Last week we covered Merrill Lynch’s downgrade of Clearwire (NASDAQ: CLWR) in response to the lack of funding in the foreseeable future. Michael Funk went so far as to suggest his target price for Clearwire was $.50 a share.
Debt financing: “Clearwire can’t fill the funding gap with debt, in our view, as secured debt incurrence is dependant on additional equity capital. Further, the second lien debt has started to trade based on recovery value rather than yield, in our view.”
Any analyst suggesting that Sprint and Clearwire’s union is in danger between the end of 2012 through mid-2013 (at the minimum) is either full of him/herself or has an overly pessimistic view of the viability of Clear’s ability to continue day to day operations. Sprint has built their future on the back of Clearwire and their WiMax networks. In the decision to transition from WiMax to LTE-Advanced Sprint has effectively proposed to both their girlfriend and their mistress. Without the WiMax network, Sprint cannot possibly survive the current wireless environment (read: Pre=AT&T and T-Mobile merger). They can and will not allow Clearwire to fail.
This was evidenced late Thursday night when reports got out that the Sprint (NYSE: S) board is considering a “substantial” investment in Clearwire. It is rumored that Sprint may (and should) tie the speed and efficiency of the roll out of the new LTE network to the amount of investment they are willing to offer. Clear stated last week that they will need an additional $600 million to fund its transition to TDD-LTE, and are in need of $150 million to $300 million to maintain its existing mobile WiMAX business.
The majority of the transition from WiMax can be done with existing radio equipment and current backhaul capacity. During the trials held in Phoenix earlier this year it was demonstrated that coexistence of WiMAX and LTE services on the same network was possible. In a fixed environment network speeds of up to 120 megabits per second were achieved. In the mobile environment they were able to reach 90 Mbps using 40 MHz (2×20) of total spectrum.
Sprint and Clearwire recently revised their wholesale agreement leading to Sprint paying out $1 billion dollars through the end of 2012. Sprint recently reduced their voting shares in Clear in an effort to relieve concerns that Clear was in fact a subsidiary. Comcast (NASDAQ: CMCSK) is the second largest holder of voting shares with 19.6%. Intel (NASDAQ: INTC) which had a 10% in the company announced earlier this year that they would be offloading as many as 10 million shares of Clear.