Earlier this week, mobile carrier Sprint (click ticker for report: ) announced a $2.90 per share offer for spectrum owner and perpetually undercapitalized Clearwire (click ticker for report: ). Shares of Clearwire rocketed far above the offer price, as many participants anticipate a higher offer.
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 offer ($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 would provide Clearwire with $800 million in financing 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 (click ticker for report: ) or AT&T (click ticker for report: ) 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.
Sprint and Clearwire now sit at a complicated impasse, where plenty of minority Clearwire shareholders believe that the company is worth significantly more than the value of the standing offer, but these same shareholders have few other options. Sprint, on the other hand, desperately needs to improve its network and looks to do so by acquiring Clearwire at a good price, but the cohort could face legal action if it sufficiently upsets Clearwire’s minority shareholders.
Our median fair value estimate for Clearwire sits at $4 per share, though our fair value range is much wider and is based on a discounted cash flow analysis rather than a net asset value approach. We think it’s reasonable for shareholders to earn a slightly higher premium than the current offer, but without much competition for the company, potential upside seems capped. We remain on the sidelines, but we are anxious to see how the deal eventually does (or doesn’t) pan out.