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Clearwire Buyout by Sprint Seen Best For Owners: Real M&A

December 12, 2012

Clearwire Buyout by Sprint Seen as Best Bet for Owners

Sprint is studying options for Clearwire and is in talks to buy out the company’s minority shareholders. Photographer: Victor J. Blue/Bloomberg

The best escape for shareholders of Clearwire Corp. (CLWR:US), a stock whipsawed more than any other in the Russell 1000 Index, would be locking in a bid from Sprint Nextel Corp., even at $3 a share.

Sprint, which owns just over 50 percent of Clearwire, is studying options including a full takeover of its Bellevue, Washington-based wireless partner, with $3 a share serving as a benchmark for transactions, a person with knowledge of the situation said this week. Clearwire’s stock, which fell below $1 in July, had the biggest swings in the Russell 1000 Index during the past 90 days, according to data compiled by Bloomberg.

While Sprint’s offer is less than a tenth of Clearwire’s peak stock price five years ago, Macquarie Group Ltd. says the $4 billion company has few alternatives as it runs out of money building out its high-speed network. Clearwire is struggling with a debt load (CLWR:US) bigger than its market value and projected losses (CLWR:US) through at least 2017. Analysts estimate the stock price will be lower in a year than where it ended yesterday at $2.75.

“It’s Sprint or nobody,” Christopher King, a Baltimore- based analyst at Stifel Financial Corp., said in a telephone interview. “They’re losing money hand over fist. They’re burning so much cash. At the end of the day, Clearwire’s worth what Sprint’s willing to pay for it.”

Scott Sloat, a spokesman for Overland Park, Kansas-based Sprint, declined to comment on the company’s potential plans. The third-largest U.S. wireless carrier is getting an influx of $8 billion in capital from Japan’s Softbank Corp. (9984), which agreed in October to buy 70 percent of Sprint for about $20 billion.

Mike DiGioia, a Clearwire spokesman, also declined to comment.

Wireless Venture

Sprint and Clearwire formed a joint venture in 2008 that added a portion of Sprint’s airwaves and $3.2 billion in investments from Intel Corp. (INTC:US), Google Inc. (GOOG:US) and cable companies including Comcast Corp. (CMCSA:US) and Time Warner Cable Inc. (TWC:US) The venture planned to build a high-speed network to get a lead on rivals Verizon Wireless and AT&T Inc.

Clearwire never lived up to those ambitions, and the project has yet to break even. Along the way, partners such as Google and Time Warner Cable have sold their stakes for a fraction of their original value.

Bailing Out

Craig McCaw, the telecommunications pioneer who founded Clearwire, resigned as chairman in 2010. In October, his investment firm Eagle River Holdings LLC agreed to sell a stake in the company to Sprint for $2.97 a share, giving the wireless carrier its majority position.

“I don’t think this has played out exactly the way people expected and probably not the way McCaw envisioned,” Todd Lowenstein, a Los Angeles-based fund manager with HighMark Capital Management Inc., which has $17 billion under management, said in a phone interview. “Early investors and the cable companies have been dumping their Clearwire stake. People are voting with their feet.”

Clearwire, which peaked at $33.30 in July 2007, slumped (CLWR:US) to as low as 90 cents this year and is projected by analysts to post a record $1 billion net loss for 2012, according to data compiled by Bloomberg.

Sprint is studying options for Clearwire and is in talks to buy out the company’s minority shareholders (CLWR:US), two people with knowledge of the situation, who asked not to be identified because the talks aren’t public, said this week.

A deal may be announced by the end of the year, though talks could still fall through, according to the people. A $3-a- share value will serve as a benchmark for future transactions, one person said.

Spectrum Value

For Sprint (S:US), having full control of Clearwire’s spectrum, which blankets the entire country, would help the carrier shore up its wireless network at a time when smartphones and tablets are fueling a surge in data traffic.

“Clearwire’s got a tremendous asset in deep spectrum and we think Sprint would like access to that,” Jonathan Schildkraut, a New York-based analyst with Evercore Partners Inc., said in a phone interview.

An offer for $3 a share would be a 25 percent premium to Clearwire’s closing price Dec. 10, the day before the stock rose on reports that Sprint is studying a takeover, and 32 percent higher than its 20-day average (CLWR:US) from that point. That’s in line with the 31 percent average premium paid in acquisitions of U.S. telecommunications-services providers larger than $500 million, according to data compiled by Bloomberg.

‘Pretty Good’

Clearwire hasn’t traded (CLWR:US) for $3 since September 2011, and analysts are projecting the stock won’t top that level any time soon. The average share-price estimate for the next 12 months is $2.59, 5.8 percent lower than yesterday’s close, data compiled by Bloomberg show. In July Clearwire slipped below $1 and didn’t climb back above $2 until October.

“Considering where the stock was three or four months ago, I think, if indeed there is a $3 offer, it’s a pretty good deal,” Kevin Smithen, a New York-based analyst with Macquarie, said in a phone interview. “It’s been shopped around. I don’t think there’s any other buyer for their spectrum.”

A deal would lock in a value for shareholders who have endured years of dramatic price fluctuations. Clearwire’s realized volatility, which increases as swings in a stock’s price widen, is 129 for the past 90 days, higher than every other company in the Russell 1000 Index, data compiled by Bloomberg show. The figures for all of 2012 and the past three years are 94 and 87, respectively, the third-highest values in the index, the data show.

Not Enough?

Still, BTIG LLC’s Walter Piecyk said Sprint may have to pay more than $5 a share to win over the majority of non-Sprint shareholders.

“It will be well worth the price in order to secure all of Clearwire’s spectrum for its own use,” the analyst wrote in a note to clients yesterday.

After Eagle River closed on the sale of its stake to Sprint this week, Clearwire shareholder Crest Financial Ltd. filed a complaint in Delaware Chancery Court in Wilmington accusing the investment firm, Sprint and Clearwire of allowing Sprint to selectively gain from Clearwire’s spectrum value while minority shareholders couldn’t.

Crest owns 6.6 percent of Clearwire’s Class A shares and said it was seeking to block the pending Softbank investment in Sprint and to collect damages, according to a statement.

‘Only Buyer’

While some Clearwire investors may view a $3-a-share bid as insufficient given the attractiveness of the company’s spectrum, their ability to negotiate is limited given the company’s need for funds and lack of alternative buyers, said Stifel’s King. Clearwire has spent more money than it’s taken in every year since at least 2007, and had negative free cash (CLWR:US) flow of $563 million in the 12 months ended in September, according to data compiled by Bloomberg.

“I’ve talked with a lot of shareholders who would not be happy with $3 a share,” he said. But Clearwire “needs additional funding to complete their 4G network builds. Sprint has a lot of leverage. They are the only buyer out there.”

The case is Crest Financial Ltd. v. Sprint Nextel Corp., CA8099, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Scott Moritz in New York at smoritz6@bloomberg.net.

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Nick Turner at nturner7@bloomberg.net


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