Yesterday there was a piece in the Wall Street Journal suggesting that Sprint’s board was actively discussing the pros and cons of letting TMobile USA invest in clwr. That would certainly be an easy way to fund the rest of Clearwire’s buildout and possibly gain an ally in the LTE/WiMAX popularity contest. There have also been occasional rumors (unlikely ones IMHO) over the past year suggesting that TMobile USA and Sprint Nextel (NYSE:S, news, filings) ought to merge, and coming together on Clearwire’s 4G network could be a first step. But a faction of Sprint’s board is said to be dead set against it, suggesting it would strengthen a rival unnecessarily. Honestly, I think it just isn’t likely to happen.
From Sprint’s point of view, they are just much less desperate than they were last year or the year before. They don’t need to make a drastic move, and so far Clearwire’s subscriber gains have been off the charts. Why share that with anyone? As for the remainder of the funding for Clearwire’s buildout, they do have options. WiMAX may have enemies in the financial community, but it has friends too.
And from TMobile’s point of view, their HSPA+ network is holding its own against early 4G speeds and, therefore, they don’t need to rush into anything just yet. They need a partner who needs them back, and whom they would have more leverage with. A subordinate position to Sprint in Clearwire sounds like a good way to stay #4 indefinitely. Harbinger’s LightSquared has practically been tailor-made for TMobile’s benefit, I think they’re just making sure the venture has all its ducks in a row before they throw their weight behind it.
So, while the street always thinks every decision is up against some sort of deadline, I don’t see that either of these companies really has enough of a reason to do anything dramatic and therefore they probably won’t. They’ll consider it of course, but they just won’t take any action at this time – and the opportune moment will quickly pass. Anyone out there think I’m missing it?
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Categories: Mergers and Acquisitions · Wireless
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Rob,
below is the other side of the argument:
<> (CSFB)
I am not sure I agree the CLWR equity is possibly worthless w/o/ a TMo deal, but the other views have merit.
OOps I guess the chevrons blocked the paste, see below:
There are five reasons why the board should back a deal (please see the attached report
for detailed analysis supporting our view):
i) We estimate adding T-Mo’s subs to CLWR could lower Sprint’s 4G
network costs per sub by 46%. The economic impact of improved scale
should drive the board’s decision. The scale benefit will likely dwarf the
economic impact of 4G competition from T-Mo, in our view.
ii) A deal would significantly increase the value of Clearwire, in which
Sprint has a 54% stake. Every $1 increase in CLWR stock should boost
Sprint’s equity value by about $0.20 (4%). To take it a step further, without
additional partners like T-Mo, CLWR’s equity may be worthless. Sprint can’t
generate enough demand from its own subs alone to realize the potential
value of Clearwire’s spectrum.
iii) Sprint will not be relinquishing a meaningful competitive advantage. TMo
has said that they are only interested in an LTE 4G solution (as opposed
to WiMax). Clearwire will likely not deploy LTE until sometime next year. By
the time, T-Mo is able to offer 4G services on Clearwire’s network, VZ will
have a 4G offering and AT&T’s 4G roll-out will be well under way – 4G will no
longer be a source of differentiation for Sprint.
iv) The alternatives are far worse. If T-Mo is unable to get a deal from CLWR
they could do a deal with Lightsquared. With T-Mo involved, Lightsquared has
a much better shot at raising the financing they need to build a new,
competing network. This would be a bad outcome for Sprint and for the
industry in general. By contrast, if T-Mo signs a deal with Clearwire, the
prospect of Lightsquared succeeding is reduced, in our view.
v) A T-Mo / Clearwire deal would move the companies one step closer to a
T-Mo / Sprint combination. While the integration would be complex, the
synergies could be significant. Furthermore, if the board believes that a Sprint
/ T-Mo combination makes sense at some point then it makes no sense to
push T-Mo into a situation where they make it possible for a new entrant to
build a competing network.
