Protests Continue to Put Pressure on the FCC

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The outrage stemming from Sprint Nextel’s (NYSE: S) $2.90/share offer to acquire Clearwire (NASDAQ: CLWR) is of epic proportions as more and more come to the table to state their dissatisfaction regarding the merger. The FCC now has a tough decision, as protests demand that the acquisition be blocked.

A Quick Run-Down

Cleawire investors had been talking about merging with Sprint for the last two years, and would’ve jumped at the opportunity for a $2.90/share takeover bid back in June of last year. However, as shares of Clearwire rose in anticipation of a potential takeover, investors were furious when the bid was announced.

The Sprint/Clearwire merger gives Sprint the all-important spectrum, and ultimately saves Clearwire from what could be bankruptcy. Clearwire is a company whose sum of its parts is much more valuable than its actual operations. The reason is due to the increase in data usage combined with restrictions on spectrum, a company that has a spectrum is valuable.

It’s important to remember that no two spectrums are created equally. Those that are lower have higher valuations due to better signals, better travel, and lower frequencies. Clearwire has a 2500 MHz spectrum, and Sprint acquired it for just $0.17/MHz. This is cheap compared to Verizon’s recent acquisition of $0.68/MHz for their 1700/2100MHz spectrum; which is one of the primary reasons that Clearwire investors have been so outraged.

It’s kind of hard to say how much Clearwire is worth, because Sprint is not just buying the spectrum, it’s also buying the fundamental disaster that is Clearwire’s company. Therefore, you have to take into consideration that a cheaper premium is paid to acquire a company, not a spectrum that has significant operational weaknesses. The bottom line is that the deal is somewhat similar to the fiscal cliff; a deal was reached but neither party is completely satisfied with all that comes with the deal.

Significant Protest

I am sure that Sprint wishes it could just acquire Clearwire’s spectrum and avoid the company itself -- Cleawire investors want more money for their spectrum – therefore no one is really happy.  However, it’s not just retail investors who don’t like the deal it’s also institutions and other companies as well.

Over this last weekend, Crest Financial announced that it intends to ask the FCC to block Sprint’s acquisition of Clearwire; and furthermore block the Sprint/Softbank deal. Crest, who owns 8% of Clearwire, joins fellow Clearwire investor Mount Kellet, who owns 3.6% of the company. Mount Kellet states that the deal would be an “absolute outrage,” and values Clearwire at $6.30 per share based on its spectrum being “worth” $18 billion! Crest Financial is arguing that the deal would hurt government revenue from the auction of licenses, and that the deal “grossly undervalued Clearwire.”

In addition to arguments from large institutional investors, Dish Network (NASDAQ: DISH) has also asked the FCC to block the acquisition. Dish Network was reportedly in talks with Sprint prior to the Clearwire acquisition; as Sprint was attempting to use its spectrum and Dish was going to use Sprint’s mobile network. However, as we all know, Dish had been in an ugly battle with the FCC regarding the use of its spectrum. Therefore, it should come as no surprise that Dish is fighting the Clearwire acquisition now that its spectrum has been approved to offer 4G services (too bad Sprint was impatient).

 In Dish Network’s suggestion to the FCC, it asked that the FCC look at the “competitive effects” of the Clearwire/Sprint deal. Dish’s most significant stance might be the fact that if the deal is approved, a foreign company (SoftBank) would control a large U.S. spectrum. Overall, these “effects” of the deal will ultimately determine whether or not it’s approved.

A Foolish Conclusion

The entire situation is sloppy, and it’s near impossible to make an educated guess as to the outcome. When it’s all said and done, I don’t think the Sprint/Clearwire acquisition will be approved. The reason is because of the importance for spectrum, and the negatives set forth by those who oppose the deal. Therefore, I think Sprint will end up partnering with Dish and Clearwire investors will realize that the company is not worth as much as they think.

The ultimate loser (if my prediction is accurate) will be Clearwire: It’s a stock that rose due to the speculation of a potential deal. Yet the company has never seen a profit and has over $4 billion in debt. Therefore, I think its $18 billion spectrum will be acquired for much less than Sprint’s acquisition offer in bankruptcy, and Dish will be the clear winner as it partners with Sprint and sets itself apart by offering mobile services to its customers. However, this is just a prediction, no one knows the outcome. But rest assured, it’s an outcome that will be interesting to follow, and will have long-lasting effects for those who come out on top.

BrianNichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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