Taking a Look at the Sprint/Clearwire Deal

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

Wireless provider Sprint (NYSE: S) will acquire Clearwire (NASDAQ: CLWR) for $2.97 per share, pegging the company’s enterprise value at $10 billion. The deal also includes bridge financing of $800 million, and as wtih the SoftBank deal, it is expected to close mid-2013.

Last week, Sprint offered $2.90 per share for the company, and shares spiked to well over $3. We’ve seen several large minority shareholders voice concerns about the relatively low valuation the deal gives the company based on its net asset value, which appears to be a valid concern given the recent deals for spectrum. However, the previous connection (Sprint owns over 50% of Clearwire) between the two companies has put Clearwire shareholders in a tough position, as there was little chance that a fair market value could surface.

Mount Kellett Capital Management, which owns 3.6% of Clearwire (7.3% excluding Sprint’s stake) authored an open letter to the board of directors claiming that the company is worth over double the current deal value ($6.30 estimate). Mount Kellett argues that if the board were to allow a deal to materialize at Sprint’s current offer, it would be breaching its fiduciary relationship with shareholders. We implore interested parties to read the letter, but the heart of Mount Kellett’s letter articulates that the recent spectrum deals would value the entire company at a substantial premium to Sprint’s offer.

Unfortunately for Clearwire shareholders, the firm is not well capitalized and needs financing. Sprint will provide Clearwire with $800 million in financing, as we mentioned earlier, to help the company keep afloat. Clearwire shareholders are also placed in a difficult position when considering Sprint’s majority stake in the company. The position has kept other parties from having any interest in acquiring the company, even if it has incredibly valuable spectrum. There is no Verizon or AT&T ready to steal the company from Sprint.

Oddly, Sprint doesn’t have a strong hand to play either. SoftBank’s investment in Sprint will put it in a meaningfully better financial position, but there is no doubt that Sprint is currently the bottom of the US “Big Three” wireless providers. Sprint charges the least and offers unlimited data, but that comes with the price of clogging up spectrum and slowing network speeds. If Sprint wants to compete with the big boys, then it needs better spectrum, and it needs to acquire this better spectrum while it attracts new customers via better phone offerings. If the deal goes through as planned, we think the price will prove to be a bargain for Sprint.

We expect to see several shareholder lawsuits against Clearwire’s board of directors, which is sometimes common when controversial mergers occur. In this case, we think shareholders will have a valid claim, which could drag out the process or even prevent the deal from consummating. Still, we remain on the sidelines in this situation.


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