Clearwire and Sprint: Squeezed Together?
When Clearwire forged a partnership with Sprint Nextel last year, the deal was viewed more as a bonus than a must. Sprint Nextel was offering an extra set of hands, with money in them, to help Clearwire accomplish what it had set out to do anyway—build a nationwide high-speed wireless network based on a technology called WiMax—cheaper and faster.
In retrospect it appears that Sprint's helping hands were—and remain—vital to Clearwire's (CLWR) plans. The company's shares slid 3.3%, to 14.02, on Mar. 4 after a weak fourth-quarter report that also failed to bring word of a new deal with Sprint (S) to replace the preliminary agreement that unraveled in November. Sprint, which has been stung by customer losses and a management shakeup, "is now fully focused on how it can take advantage of its [next-generation network] opportunity," Clearwire CEO Ben Wolff said in a conference call with investors on Mar. 4. "We hope to be able to have something more definite to discuss with you soon."
The prospectus for Clearwire's initial public offering in March, 2007, told a far different, more independent story: "We intend to deploy our network throughout the United States and internationally in markets that we find attractive." Most investors took that to mean that with support from investors Intel (INTC), Motorola (MOT), Bell Canada and stockholders, Clearwire would and could go national—nay, international—all on its own.
A Long, Pricey Road Ahead
But now it's becoming clear that Clearwire probably didn't have the financial wherewithal to pull off a solo act when the deal with Sprint was cobbled together. "Even at the IPO there was a funding gap," says Eric Kainer, an analyst at ThinkEquity Partners. To build a nationwide WiMax network and get it off the ground, a company would need to spend from $8 billion to $12 billion, he figures. After all, once a network is constructed, "I don't think it would be profitable in the first few years," says Dan Locke, an analyst at consultant Pyramid Research.
And Clearwire is at the very beginning of this journey: It only plans to soft-launch its first market—Portland, Ore.—by midyear. The company, founded by celebrated wireless entrepreneur Craig McCaw, currently uses an older technology to deliver broadband Internet access to 400,000 customers in 16 states.
Last year, Clearwire was counting on raising additional funds through public debt offerings. But with the subprime mortgage crisis freezing up the credit markets, raising capital for its network build-out became "easier said than done," says Walter Piecyk, an analyst at Pali Research. "It's a difficult financial market to raise capital in for a company that's burning cash." Not counting interest, taxes, and depreciation, Clearwire lost $133.8 million in the fourth quarter, nearly double its $78.1 million loss during the same period in 2006.
Without new funding or a partner, Clearwire would be left with nearly $1 billion in cash and liquid investments, only enough to build a smaller network spanning markets with 36 million people, or about a tenth of the country, Piecyk estimates. That would make Clearwire little more than a regional player. And companies like Intel "don't want to invest in a regional player," says Piecyk.
Sprint faces a similar predicament. It may still hope to recover from its market drubbing by building a next-generation network offering mobile broadband connections, a potential competitive advantage against its chief rivals in the cellular industry. But Sprint, which recently recorded a stunning $29.7 billion writedown (BusinessWeek.com, 2/28/08) in the value of its assets, is losing customers and bleeding money. With just $2.25 billion in liquid assets, the company is struggling just to upgrade its existing networks. "At this point, Sprint and Clearwire would be glad for anybody to write them a check," Piecyk says. "This is [Sprint's] escape plan."
As a result of their mutual miseries, it's likely that potential corporate investors are calling the shots in any Sprint-Clearwire negotiations. Analysts say Intel, Motorola, SK Telecom, Google (GOOG), Comcast (CMCSA), Best Buy (BBY), and even Singapore Telecom may be hammering out a joint venture between Sprint and Clearwire. Although the WiMax market has developed more slowly than some had hoped, the outlook remains bright enough for these investors to take a chance. ABI Research forecasts that U.S. WiMax service revenues will add up to more than $10 billion by 2012.
Still, many of these would-be investors are also being squeezed by the current economic downturn. Motorola's handset business is ailing and likely in need of extra cash. And Intel, hurt by weaker memory pricing, just lowered its guidance for first-quarter profit margins.
Many analysts still consider a Clearwire-Sprint venture likely: Intel has already poured billions into developing WiMax technology and needs a nationwide WiMax network to make that investment pay off. But hammering out an agreement could take time. "You have a lot of big, very powerful companies engaged here," Kainer says. "It's like trying to get elephants to dance."