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Friday, 01 August 2014

Ersatz sweetener

Sprint and Softbank forced into tactical warfare

Sprint and Softbank are being forced into tactical warfare. U.S. satellite-TV company Dish Network, run by the enigmatic Charlie Ergen, put forward a highly conditional $2.3 billion offer for Clearwire, a spectrum owner integral to the ambitions of Sprint and its Japanese buyer. Though the bid is unlikely to go far, it could pressure Sprint to pay more - or strike a deal with Dish.

The offer trumps Sprint’s $2.2 billion agreed deal for Clearwire. Though a board committee is considering the rival offer, it’s hard to imagine how it could possibly succeed. Sprint controls just over half of Clearwire’s votes and says it won’t accept. Part of Dish’s offer is to buy 24 percent of Clearwire’s spectrum outright for $2.2 billion, a proposal Clearwire has rejected before. What’s more, Clearwire can’t sell the spectrum without Sprint’s consent.

The Potemkin offer will nevertheless have consequences. Uppity investors already have come out against Sprint’s bid, which followed Softbank’s $20 billion deal to buy 70 percent of Sprint last October. Dish’s interloping at the very least lends intellectual credence to the idea that Sprint is trying to grab Clearwire on the cheap. That could tangle up Sprint’s deal in legal knots. Further, Sprint needs three-quarters of Clearwire shares for approval. Activists hold under 15 percent, but Dish’s offer could help them woo more investors to their plight.

Sprint may consider a sweetener, even if its bid is the only realistic one on the table for troubled Clearwire. Softbank is eager to tackle the U.S. market and to do that it needs additional bandwidth. Clearwire is the obvious source. Increasing the bid could clear the path for Sprint and Softbank to get down to business.

With the Clearwire shareholder vote months away, there’s plenty of time for Dish to make trouble. The company is sitting on a whopping 40 megahertz of spectrum it bought from two bankrupt firms. It’s probably worth three times the $3 billion Dish paid, after regulators allowed it to be repurposed from satellite use to cellular. That means Ergen could now be a seller and might explain why he’s positioning himself as a spoiler with Sprint. Until he explains himself, deal watchers will have to consult Sun Tzu instead.

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Clearwire said on Jan. 8 it had received a non-binding $2.3 billion, or $3.30 a share, offer from Dish Network that trumps a $2.2 billion, $2.97 a share, bid from controlling shareholder Sprint Nextel.

The Dish offer is preliminary and contains multiple parts. The pay-TV company would acquire 24 percent of Clearwire’s spectrum; have Clearwire build and run a wireless network for Dish; acquire at least a quarter, and up to all, of Clearwire stock; fund the spectrum purchase price through senior unsecured payment-in-kind notes; provide additional capital for Clearwire to build out its network on similar terms to that agreed to by Sprint; and seek board representation.

The rival bid will lapse if Clearwire draws down on $800 million of financing provided by Sprint as part of its offer.

Sprint, which controls more than half of Clearwire’s votes, said it would not agree to the Dish proposal because it is inferior to its own and that the proposal violates Clearwire’s legal and contractual obligations. It also requires Sprint to waive rights it holds in relation to Clearwire, Sprint said.

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