by David Sterman
With the proper focus, it's sometimes possible to see a business
headed for trouble long before it occurs. Last summer, I told
readers wireless service provider
Clearwire Corp. (Nasdaq: CLWR)
was in deeper trouble
than Wall Street analysts were publicly conceding. The analysts
were carrying "buy" ratings, even when the business was starting to
collapse. Since I looked at the stock, it has fallen nearly 80% in
just 14 months. And from where I sit, a bankruptcy is almost
certain. Let me explain...
In 2010, I noted Clearwire had been making a major bet on the
WiMax technology (worldwide interoperability for microwave access)
to deliver 4G mobile wireless speeds. The trouble was telecom
engineers were increasingly convinced that a rival technology --
LTE (long-term evolution) -- was even better, since it could handle
larger volumes of data at faster speeds. Clearwire's management
acknowledged that growing sentiment, which immediately raised the
question of why the company had borrowed and spent billions of
dollars in support of WiMax.
In 2011, things got messier. Clearwire had always counted on
generous financial support from its largest customer,
Sprint Nextel (
. (Sprint has made serial capital injections in Clearwire and now
owns 48%, controlling 54% of the voting stock.) But Sprint has
begun to express regret about pinning its 4G hopes on Clearwire's
network. Once Sprint started to make its own 4G network -- using
the stronger LTE technology -- it was almost a matter of time
before it announced a public divorce. In a meeting with analysts on
Friday, Oct. 7, Sprint said it would soon stop selling phones that
work in conjunction with Clearwire's 4G network. This caused
Clearwire's stock to fall 30% that same day. And the selling may
just be beginning...
A transition to... what?
Clearwire probably saw this coming. The company had announced
plans earlier this year to place LTE technology right on top of its
WiMax network. Management figured the upgrade would cost just $600
million -- a mere pittance when compared with the nearly $6 billion
that has been poured into the business. Clearwire hoped that would
be enough to mollify an increasingly displeased Sprint, which has
grown tired of writing more checks to support Clearwire while
tackling financial challenges in its own business. And Sprint,
apparently, has had enough. It will solely focus on its own
business in 2012 and beyond (the company has an agreement to pay
for the use of Clearwire's network through 2012).
Where does this leave Clearwire? The company had 7.7 million
customers at the end of the second quarter, of which 80% came
through Sprint's enterprise-level relationships. Clearwire has also
been pursuing retail customers through its direct sales efforts (at
a cost of about $300 per subscriber in marketing expenses). This
summer, management spoke of a full-year target of 10 million
customers. But now, after Sprint's announcement, it's not clear how
Clearwire intends to draw the additional 2.3 million customers. In
addition, the retail wireless business is fiercely competitive,
which is why other Clearwire partners such as T-Mobile are also
looking for an exit strategy.
In the wireless telecom business, it's not just about the
customers you attract, but the customers you don't lose. Many
companies that have services with Clearwire may now conclude it's
simply safer to switch over to a firm like
Verizon Wireless (
, now that Sprint is no longer fighting on behalf of Clearwire,.
You can be sure sales teams at these firms will be asking potential
clients "Are you really sure Clearwire will be around in a few
That's actually a good question.
Left solely to its own devices, what kind of business can
Clearwire build? And will its debt-laden balance sheet hold up in
the weight of further capital-spending requirements? As it stands
now, Clearwire's cash flow and spending trends will be without any
more funds by next June. Clearwire has already spent $5 billion on
capital expenditure in the past three years, and likely still needs
to spend another $1 billion to complete its network development.
The company has announced plans to raise even more money -- either
in stock or debt -- but the Sprint announcement makes this a lot
harder to materialize. Without Sprint as a partner, investors and
lenders will now question Clearwire's viability.
Analysts at Merrill Lynch, in a just-released report, put it
"Based on work with our high-yield research group, we
believe Clearwire has effectively exhausted its secured
debt capacity and with the second lien bonds trading at
<$0.60, unsecured financing is not a practical option.
Equity capital markets are similarly closed, in our view.
Sprint has been viewed as a funder of last resort for
Clearwire based on the strategic value of Clearwire's 4G
network to Sprint, but today's comments cast further doubt,
in our view."
Merrill's analysts have a new price target of just $0.50 for the
stock, which is well below the current $1.40 price. The reason the
stock may not go all the way to zero: Clearwire holds valuable
wireless spectrum. But what it would be worth, after debts are
repaid, is unclear. Regardless, it appears as if shares would
slowly lose steam and drop further form here as the implications of
a divorce from Sprint become fully digested.
Risks to Consider:
Clearwire's weak position has left it quite valuable to a
strategic or financial investor that wants to acquire all of the
invested assets on the cheap. So the emergence of a white knight is
the biggest risk to shorting the stock.
Death spirals often play out the same way. Cash needs to be
conserved and growth ambitions get curtailed. Without planned-for
growth, financial targets can't be met, bondholders grow skittish
and the corpus of the enterprise gets cut up in bankruptcy court.
Unless something changes, this is what may well happen to
Clearwire, wiping out equity holders in the process. Before this
happens, you should sell this stock now if you own it -- or think
about shorting it if you don't.
: D. Sterman and/or StreetAuthority, LLC hold a position in
NYSE:VZ, NYSE:T, NYSE:S, NASDAQ:CLWR.
Balchem: Small Company, Big Profits