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Dish Bid For Clearwire May Be A Hedged Bet

 January 10, 2013 02:27 PM
 


(By Mani) It is hard to guess what Dish Network Corp. (NASDAQ: DISH) is up to in its surprise bid for Clearwire Corp. (NASDAQ: CLWR).

On one hand, the deal would allow Dish to get along with its wireless aspirations with valuable and useful spectrum and a LTE network that is largely built out.

On the other hand, it may be a ploy by Dish to boost the price of Clearwire for Sprint Nextel Corp. (NYSE: S), especially given the recent conflict between Dish and Sprint, which owns 50 percent of Clearwire and has offered to buy the rest of Clearwire for $2.97 a share.

[Related -Warren Buffett's Latest Stock Picks And His Biggest Portfolio Holdings]

Dish is offering $1.5 billion for certain spectrum assets held by Clearwire and offering to buy up to 25 percent of the company's shares outstanding for $3.30 a share, an 11 percent premium to the $2.97 per share offer from Sprint, which was newly recapitalized by an investment from Japan's Softbank.

With this offer, Dish seeks to buy 11.4B MHz/PoPs of spectrum, accounting for 24 percent of Clearwire's total spectrum, for $0.19/Mhz/PoP. Dish would also get the option to purchase or lease an additional 2Mhz of Clearwire's spectrum assets sitting adjacent to the acquired portfolio.

In addition, Clearwire will likely be required to assist in the construction and operation of a wireless network to cover Dish's recently FCC approved AWS-4 spectrum, as well as the new 2.5Ghz spectrum that Dish would get from Clearwire.

[Related -DISH Network Corp (DISH): How DISH Could Monetize Spectrum Assets?]

Dish also indicated that the proposal will be withdrawn if Clearwire draws on the financing under the Sprint Financing Agreements, whereby Sprint agreed to provide additional financing through notes exchangeable at $1.50 per share, consisting of ten monthly payments of $80 million beginning Jan 2.

On the other hand, Sprint stated that the transaction cannot be implemented in light of Clearwire's current contractual obligations. For instance, under the Sprint agreement, Clearwire is prohibited from selling spectrum assets without Sprint's consent and would still be subject to other restrictions on spectrum sales even prior to its merger agreement with Sprint.

Furthermore, Clearwire is prohibited from entering into commercial agreements under the merger agreement, and would need to receive at least 75 percent of votes if the Dish proposal constitutes a change of control.

"In our opinion, the proposal is clearly a leverage play by Dish, given that it would like to disrupt the deal between S and CLWR in order to negotiate a network build-out with Sprint on better footing," Oppenheimer analyst Timothy Horan said in a client note.

Sprint will most likely need to improve its bid for Clearwire ($3.30 might end up being right) and will most likely wind up cutting a deal with Dish to build out its AWS-4 Network.

However, it is very difficult to know how much leverage either party has given that the Sprint/Clearwire agreements are mostly private documents. Also of significant importance to this issue is the question of the upcoming auction for the AWS H-block spectrum.

"As we have previously mentioned, this block sits in between Sprints G Block spectrum, and Dish's 20MHz block of spectrum in the 2000MHz band. Both companies would realize significant value from the acquisition of the asset, and we think this issue could play a pivotal role in the negotiations behind closed doors," Horan added.

As part of its offer, Dish has also requested changes in Clearwire's governance including a change in Clearwire's board to give it the right to appoint representatives to the board, and the right to block a change of control. It also wants to help Clearwire to pay down debt.

For its part, Sprint has said it would take 75 percent of Clearwire's shareholders to approve the deal, and that it will not vote to approve the deal. Nevertheless, Clearwire's board must entertain Dish's offer as part of their fiduciary obligations.

In this scenario, shares of Dish are likely to face a rocky road ahead. Speculative investors might unwind their positions as they look for Dish to sell its spectrum, and longer term investors wait for concrete financial indications of Dish's wireless plans.

However, Dish noted that it would not sell its spectrum and would instead move forward with its plans to develop a wireless service extension to its network.

"We believe DISH will partner with one of the incumbent wireless providers, and use its spectrum to build out a two-way backbone for the DISH network, and offer fixed wireless broadband, while DISH's partner uses some spectrum to make its own wireless offering more robust," Brean Capital analyst Todd Mitchell said in a client note.

iStock believes that Dish cannot actually acquire Clearwire. Buoyed by the investment from Softbank, Sprint is trying to build a 4G network with Clearwire. By jumping in to the takeover battle, Dish may be eyeing a joint venture or network sharing deals with Sprint to reduce its wireless building costs.
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