In other words, their view is that Sprint is desperate and Clearwire is doomed, and therefore the only choice is to beg TMobile to come help them. I don’t think Sprint sees it quite this way, and while they might eventually agree in principle to let TMobile do it, the two will not agree on price. Because TMobile has the LightSquared option, they will not want to pay what Sprint demands to overcome its own reticence.
Rob– I think the note is more nuanced than to suggest Sprint is “desperate” or that CLWR is “doomed”. In fact the whole discussion is in the context of a split view at the S board level. It seems a viable option is for Sprint to go it alone and fund CLWR’s national roll-out. To me, as an S shareholder, it’s likely that they will be a weak #3 competitor for the foreseeable future but that the spectrum assets of CLWR are a potential diffeerntiator when it comes to advanced services. I want them to solidify that position and cut off the air supply to potential third party threats (Lightsquared)– so do the T Mo deal. If CSFB are correct they won’t be giving up subs they wouldn’t lose anyway and the history of national servises that need scale is there is probably room for three only anyway so an ultimate merger with T Mo likely makes sense– but not yet– S should continue to get its act together and its stock price up from the basement before considering that.
I voted “yes” in your poll.
Well, there is a difference between ‘should they’ and ‘will they’. It may be that they should, but I simply don’t think that they will – based on the principles of ego and raw inertia. I would be happy to be proven wrong though, I don’t have a dog in this hunt.
with economic animals a positive answer to “should they” would hopefully result in a positive answer to “will they”. Hopefully the ego thing has been beaten out of them over the past few years of circling the bowl. I guess we will see.
I think the ‘should’ part is unclear enough to slow things up at this stage. It’s a close call to me. But then, I don’t have a vote.
Why is it that analyst commentaries described as “arguments” on behalf of their owners in order to benefit whomever or whatever it is they want, more importantly, need, appear as “threats” more often than not?
For example, as a Deutsche Telekom customer, I would switch in a heart beat to CLWR as soon as their product portfolio becomes available at a more cost effective price, with corresponding compelling solutions along with similar or better coverage plans according to my needs.
Why wouldn’t the same principles apply to AT&T and/or VZ customers as well?
Have these CYSTS somehow DEBUNKED Adam Smith’s “Invisible Hand” by their own “decrees”?
Rob’s point about the “speed” which one mustn’t react, is spot on. We’ve seen it play out accordingly while tying it to all the “scale” talk that Sprint has let go in favor of keeping their legacy “pin drop,” LD network to be sure.
The # of subs in the marketplace is a “zero sum game” moving along at a fluid pace daily, weekly, monthly and yearly.
I hope Sprint is intent on taking Deutsche Telekom subs as an entrée to VZ and T.
Carlk,
I think you miss the point. Strategically the dumbest thing CLWR/S could do would be to feed the major potential independent threat which is Lightsquared. Get TMo on board and who else they got?. As a shareholder i am glad you are not on the board of Sprint.
Strategically, I would hope that Sprint is fully capable of assessing whatever threat an independent “Lightsquared” will mean to them in the marketplace including all the variables including “subs.”
Stated differently, if their product based upon their “assets,” especially “spectrum” tied to costs to deliver their product are expected to remain superior, then they will take Deutsche Telekom subs as time marches on.
I can see Hess’s friendly face selling it over the airwaves now!
I expect my management teams to KNOW their “COMPETITION,” especially when they will kick the competitions’ BLEEPS. No R or worse ratings for Powell’s site any longer!
If what you’re saying has contemplated all the “potential” debits and credits according to reasonable “time” frames, I’m sure such a deal is forthcoming then, right???
Is such a deal imminent– who knows, we aren’t privy to all the information, concerns and facts. What I do know is that, given imperfect information, there exist credible arguments on both sides of the question. That is the value of boards such as this surely? So, add some value and rebutt the CSFB position point by point, rather than railing on about “CYSTS” and Adam Smith, etc. That adds little to no value.
