Is Clearwire still a Good Deal for Sprint?

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

So Sprint (NYSE: S) finally announced its intention to acquire Clearwire (NASDAQ: CLWR), subject to regulatory approval. We all knew that something like this would eventually come to pass. However Sprint isn’t the only one vying for Clearwire now. Dish Network (NASDAQ: DISH) popped in recently with a higher bid for Clearwire at $3.30 per share, trumping Sprint’s valuation at $2.97 per share.

Sprint may be Clearwire’s single largest investor and customer with a more than 50% stake in the company, but in order to acquire Clearwire, it needs to get most of its minority shareholders to vote in favor of the deal. But with Dish’s higher bid, my guess is that Sprint would probably have to trump that in order to win over the company.

Two large Clearwire shareholders, Mount Kellett Capital Management, which, owns 7.7%, and Crest Financial, which owns an 8.3% stake, have already slammed Sprint’s acquisition plans publicly. Crest has gone on to lodge a complaint with the FCC and file a class action lawsuit on behalf of Clearwire’s minority shareholders stating that Sprint’s $2.97 per share bid for Clearwire grossly undervalues the company.

But if Sprint were to bid at a higher price, how good a deal would Clearwire really be?

By your powers combined

A Sprint and Clearwire combination packs more than twice the spectrum of the top two wireless service providers. Clearwire will certainly give a massive spectrum boost to Sprint and would increase the company’s competitive edge in the domestic wireless industry. With an enhanced spectrum portfolio and SoftBank's financial backing, the Clear-Sprint combination could actually start giving executives at AT&T and Verizon sleepless nights. But while all this may be true, Sprint still has some very important hurdles to negotiate.

The technological problem

First is that Clearwire’s network is not compatible with that of Sprint. Sprint uses distinct 4G LTE technology called FDD. Here FDD stands for frequency division duplexing where data is sent and received using two different channels or frequencies of communication. Clearwire, on the other hand, uses the TDD or Time division duplexing, which uses just one frequency channel to send and receive information. While TDD uses less spectrum resources to achieve connectivity, it also tends to be slower than FDD.

Anyways, the fact of the matter here is that Sprint needs to somehow get these two technologies to work together. This means investing more money into developing solutions to tackle the problem or encouraging manufacturers to make devices that work with both technologies. This is bad news because Sprint already has a colossal $15 billion net debt on its books. Acquiring Clearwire would add another $4 billion to that figure.

The spectrum problem

Another problem Sprint would face is something inherent to the 2.5 Ghz frequency band. While lower frequencies such as 850 Mhz used by AT&T can propagate longer distances, 2.5 Ghz is known to propagate at shorter distances and also has problems penetrating objects such as walls. So using these frequencies in urban areas with tall buildings is going to be quite a nightmare for Sprint. The company would have to invest a lot of money in setting up more cell phone towers and miniature ones called femtocells, such as those manufactured by Qualcomm, in order to improve service coverage.

On the bright side Sprint can use some of its existing sub 2.5Ghz spectrum to bridge the gap in urban areas. Sprint is already in the process of phasing out its old iDen network and this could free up prime spectrum in the 800Mhz band.

But the problem of getting a wide variety of mobile devices to operate at so many different frequencies without a hitch is a problem Sprint would have to iron out soon. 

The Foolish bottom line

With the growing probability that Sprint would have to cough up more cash for complete control over Clearwire, things might get more difficult for the company that is already neck deep in debt.

However, like land, spectrum is a limited and scarce resource. You cannot just make it out of thin air (ironically). As more people use smart devices to connect on the go, the requirement of mobile data services would only increase, thus driving up the demand and the value of Clearwire’s spectrum. Sprint might have Softbank’s backing under its belt, but if it finally does acquire Clearwire, it would be closer than ever to making a turnaround, despite the inherent shortcomings discussed above.

Just don't expect the company to start making a profit overnight. That would probably take many more years as it would have to pay off its colossal debt. And with Verizon and AT&T way ahead in their implementation of 4G LTE, it would take a lot for a distant third Sprint to catch up with the duo.

So what do you readers think about Sprint’s acquisition of Clearwire? Feel free to express yourself in the comments section below. 

kekidf 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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