Sprint’s 4G Lead at Risk Amid Clearwire Cash Crunch

When Sprint Nextel Corp. took a stake in Clearwire Corp. in May 2008, Sprint’s Dan Hesse said the deal would give his company rights to a next-generation wireless network without further financial obligation.

So far, the deal has cost Sprint an additional $1.18 billion and the bill may go higher.

Clearwire, which is building a high-speed wireless network with WiMax technology, said this month it will run out of cash by the middle of next year unless it can raise more. Sprint, with 54 percent of Clearwire’s stock, may face the prospect of paying billions to bail the company out or letting it lapse into bankruptcy, endangering its equity stake.

“It puts them between a rock and a hard place,” said Craig Moffett, an analyst at Sanford C. Bernstein & Co., who doesn’t own any Sprint shares and rates them “underperform.”

Clearwire has said it’s trying to raise money on its own. In a regulatory filing Nov. 4, the company said the effort may not succeed, leading to “substantial doubt” about its ability to keep operating.

Keeping Clearwire afloat would cost Sprint $1 billion to $2 billion next year, while letting Clearwire go into bankruptcy may push $9.9 billion in Sprint’s bonds into default, Moffett said. Sprint, based in Overland Park, Kansas, could allow a rival such as T-Mobile USA buy a stake in Clearwire, though that may undermine Sprint’s control and hurt its ability to compete.

“Sprint’s hands may be tied here,” said Moffett. “They may have no choice but to be the financier of last resort.”

Sprint’s Early Lead

Sprint said in a regulatory filing it can take steps to avoid fallout from a Clearwire default. Cristi Allen, a Sprint spokeswoman, declined to comment beyond the filing. Mike DiGioia, a spokesman for Clearwire, declined to comment on how much cash the carrier needs or what Sprint might do.

Sprint, the third-largest U.S. wireless carrier, has been ahead in rolling out what’s known as fourth-generation wireless technology. In June, the company started selling the country’s first 4G phone, letting customers surf the Web at high speeds on Clearwire’s network. AT&T Inc. and Verizon Wireless, the largest U.S. carriers, are following with their own 4G networks.

Sprint’s technology lead is at risk because of Clearwire’s financial troubles, said analyst Dennis Saputo of Moody’s Investors Service. Clearwire is cutting 15 percent of its workforce and slowing its expansion to conserve cash.

“It’s a relationship that’s a little dysfunctional right now,” said Saputo in an interview, after Moody’s said it’s reviewing whether to cut its rating on Sprint.

Tumbling Bonds

The company’s bonds have tumbled, with its 6.875 percent notes due 2028 down 6.7 percent from Nov. 4, on investor concern a Clearwire default could affect Sprint. Under a provision from 1998 that ties the fate of Sprint Capital Corp. to subsidiaries, Sprint’s capital arm could be considered in default if Clearwire defaults. Sprint Capital’s $9.9 billion in bonds come due through 2032, according to Bloomberg data.

Sprint can avoid the liability, by selling Clearwire shares to drop its stake below 50 percent for example, Saputo said, and it’s unlikely to let Clearwire file for bankruptcy in any case because of its strategic importance.

“All parties are very interested in Clearwire staying out of bankruptcy,” he said. “The ability to say you’re rolling out the nation’s first 4G network, that’s a pretty powerful line.”

Clearwire will likely need $4.7 billion through 2012, Saputo estimates. Sprint would have to pay $2.5 billion of that if it contributes 54 percent of that amount -- a sum equal to its ownership stake. The company could also contribute all of the funding, increasing its ownership to 72 percent, he said.

Initial Investors

Sprint could accommodate those two scenarios without raising additional funds itself or sacrificing its debt repayment, Saputo said. If Sprint tried to buy out Clearwire and assume all of its funding needs through the end of 2012, then Sprint’s debt repayment would be threatened. The company’s debt is already rated below investment grade at Moody’s.

Clearwire Chief Executive Officer Bill Morrow said in a conference call this month he is “cautiously optimistic” that the company will be able to resolve its funding issues in the near future. The company wants to raise $2.5 billion to $5 billion by selling rights to airwaves that aren’t critical to its network, people familiar with the plans said last month.

Sprint was part of an initial group of investors, along with Google Inc. and Intel Corp., that put $3.2 billion in Clearwire to finance its 4G network. Sprint folded its 4G assets into the venture, giving it the largest stake.

Starting Over

Sprint contributed the $1.18 billion to the Kirkland, Washington-based company a year ago to help it meet its goal of covering 120 million people with 4G service by the end of 2010.

Sprint gained 14 cents to $3.86 in New York Stock Exchange composite trading at 4 p.m., while Clearwire rose 26 cents to $6.99 in Nasdaq Stock Market trading. Sprint shares have risen 5.5 percent this year, and Clearwire increased 3.4 percent.

Sprint may ultimately have to decide if Clearwire is the best means for offering 4G services. As Clearwire continues to struggle to generate cash, other companies in the original group of investors have contributed less, leaving Sprint with the largest financial burden.

Sprint may not have a viable alternative for offering 4G services to compete with Verizon Wireless and AT&T. Since introducing the first 4G phone, the Evo from HTC Corp., Sprint has started adding customers for the first time since 2007.

“They have finally improved their marketing message and the marketing message is predicated on their 4G network,” said Michael Nelson, an analyst at Mizuho Securities USA Inc., who recently gave Sprint his first “buy” rating in five years. “Clearwire is the primary driver of Sprint’s business.”

To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net.

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net.

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