Sprint offers Clearwire $1.6 billion "lifeline"

NEW YORK Thu Dec 1, 2011 7:01pm EST

A woman talks on her phone as she walks past T-mobile and Sprint wireless stores in New York July 30, 2009. REUTERS/Brendan McDermid

A woman talks on her phone as she walks past T-mobile and Sprint wireless stores in New York July 30, 2009.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - Sprint Nextel Corp, the No. 3 U.S. mobile provider, agreed to pay up to $1.6 billion to Clearwire Corp in the next four years, easing concerns about a liquidity crisis at Clearwire.

Shares in Clearwire, which investors had seen as a bankruptcy risk, rose 14 percent after the news. The deal includes a potential equity infusion and extends Sprint's use of Clearwire's network.

Clearwire also said it was able to pay $237 million debt interest due December 1.

Clearwire, which is majority owned by Sprint, had been seeking almost $1 billion in financing to keep operating and to fund an important network upgrade. Its stock rose 13 percent on Wednesday after a Reuters report that Clearwire was expected to reach a funding deal with Sprint.

While the deal with Sprint, Clearwire's biggest shareholder and customer, was applauded by investors, some analysts still questioned the long-term future of the partnership as Sprint and Clearwire have a tempestuous past and Sprint is also planning on upgrading its own network.

Sprint is attempting to throw a "lifeline" to Clearwire, according to Nomura analyst Michael McCormack but, he said, it "merely prolongs the current debate regarding Clearwire's strategic importance to Sprint."

Standard & Poor's rating agency described the deal as "potentially positive" but it did not change its ratings of Clearwire, which still implies a default risk. It is waiting for the timing of the funding "in light of Clearwire's current substantial cash flow deficits." before any changes, S&P said.

However, Moody's rating agency changed its rating outlook on Clearwire to "stable" from "negative" after the news.

LONG-TERM QUESTIONS REMAIN

Sprint, which is seeking up to $3 billion additional funding itself, committed to a Clearwire equity offering of up to $347 million and said it would pay Clearwire about $1.28 billion for using its wireless network.

Clearwire made a concession to Sprint by adjusting their existing agreement to allow unlimited data use. But Mizuho's Michael Nelson said that was "a small price to pay."

In particular, he said Sprint's equity investment commitment gives other prospective investors more confidence.

"We believe the deal with Sprint increases the probability that Clearwire will secure additional funding," said Nelson.

Clearwire's Chief Executive Erik Prusch said the deal "cements" the relationship with Sprint.

"We think this is a very important piece to the whole mix of funding for this company, having our leading shareholder step up in this way," he said.

He declined, however, to comment on Clearwire's other efforts to raise more money in an equity offer or vendor financing.

The deal also helped answer questions for Sprint investors on Sprint's spectrum requirements for its high-speed wireless service plans, Wells Fargo analyst Jennifer Fritzsche said.

"It removes a significant overhang for the shares," Fritzsche said in a research note, adding that Sprint now has "an enviable spectrum position."

But others were more cautious about Sprint's long-term intentions for Clearwire. Sprint is building its own national high-speed service but has said it will need to piggy-back on Clearwire's service in high-demand markets.

"Sprint gives them the breathing room they need to continue to survive, for now," said independent analyst Jeff Kagan. "The next big question is, what is next?"

DIFFICULT RELATIONSHIP

Clearwire had said last month that it was considering skipping the Dec 1 interest payment, a comment analysts saw as a negotiating tactic aimed at forcing Sprint's hand.

Many investors fled Clearwire on October 7 when Sprint's comments at an analysts meeting led to fears that it was considering abandoning Clearwire.

Under the new agreement, Sprint will pay $926 million for unlimited use of Clearwire's WiMax wireless network in 2012 and in 2013, after which payments will depend on data usage.

It will also pay Clearwire up to $350 million over two years for capacity on a high-speed service Clearwire wants to build using a faster technology known as Long Term Evolution, if Clearwire achieves certain network targets by June 2013.

Sprint also committed to providing equity funding of up to $347 million if Clearwire makes an equity offering between $400 million and $700 million to keep Sprint's current voting interest at the same level.

Clearwire shares closed up 25 cents at $2.03 on Nasdaq after the news, still two pennies below their close before the October 7 event. Sprint shares closed at $2.70 on the New York Stock Exchange, unchanged from Wednesday.

Fixed income investors also reacted positively to the news, sending Clearwire's typically illiquid debt instruments up and pushing down the price of Sprint's credit default swaps, or the cost of insuring Sprint's debt.

(Reporting by Sinead Carew, Nicola Leske and Melissa Mott; editing by Derek Caney, Gerald E. McCormick and Andre Grenon)

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