January 14, 2013

Musical Chairs

This article originally appeared in the Dec. 2012 issue of Next Gen Mobility Magazine.

The last few months have been particularly busy ones in the realm of wireless mergers and acquisitions. You had Deutsche Telekom (News - Alert) making a play for MetroPCS, SOFTBANK announcing plans to invest in Sprint, and Sprint in turn moving to up its stake in Clearwire.

Industry watchers expect the DT-MetroPCS deal, which is being done as a merger, to be much more palatable to regulators than AT&T’s (News - Alert) failed effort to buy T-Mobile for $39 billion.

DT CEO, René Obermann, says the two brands are a good fit both operationally and culturally and as a result of the merger will be “the value leader in wireless with the scale, spectrum and financial and other resources to expand its geographic coverage, broaden choice among all types of customers and continue to innovate, especially around the next-generation LTE network.”

Julien Blin, directing analyst for consumer electronics and mobile broadband at Infonetics Research (News - Alert), agrees that this pairing is a winner from both companies’ perspectives. For T-Mobile USA, it will “reinforce its strong prepaid business and help partially offset its weak postpaid business, which has been eaten into by the growing popularity of the iPhone (News - Alert) at other carriers. T-Mobile USA can take advantage of the fast-growing prepaid market, which drives a good portion of the US carriers' total net adds today.”

Meanwhile, it will enable MetroPCS to scale and give the company – which was the first U.S. operator to deploy LTE – more experience relative to the technology.Blin added that, “the fact that T-Mobile (News - Alert) USA recently went back to unlimited data plans perfectly complements MetroPCS' unlimited prepaid offering. MetroPCS also has a fairly large smartphone user base, surely of interest to T-Mobile USA.”Sprint, she says, could be negatively affected by the deal. Not only will the DT-MetroPCS combination knock Sprint out of the No. 3 carrier slot, but it could put new pressure on its fast-growing prepaid business.

Of course, Sprint is getting a boost of its own via an investment by SOFTBANK. The Japanese tech titan has announced plans to pay $20.1 billion for a 70-percent share in the U.S. telco. 

The deal, SOFTBANK notes, enables it “to establish an operating base as one of the largest mobile Internet companies in the world.” Between the companies, they will have one of the largest combined subscriber bases between the U.S. and Japan, says SOFTBANK, and the combined mobile telecom service revenue will rank third in the world.

The value of wireless spectrum also seems to be a driver of the deal. Shortly after the SOFTBANK-Sprint relationship came to light, Sprint announced plans to up its stake in spectrum-rich Clearwire Corp. from 48 to 50.4 percent.

Sprint’s efforts to up its stake in Clearwire have raised concerns that it has designs to buy the company outright.

In a letter sent to Clearwire (and a press release issued) last month, Clearwire shareholder Mount Kellett Capital Management LP said it believes Clearwire’s stock (of which it holds 53.2 million shares) is “substantially undervalued” and has strongupside potential in light of the company’s spectrum holdings and U.S. growth in high-speed wireless demand.

“As a significant stockholder, we have been carefully monitoring the recent events relating to Sprint's agreement to acquire outright control of Clearwire through its acquisition of shares from Eagle River and the resulting right of Sprint to designate a majority of the Board of Directors of Clearwire's board of directors (the "Board"), none of which designees are required any longer to be independent,” the letter says.

“This development is particularly significant given that the Company's build-out program has an estimated funding gap of over $1 billion. Based on the disclosed run rate of expenditures, we believe that Clearwire has only enough cash to continue its build-out for approximately one year.  Perhaps not coincidentally, the standstill agreement applicable to Sprint that, among other things, prohibits it from acquiring 100 percent of the outstanding common stock of the Company unless the acquisition has been approved by a majority of both the board of directors and stockholders of Clearwire that are unaffiliated with Sprint, expires at approximately the same time that the Company's funds are currently expected to run out.”

To prevent Clearwire from getting into a situation in which its acquisition by Sprint at a distressed value is the only option, the letter says, the Clearwire board should move to have the company sell off its 60 80mHz of excess spectrum.

Based on recent industry spectrum says, Kellett Capital Management estimates that Clearwire could get $6-$9 billion for its excess spectrum ­– “an amount that exceeds the current enterprise value of the company.”

Edited by Braden Becker

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