The Fate of Clearwire’s Existing Long Term Evolution (LTE) Network Clearwire LTE Plans

Clearwire Corporation (NASDAQ CLWR) is a leading provider of fourth generation, or 4G, wireless broadband services.  Clearwire owns the rights to radio frequency spectrum in the 2.5 GHz range and provides service primarily using the 4G mobile WiMAX standard. According to a study by the FCC and Citibank, Clearwire has over 130MHz of spectrum.   Major industry players, namely Sprint, DISH, Softbank, and now Verizon, are all eyeing Clearwire’s valuable spectrum.  Clearwire, in the 10k published in February 2013, confirms that their 4G mobile broadband network operates on the Worldwide Interoperabiity of Microwave Access technology 802.16e standard, referred to as mobile WiMAX.  As of December 2012, they offered services in 88 US markets, covering 137.4 million people; of which, 71 of those markets were covered by 4G mobile broadband networks.  In their current US 4G mobile broadband markets, Clearwire offers services through wholesale partners, substantially all through Sprint.  They have invested heavily in their networks and have a history of operating losses; as of December 31, 2012, their accumulated deficit was approximately $2.35 billion.

Regarding their Long Term Evolution (LTE) strategy, since this technology is being adopted by most wireless operators globally, Clearwire’s business strategy is to take advantage of their leading spectrum position to offer substantial increased data capacity. According to a recent forecast by Cisco, global mobile broadband data consumption is expected to grow at approximately a 92% compound annual growth rate from 2010 to 2015. To capitalize on this growth, Clearwire’s initial plans were to overlay 2,000 of its existing mobile WiMAX sites with Time Division Duplex LTE (TDD-LTE) over 20 MHz-wide channels by summer of 2013 and approximately 5,000 sites by the end of 2013 and 8,000 by the end of 2014.  As of April 25, 2013, Clearwire had overlaid 1,600 of its WiMAX sites with LTE with the expectation that it would meet its commitment to Sprint of overlaying 5,000 by the end of 2013.  The first sites are located in major urban centers of major markets including New York, Los Angeles, San Francisco, Miami, and Seattle.  This deployment has begun, although Clearwire now finds itself in a cash crunch position and says it needs at least $1.7 billion to keep operating, adding urgency to complete a deal.

Bidders

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Sprint

Because of the boom in broadband data consumption, wireless operators are facing capacity constraints and are therefore eagerly eyeing Clearwire’s spectrum.  In December, Sprint bid for the remaining 49.5% of Clearwire that it doesn’t already own.  It was forced, on May 21, to increase this bid by $500 million to $2.5 billion, valued at $3.40 per share.  Clearwire has postponed its vote on this offer until May 31, 2013, but its board is recommending approval. Two major Clearwire investors are still recommending a no vote, Crest Financial Ltd., a Houston-based firm, and a group of investors led by Mount Kellett Capital Management LP.  Sprint talks of the advantages of leveraging Clearwire’s 2.5GHz spectrum for its LTE network, which excels at broad-based, high speed coverage, and would provide Sprint customers with increased speeds and capacity in densely populated cities.   Ken Schmidt, of Steel in the Air, Inc., believes that existing Clearwire cell sites will likely only be needed where Sprint doesn’t already have sites.  Assuming there are around 20,000 to 25,000 sites, even if Clearwire overlays 8,000 sites with TDD-LTE by 2014, that still suggests that the remainder of the Clearwire cell sites will not be needed going forward.  Sprint has discontinued offering and supporting WiMAX devices to new customers.

Sprint and SoftBank

Sprint is facing its own financial hurdles.  It agreed to have itself be taken over by Japan‘s Softbank.  The deal was announced in October 2012 in which the Japanese telco and media giant would acquire 70% of Sprint for $20.1 billion including a badly needed $8 billion cash infusion for Sprint.  SoftBank has been a successful wireless competitor in Japan, where, like Sprint, it is third in overall ranking but has gained ground on its rivals.  It has also used the same wireless technology that Clearwire is using to add faster LTE wireless service. SoftBank’s experience in Japan’s dense urban centers would give Sprint help in deploying LTE in U.S. urban markets where Clearwire’s spectrum would be most useful.

The U. S. Department of Justice has approved the transaction, but the deal still faces questions from the FCC, shareholders, and now a competing bid of $25 billion from Dish Networks.

