Clearwire Corporation (NASDAQ:CLWR) sent a letter to its shareholders today laying out in pessimistic detail the Clearwire board of directors’ reasons for agreeing to sell itself to Sprint Nextel Corporation (NYSE:S) for a price some large minority investors feel is a rip off. Here is the company’s rationale.
Sprint’s bid of $2.97 a share, or $2.2 million, was not the initial price put forward by Sprint Nextel Corporation (NYSE:S). Clearwire Corporation (NASDAQ:CLWR) had already rejected Sprint’s first offer of $2.60 a share.
The $2.97 price, according to Clearwire, was a “~130% premium to Clearwire’s closing share price on October 10, 2012,” and would give “immediate liquidity to stockholders at transaction close.”
According to Clearwire Corporation (NASDAQ:CLWR), a special committee made up of directors not beholden to Sprint Nextel Corporation (NYSE:S) (Sprint already owns 51% of Clearwire.) hired independent legal and financial advisors that vouched for Sprint’s offer of $2.97 a share being a fair price.
As Clearwire Corporation (NASDAQ:CLWR) explained, Google Inc (NASDAQ:GOOG) only received $2.26 a share on March 1, 2012 for its shares of Clearwire, and Time Warner Inc. (NYSE:TWX) only got $1.37 a share when it sold its Clearwire stock on October 3, 2012, just a month before Sprint Nextel Corporation (NYSE:S)’s bid jacked up the market’s price above $3.00 a share. Bad timing, Time Warner Inc. (NYSE:TWX).
“Prospects are risky and highly uncertain”
The company paints a bleak picture of its chances to go it alone. It only had 12 months of liquidity left by the end of the third quarter of 2012, and it would run out of money during the first quarter of 2014 — even if it stopped building its LTE network.
“The proposed transaction with Sprint Nextel Corporation (NYSE:S) provides a clear solution to the substantial funding gap Clearwire Corporation (NASDAQ:CLWR) is facing,” the letter states (emphasis theirs), and without the $2 billion to $4 billion it needs, the company’s continuing operations and LTE plans would be in jeopardy. Getting the funding it needs to continue as a stand-alone venture “would be challenging, expensive and highly dilutive to stockholders, if available at all.”
Five not-so-easy alternatives to selling to Sprint
1. Getting additional wholesale partners: Sprint is Clearwire Corporation (NASDAQ:CLWR)’s only major wholesale partner, but given “industry dynamics” and potential wholesale partners wanting more spectrum above forming a partnership, finding additional partners is unlikely.
2. Selling excess spectrum: Clearwire talked to a large number of potential spectrum buyers in 2010 and again in 2012 but those discussions “did not result in any compelling offers”
3. Debt/equity financing: Clearwire Corporation (NASDAQ:CLWR) already pays $510 billion a year in interest. Increasing debt financing would result in more cash payouts and “potentially result in an untenable capital structure.” Other than that, it says, more debt would have a dilutive effect on share price.
4. Selling itself to another company: Sprint controls Clearwire and has said it does not want to sell Clearwire. Is it any wonder that DISH Network Corp. (NASDAQ:DISH)‘s chairman, Charlie Ergen, felt it was unlikely DISH Network Corp. (NASDAQ:DISH) could succeed in its bid for Clearwire? “[T]he deck is stacked against us,” he said at an AllThingsD media conference last February. So DISH went for Sprint instead.
5. Bankruptcy: Without Sprint Nextel Corporation (NYSE:S), Clearwire Corporation (NASDAQ:CLWR) could end up with “financial restructuring [as] the only available alternative.” That could mean having to sell off the company’s spectrum at distress-sale prices. Restructuring could also result in damage claims. All in all, shareholders would see their investment be much reduced, says Clearwire.