Sprint, Clearwire Extend Contract - Analyst Blog
Sprint Nextel Corp. ( S ) entered a new network-sharing deal with Clearwire Corporation ( CLWR ). The new deal, worth $1.6 billion, is an extension of the existing one that was to expire by the end of next year. Sprint buys WiMax wireless capacity from Clearwire and then resells services to its own customers.
As per the terms of the new deal, Sprint, which owns a hefty 54% stake in Clearwire, would pay $926 million to use the unlimited WiMax network of the latter for its 4G Long-Term Evolution (LTE) services over the next two years (i.e. 2012 and 2013). The third-largest U.S. wireless carrier would also make prepayments of $350 million for LTE capacity, provided Clearwire meets certain build-out targets by June 2013.
Moreover, Sprint would provide additional funding of $347 million, if Clearwire succeeds to raise new equity of $400-$700 million. Further, Sprint intends to operate WiMax network through at least 2015.
Coming to Clearwire, it is seeking a billion dollar funding to keep its current network operating as well as to support an improved LTE network. The transaction infuses new life into the company, as it is losing money and in need of additional funding. The company's losses have widened over the past years amid competition from larger rivals.
Immediately after cutting the deal, Clearwire cleared an interest obligation of $237 million due December 1. This had a positive influence on its share price, which improved close on the heels of the payment. We believe the new contract with Sprint raises the probability that Clearwire will secure additional funding.
The new transaction also supports Sprint's Network Vision strategy, which serves as a major catalyst in its growth plan. Sprint is switching to the 4G LTE technology from the current WiMax network.
With the rapid growth of LTE service offerings, Sprint plans to launch its own 4G LTE networks in the 1.9 GHz band in mid-2012 and expects to complete the deployment by year-end 2013. The coverage will likely touch more than 120 million by the end of 2012 and 250 million by 2013.
However, the contract with Clearwire raises doubts on Sprint's funding ability, the strategy of LTE build outs and its partnership with LightSquared, which is battling to resolve GPS interference problems. In July, Sprint inked a 15-year deal with LightSquared that would aid it in the upgrade or building of its own networks using the 1.6 GHz band of the former.
Further, the Clearwire deal raises Sprint's payment commitments that would dilute it free cash flow over the next two years. In addition to $1.6 billion, Sprint has to pay at least $1 billion to Clearwire for its 4G wholesale services over the next two years as committed in April. Of this, Sprint has to pay $300 million this year and $550 million in the next with prepayments of $175 million in installments over the next two years.
Hence, Sprint is in need of $5 billion to $7 billion additional funding over the next two years to address its 4G network upgrade. The funds would also be required to pay down debt and subsidies on iPhone to Apple Inc. ( AAPL ). Besides, Sprint has to reach a cash balance target of $2 billion.
While wait to see how Sprint deals with its funding problems, we currently maintain our long-term Neutral recommendation on Sprint. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.