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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


Thoughts on That Wacky Sprint Call

I’ve received a handful of emails this weekend about the sell-off in Clearwire last Friday after a number of comments the management team of Sprint made during a presentation to Wall Street analysts. In the interest of time, I’ll try to do this in a Q&A format. Consider the below Part I.

First, though, know that I bought more shares in Clearwire on Friday. I viewed the drop last week as an opportunity. I also have no interest long or short in Sprint. All of that may represent biases of some sort in my thoughts below.

Second – the noise this week will probably get temporarily louder. Last week’s drop in price will continue to embolden the aggressive/opportunistic shorts, and the current investor base of Clearwire is, shall we say, a bit twitchy. That combo can be volatile. So, if the past few months are any indication, you should expect more rumors to pop up, whether about bankruptcy, delisting, debt for equity swaps, WiMax iPhone 5’s, or whatever else. My advice is to ignore them. The probability of any of them happening anytime soon is too low to take seriously.

That said, the company continues to face an important near-term challenge – the need to find additional funding. Again, Clearwire says it has enough cash to last through June of 2012, and though I am confident the company can raise capital through several different avenues, there are simply no guarantees. After Friday, it is clear Sprint will not be one of those sources of near-term capital, but as I mentioned previously, Clearwire has other (better) options, too.

If I had to summarize my thoughts about last Friday, I’d say three things:

(1) Clearwire’s spectrum is as valuable today as it was the night before Sprint’s conference call. Right now, based on asset value, Clearwire is the cheapest company I have ever seen.

(2) Welcome to the world of momentum shorts and high frequency trading. And there was no doubt a lot of selling on Friday by speculators disappointed that Sprint did not announce a Clearwire buyout or capital injection. But if you can’t distinguish between price and value, Clearwire is going to drive you insane.

(3) There really was no new news on Friday from Sprint about Clearwire for anyone who’d been paying close attention the last few months.

As Clearwire’s CEO pointed out later that day, Sprint remains completely dependent on Clearwire – through the end of 2012 at least. And nothing in my original thesis was contingent on anything other then the terms of the company’s existing relationship with Sprint, which will continue as expected.

Q. What the hell happened on Friday?

A. I’m paraphrasing there. That same question was asked a handful of different ways – including, “Do you think Hesse is angling for a better price on a take-under of Clearwire?” and, “Do you think Sprint is trying to push Clearwire into bankruptcy to buy that spectrum cheaply?”

First, a little context. From Sprint’s perspective, I think it’s safe to say they feel like they created a monster in Clearwire. Sprint gave them spectrum, helped arrange for strategic equity, and sent them wholesale traffic. In the end, Clearwire not only refused to pay Sprint to host their network like Lightsquared did, but somewhere along the way Clearwire realized they held all the cards in terms of launching a wholesale business – and that would directly compete with Sprint’s own network hosting plans.

In short, on Friday, Sprint failed or refused to answer several key questions about Clearwire for uncertain reasons that made the management team appear unprepared, arrogant or evasive. Regardless, the day further underscored that Clearwire’s largest equity owner (and currently sole wholesale customer) would not be providing any new capital, and that the relationship between the management teams was strained. Here are some other summaries from folks who were in attendance at the analyst meeting (one here and another article here).

So there was some superficial sandbagging of Clearwire by Sprint on Friday based on some combo of legitimate gripes and plain old jealousy, but I don’t think it was done because Hesse is angling for a better deal or a take-under. I think he is simply stuck for the time being, frankly, and is biding time while the other sources of uncertainty for Sprint out there become clearer…i.e. T-Mobile, L2 getting through the FCC, CLWR’s raise, etc…while hoping that a better path forward emerges for Sprint afterwards.

In the meantime, Sprint has to move ahead with LTE plans to compete with Verizon and AT&T, and the iPhone is a must for them as well. So while I’m not sure what that all means for the value of Sprint, I do know none of it impacts the value of Clearwire’s spectrum. And let’s not forget that Sprint will be paying $1 billion to Clearwire for wholesale services between now and the end of next year. This is not the act of one company trying to force another into bankruptcy.

So, to greatly simplify, there is still uncertainty about how exactly the value of Clearwire’s spectrum will get unlocked, but in my opinion, the gap between market and intrinsic value is so large and the timeline long enough that Clearwire should soon be able to find some strategic equity…and then sign other wholesale customers, line up some vendor financing and, along the way, further contrast its own fate with that of Sprint.

That won’t happen overnight, obviously, but it was going to take a little time before last Friday, anyway. And if there was an irony in all the chaos of that day, it was that Sprint appears to now have a harder road ahead of it then Clearwire.

Disclaimer: Long CLWR. The above in no way constitutes investment advice. It is for educational and informational purposes only. Nothing contained here should be construed by anyone as an invitation or solicitation to buy or sell any security. It does not contain personalized legal, tax, investment, or financial advice.