Assuming Sprint wins the bid to buy the rest of Clearwire and it obtains Clearwire management and board approval, it will use the spectrum to build out its network.  This would require more cell towers, but the capital from Softbank would make this possible.  Clearwire claims this TDD-LTE network would be faster than both Verizon’s and AT&T’s.  In addition, this greater data capacity would allow Sprint to be able to continue its unlimited data plans and thus differentiate itself from the plans offered by AT&T and Verizon. Sprint is currently far behind AT&T and Verizon in deploying LTE.  In order to bridge that gap, Sprint is aggressively executing its Network Vision Strategy to deploy most of its 4G LTE by the end of 2013.   Sprint plans to phase out iDen gradually and consolidate its network holdings into one 2G/3G/4G network using a combination of CDMA and EV-DO.  “We believe this transaction [buying Clearwire], particularly when leveraged with our Softbank relationship, is further validation of our strategy and allows Sprint to control its network destiny,” Sprint CEO Dan Hesse said in December, following his initial bid for the Clearwire shares.  And, as LTE is more efficient at handling data, Sprint would be able to realize margin benefits as it rolls out in new markets.

DISH

In January 2013, Dish Network (NASDAQ DISH) made a bid for the 49.5% Clearwire not owned by Sprint that was 11 percent higher than Sprint’s offer. Then it April, DISH proposed a $25.5 billion merger with Sprint, a 13 percent premium to SoftBank’s proposal with or without Clearwire.  DISH claims this would create “an industry-leading spectrum portfolio and the only company that can offer customers a fully integrated, nationwide bundle of in- and out-of-home video, broadband and voice services.”

DISH acquiring Sprint would create an entity with over 60 million retail subscribers and $50 billion in revenues, helping it better compete with wireless behemoths Verizon and AT&T. DISH’s motivation behind entering the wireless market is mostly driven by the need to diversify its business away from a sluggish pay-TV market. With mobile data usage on the rise, driven by the proliferation of mobile devices such as smartphones and tablets and the ongoing transition to high-speed 4G LTE networks, DISH wants to be able to bundle wireless services with its pay-TV and broadband services in order to better serve customers.  Some debate whether this would add much value to customers other than the convenience of a single bill.

More discussion is covered in a Forbes article on DISH’s move.  Dish Network Chairman Charlie Ergen has been trying to use the satellite business cash flow, of about $2 billion a year, to develop a business with growth prospects.  In 2011 he acquired Terrestar and DBSD North America for less than $3 billion.  He then convinced the FCC to allow him to convert the spectrum for satellite data that these two companies control to terrestrial use.  Now he has national radio spectrum that he can use to build a data network.  Analysts estimate that $3 billion investment is now worth $10 to 12 billion.  However, to meet the FCC deadline of seven years, he needs to spend billions more on communications towers and base stations or this investment value goes to zero.  Therefore, if DISH buys Sprint, it winds up the nation’s third-leading mobile phone and data provider and owns Clearwire with its underexploited wireless spectrum.

Steel in the Air’s Ken Schmidt believes that If DISH buys Clearwire, the fate of Clearwire’s existing cell sites will be determined by which carrier partners with DISH. If DISH partners with Sprint, it is unlikely that DISH/Sprint will keep any sites that are duplicative of those owned by Sprint.  If T-Mobile ends up as DISH’s partner, DISH/T-Mobile will have little need for those locations that are near existing T-Mobile/MetroPCS sites, unless there are significant capacity issues in the area.

Rather than raising its bid further, DISH is now playing the security card, arguing that there are national security issues from a Softbank-Sprint merger. “There were, it noted, news reports that the Committee on Foreign Investment in the United States was concerned about the use of Chinese-manufactured equipment on a foreign-controlled Clearwire network—“confirming the serious national security risks of SoftBank acquiring Sprint and its wireless and wireline assets of national strategic importance,” remarked Stanton Dodge, DISH’s executive vice president and general counsel.”

If DISH doesn’t get Sprint, it is threatening to play hardball:

 DISH Chief Executive Charlie Ergen said on a May 9 conference call that taking out Sprint was so strategically important to DISH that he might sell his company if he loses a bidding war with SoftBank. “If we’re unsuccessful with Sprint, obviously we have a lot of options,” Ergen said. “It could include selling spectrum. It could include selling the whole company. It could include partnering with somebody else in the wireless business.”