Enron, your comment criticizing my “CYSTS” really hurt me in the buttocks! 🙂
The point of referencing Smith-you know this!-was for business owners to carefully ponder their own self-interests so that, those interests ultimately inure to their customers’ long term satisfaction(demand) in the form of positive, continuous advancements(qualities of life enhancements) in the virtuous cycle of turning profits for the business creators(capitalism).
By doing so, mankind benefits immensely. The fact that there are LOSERS along the way, only makes it JUST.
What you ask me to do intelligently, assuming I was a meaningful S share owner and “we’re” not, is what a passive investor/outsider must “trust management teams” to do.
As you say, there is dissension amongst various S board members, apparently. They must put their heads to the grindstone and pound out all the necessary numbers for qualifying their decision!
The key questions regarding where the fourth wheel’s subs may ultimately go, because of the competitive advantages and pricing systems that S maintains, all as a result of their “assets” and how much time they have to continuously fund their business plan while ramping sales, with or without The Germans investing in their ops, are quantifiable.
One would think, Comcast sub numbers must also play a role in this decision making process.
Your use of the word, “nuanced,” is a cute way of validating CSFB’s “threat” while bashing the business as unsustainable.
Of course, if I were part of a board that KNEW CSFB’s CLAIMS of failure were imminent, I would be acquiescing.
You’re quite an analyst from what I have gleaned over the years, and have vetted all the numbers based on your investment in S, I’m sure.
Do you believe the business plan of CLWR is unsustainable without DT?
One thing the enlightening back & forth above hasn’t considered is that sprint always makes the wrong decision… Whether CDMA, Nextel, handsets (palm treo) etc, sprint is a consistent strategic loser. 5 years ago, this was a real & meaningful wireline (IXC) competitor to T and VZ (MCI). Somehow, they watched WCOM implode, paid a zillion dollars for nextel, abandoned the Fortune 500 and became the wireless carrier with the worst service. Maybe now they’ll merge with XO and Chrysler and invite Countrywide to finance newco
Anon,
then maybe they should take the George Costanza appoarch to decision making– “if every instinct you have is wrong, then the opposite must be true”.
You forgot they tried to merge with WCOM before the cards came crashing down… Antitrust issues stopped them I think because of UUNet. But I believe the board has turned over as well as the management team since then so not an apples to apples comp.
it would have been cool if they called the merged company LDDS-worldcom-mci-sprint-nextel.. and they could have used all the logo’s and colors and made no decisions at all. maybe they could have heard a pin drop over a push to talk phone in prison in mississippi
Well, Anon, I see you “don’t trust the Sprint management team,” nor Clearwire’s by default? Have these LOSERS paid a sufficient price that is JUST? LOL
LOL. in truth, my take is not a trust issue, but tracks closely to the George Costanza Theorum. They just seem to pick the tactical, negative-sum answer most times.
We have to admit that the following were bad choices: cdma, embarq spinoff, palm treo, selling valuable and unique towers to allow competitors on them, and, drum roll, the $50+ BILLION nextel disaster (an “acquisition” where they inexplicably kept both names, both logos and both networks and never integrated anything other than ticker symbols). They got into data centers AFTER the 2001 blow up, then saw that they were captial intensive and gave them away.
I think all of this is institutional DNA and unlikely to change. they are deeply risk adverse, and when they take risks, they do so in a wild and unimaginative manner (think of what they could have done with the nextel $50 B!). As such, my bet is that whatever they should do, they won’t do (and will probably pay consultants a hundred million bucks for the priv).
at the margin, i agree that i’d share costs wtih T-Mo and deprive my sole 4G competitor the anchor customer and start up funding
It is true that they seem to have operated for the last five years with their brain tied behind their back. I got my position through being a NextTel shareholder (thankyou Sprint) and inertia has led me to keep it.
I am pleased we agree that, given what is known, a decision to bring T Mo on seems right. I can only hope they disagree but follow the Costanza dictum.
En- My shareholders aren’t as patient