TEXT-Fitch says Sprint's stronger link to Clearwire likely strategic
Oct 19 - Sprint Nextel's intention to buy Eagle River Holdings LLC's stake in Clearwire Corp. is likely another step in an evolutionary process that could eventually result in the company gaining sole control of the wireless network operator, according to Fitch Ratings. At the very least, Sprint's link to Clearwire would be stronger, and therefore complicate things a bit for those companies considering a move to buyout Clearwire. Upon completion of the transaction, Sprint would have a 50.4% majority voting stake, versus the 48.0% they currently control. Comcast and Intel also have meaningful stakes in Clearwire, including control of three board seats. This transaction would not increase the seven board seats that Sprint currently controls. Japanese cellphone company Softbank Corp. announced Oct. 15 it would buy 70% of Sprint for $20.1 billion, via a combination of a $12.1 billion payout to shareholders and $8.0 billion in new capital. The Softbank deal gives Sprint significant financial flexibility and a broader range of options, including how to address the longer term strategic options with Clearwire. We note that this is not completely new territory for Sprint, as they previously have had majority control of Clearwire. However, due to potential cross default risk, the Clearwire equity holders' agreement was amended to permit Sprint the ability to unilaterally surrender voting securities to reduce its voting security interest percentage below 50%. Sprint could choose a similar route to reduce only its voting interest if Clearwire struggles more financially. Clearwire will be in the need of a capital infusion in the coming quarters as it is burning cash at an annual run rate of about $700 million to $800 million even after materially reducing annual operating expenses. Whether the company can improve its cash-generation and develop a sustainable long-term wholesale business model for wireless broadband services is key to sustainability. Clearwire's inability to reach additional material strategic agreements for 4G LTE capacity and spectrum with other operators is a significant cause for investor concern. Strategically, we would view an acquisition of Clearwire by Sprint that gives the company operating control as a positive event. This would allow Sprint to fully integrate those assets into its network, thus eliminating operating expenses, control spectrum resources longer term, and facilitate execution of its strategic plans.
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