Gerard Hallaren of Janco Partners wrote on May 21 that he thinks DISH will either raise its bid or join SoftBank in acquiring Sprint.

Sprint has agreed to negotiate with Dish but SoftBank feels like its bid will prevail.

Verizon

On the company’s earnings conference call, Clearwire CEO Erik Prusch confirmed that Verizon Wireless (NYSE:VZ) made an unsolicited offer to Clearwire to purchase Clearwire’s spectrum license leases in major markets for up to $1.5 billion.  Verizon currently operates one of the two largest and fastest LTE networks in the country.  The Wall Street Journal reported that Verizon Wireless was bidding for certain spectrum leases, mostly in large markets, for $1 billion to $1.5 billion. Clearwire said it would evaluate the proposal along with majority shareholder Sprint Nextel Corp. (S), which is in the process of acquiring Clearwire. Verizon Wireless already holds large amounts of spectrum but has continued to accumulate it. Last year it paid a consortium of cable operators $3.6 billion for their wireless spectrum. Clearwire’s frequencies, which are in a higher band than most cellular systems and are well-suited for relatively short-range services, might allow Verizon to add more data capacity to its network in urban areas. Acquiring the leases would also take them away from a major rival if Clearwire is to be acquired. Verizon Communications Inc. (VZ) Chief Financial Officer Fran Shammo acknowledged the offer in an interview Thursday, but he declined to provide further details. Verizon runs the wireless venture with partner Vodafone Group PLC. “We feel that this specific frequency of Clearwire fits with our portfolio for capacity reasons, so we placed a bid for it. We’ll see what happens,” he said.

If Verizon acquires these airwaves from Clearwire, it would add to the company’s current network expansion plans. The company is trying to enhance its existing network capabilities to offer uninterrupted wireless experience to its customers. In this context, the company is working over spectrum acquisition that can support expansion plans in data services.  Verizon has already received approval from the Federal Communications Commission (FCC) to buy wireless spectrum from Spectrum Co., which is a joint venture between Comcast Corporation, Time Warner Cable Inc., and Bright House Networks in Aug 2012. The deal is priced at $3.9 billion.

Verizon’s interest appears to be purely a spectrum raid.  In an interview at CTIA, an analyst who follows telecom said that she feels Clearwire’s spectrum would work well for Verizon’s data use due to the contiguous amount of spectrum.  However, despite the value to Verizon, she believes that with Sprint’s new offer, Clearwire will be able to get approval from its large private shareholders to proceed with the deal.  If Verizon is successful at purchasing Clearwire, Verizon may need to retain more of the existing Clearwire sites because Verizon’s existing network is not optimized for the higher frequencies in use by Clearwire – which require closer spacing of cell sites to be as effective.

Bankruptcy

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If Clearwire goes into bankruptcy, then the spectrum will go to the bondholders to whom it has been pledged, plain and simple, and defeat Sprint’s entire future strategy. This scenario seems very unlikely given the number of players interested in the spectrum.  SoftBank has noted that Dish Network owns a large chunk of Clearwire debt, potentially putting it in an advantageous position in a bankruptcy.

Summary

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As of May 23, 2013 Clearwire’s board is recommending the Sprint proposal.  It says it has not received an actionable proposal from Verizon or from DISH.

At this time, it seems likely that Sprint will win the acquisition, although the price may not yet be established.  There may be additional moves by DISH and SoftBank.  It is very unlikely that the spectrum will be allowed to fall into bankruptcy.

Whatever happens, it appears to be a win for consumers in that more data capacity will be made available.  If Sprint completes the purchase of Clearwire, the spectrum could be used to shore up Sprint’s unlimited data offerings, forcing the other wireless providers to compete not only on price but also on data caps (or the lack thereof).  That also is a win for components providers.  Keith Radousky, CTO of antenna provider Quintel, told the audience at the LTE Innovation Summit in San Diego in April that “There hasn’t been a lot of innovation in base stations, compared to other parts of the ecosystem.  This has been a very slow area to progress, and this is the challenge of the future. The tower top is the only way to harness the power of the advanced air interfaces coming at it.”  Technological advances are coming. Axel Meier, project manager for LTE RF conformance test systems at Rohde & Schwarz — which sponsored the conference — said that there are now 415 network operators who are investing in LTE, with 163 launched networks around the world, and almost 400 LTE devices introduced last year.   “LTE is exploding much faster, compared to the technologies before,” Meier said. “The whole industry is pushing that.”