Clearwire and positioning themselves to use some of LightSquared’s spectrum after a resolution (in the distant future) off GPS interference issues?
I’ve wondered recently whether Ergen has little choice other than to sell DISH’s spectrum to AT&T because there are few alternative partners available. However, it seems that Ergen may not yet have given up on a deal with Clearwire, making Sprint ever more desperate to block it. If Sprint is now able to tie up Clearwire for several months, then that would probably delay any deal beyond Ergen’s window for making a decision about how to proceed. Sprint has also been spreading rumors of its own potential deal with Ergen as a way to pressure Clearwire’s strategic investors to accept the offer from Sprint: the story was reported by Bloomberg last Friday, but first emerged somewhat earlier, just when Sprint delayed its proxy filing so as to negotiate with Clearwire.
UPDATE (12/14): Reuters is now reporting that Clearwire “is also in talks about other strategic alternatives besides the Sprint offer”, apparently confirming that an alternative deal is on the table. Its hard to see what that could be other than an offer from DISH. Reuters also notes that Softbank is capping Sprint’s offer at $2.97 per share, the same as paid for Eagle River’s stake, which indicates that Softbank is certainly not willing to pay whatever it takes to buy Clearwire at this point in time.
Some have asked me what is Sprint and Softbank’s alternative to buying Clearwire. My view is that Sprint will save its money for buying PCS spectrum, where its need is far more urgent. In particular, Sprint is going to have to pay $1B+ to buy the 10MHz H block in the auction next year, and if DISH is left with no alternative other than to sell out to AT&T, Sprint would expect to pick up another 10-20MHz of PCS spectrum that AT&T would need to sell in order to get a DISH deal approved by the FCC. What is key to understanding this strategy is that Sprint wins simply by blocking DISH, regardless of what happens to Clearwire, because if DISH has no alternative other than to sell the AWS-4 block to AT&T, Sprint will be able to buy PCS spectrum from AT&T.
If Clearwire’s strategic investors don’t take Sprint’s bait then would DISH be able to pull off a deal with Clearwire? Even then would Ergen follow through and build a wireless network? My guess is that the answer very much depends on how much AT&T is prepared to pay for the AWS-4 spectrum, but its certainly not yet time to take it for granted that Sprint will end up acquiring Clearwire in the next few months.
Permalink
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »
