A Confusing Scenario in the Quest for Spectrum

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sprint (NYSE: S) could have purchased Clearwire (NASDAQ: CLWR) at any time it wanted. Back in July the stock was trading under $1.00, and Sprint could have acquired the company for much less than its $4.2 billion purchase. When you look at the $0.17/MHz-pop price paid for Clearwire, the acquisition looks to be a steal for Sprint. However, Clearwire is a highly unprofitable business, and Clearwire jumped at the first bid to be acquired. However, with Dish now looking to fight the merger, it is very possible that Sprint might see more value in Dish’s spectrum, with less risk. With that being said, let’s look at the scenario that’s playing out, confusing nonetheless.

The Rundown

Back on Dec. 7, it was reported that Sprint had approached Dish Networks (NASDAQ: DISH) about gaining access to its 4G spectrum. The reasons that Sprint needs spectrum are obvious, however Dish also wanted this partnership to leverage Sprint’s mobile network. Yet because of uncertainty surrounding the FCC, and its decision regarding Dish’s spectrum, Sprint made a bid for Clearwire and Clearwire jumped on the offer.

Dish Networks is now apparently prepared to fight the Sprint/Clearwire merger. Before, Dish was unable to complete a deal with Sprint because there were too many issues with the FCC and the intended use of its spectrum. I imagine this uncertainty is what made Sprint go ahead and make the offer to Clearwire. But now that Dish’s spectrum has been cleared to offer 4G services, Sprint might want to rethink its offer to Clearwire, and Dish is attempting to provide Sprint with a clear road out of the Clearwire acquisition.

As it stands today, Dish has petitioned the FCC for more time to file an objection to the Sprint/Clearwire deal. For Dish to make such a request, the company must have had conversations with Sprint that insinuate a partnership pending the collapse of a Clearwire acquisition. Dish is making some very compelling arguments to the FCC, such as those concerning “competitive effects” and the fact that Clearwire’s spectrum would be controlled by a foreign company.

What Happens Next?

Judging by the speed at which Clearwire accepted the Sprint offer, it almost seems as though Clearwire knew this could or would happen. Clearwire investors might be discouraged at the offer made by Sprint, but if you take a look at Clearwire’s fundamentals, they really didn’t have too many options.

Sprint had already owned nearly half of Clearwire prior to its bid, and therefore it held some leverage over the company. And let’s face it, although Clearwire does have a valuable spectrum, it does not have the fundamental leverage to be too picky when provided with a bid to acquire.

Clearwire is yet to post a profit in its operations and has a profit margin of nearly (60%) over the last 12 months. The company has reported revenue of $1.32 billion yet has lost over $600 million and has total debt of $4.27 billion! As an investor, regardless of a spectrum, is this a company you’d want to buy? My answer is no! Clearwire most likely knows that if it didn’t take Sprint’s offer then it would have been acquired much cheaper in bankruptcy proceedings. Therefore, investors should be happy with the results -- and pray that they hold up.

So where does Dish fit into the equation? First, it makes some very compelling arguments for why the FCC should not allow the acquisition. And in the past, the FCC has taken into deep consideration the competitive landscape of telecommunications (remember AT&T). Furthermore, it makes sense that if Sprint believed the FCC would’ve allowed for Dish’s spectrum to be 4G then it would have formed a partnership with Dish. The bottom line is that with Clearwire comes significant overhang and a fundamental nightmare that not many companies would want to inherit.

Conclusion

In regards to Sprint, we know its fate; but Dish is a different story. Dish desperately wants to add mobile, and if so it could change the competitive landscape of the company. Not only would it be able to add mobile revenue from its current subscribers, but it would also have a competitive edge over other companies such as DirecTV.

Either way, Dish is going to enter the mobile space. It will either spend billions to create a nationwide 4G network or it will partner with a company such as Sprint, or even Google. Personally, I think Dish will partner with the former. In the end, Sprint most likely wanted to partner with Dish but offered Clearwire a bid as a last result (seeing as how it could have acquired the company at any point in the last year). The partnership with Dish makes more sense, with less risk involved. Clearwire, on the contrary, might continue its epic decline, that is if my suspicions become a reality. 


BrianNichols has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure