CLWR - Clearwire

[bmichaud]

This just hit the 52-week low tape due to Intel announcing it is selling off ~10MM shares. Book value per share is ~$5 with spectrum assets held at $4.4B, but after adjusting spectrum upwards by $18.9B to account for an average estimated replacement cost of $.50 per MHz-POP, estimated BVPS is ~$24. The Company expects to be EBITDA positive by 2012, as right now they are still cash flow negative.

 

Glenview Capital is in the stock, which is how I was made aware of it in the first place, then I happen to see it on the 52-week low yesterday. Very interesting play given the exploding demand for wireless capacity - asset rich, cash flow poor though. If they don't doing anything dumb over the next couple of years (i.e. issue equity at anywhere close to these prices) then the stock could appreciate significantly.

 

Has anyone taken a look at this? Thoughts?

 

 

[Cardboard]

I own some after discovering it via Sprint Nextel and Brker_guy comments on the Level 3 thread. My average cost is north of $5 so I have been hit nicely by the recent "organized" selling by Intel and Craig McCaw. We are talking a tiny total of 15 million shares of a company that has around 1 billion for both class. Both of these players are retaining a much larger amount making you wonder if this is not a message that they are sending to management or trying to make the cost of a buyout more attractive to Sprint.

 

It is certainly an asset play on the spectrum alone since I put very little value on the WiMax technology which will likely be abandonned for LTE. As I mentioned on the Level 3 thread, the CFO mentioned the following this week at at a conference:

 

"Spectrum valued at $23.2Bn to $46.3Bn assuming $0.50 to $1.00 per MHz-POP"

 

The company also mentioned in their latest quarterly announcement that they do not intend or need to sell any spectrum this year to cover cash outflows. It is actually a sound strategy with spectrum going up in value continually, although the Street does not like it, since it wants to see cash now. We can tell by some spectrum auctions and the recent buyout of T-Mobile (weak financial results for a price tag of $39 billion and with a $6 billion break-up fee!) how valuable it is becoming. It is interesting to me since historically, I could only find asset plays with some assets experiencing secular declines or other business problems. Here we clearly have an asset benefiting from secular growth.

 

So the risk seems to be how bad they need cash before having to sell spectrum at distressed prices. So far we look ok and no one else is giving it away. Although, it is a stock that I believe will be highly volatile and may make one look very stupid in the short term. Forget about picking the bottom. I may add substantially if I have some cash turning handy and the price remains this low.

 

Cardboard

 

 

[bmichaud]

Cardboard,

 

I saw that valuation for spectrum in Glenview's letter and CLWR's investor presentation - if those figures are true, this is a real live 25 cent dollar we have. But like you said the cash flow is the biggest risk. I like the strategic partners in place too - i'm going to go on a limb and say they will want to do everything in their power to maximize their stake.

 

I really like the idea - I established a small position yesterday, but I find it tough to believe this will stay this cheap for that long. So maybe it is an idea to semi-load up on.

 

Interesting

[ubuy2wron]

I think the only sensible way to participate is through some senior debt at attractive prices. There are battling billionaires involved here plus huge egos and nasty hedge funds playing for keeps. What is up for grabs is bandwith which may or may not be worth a lot but is not worth much if the network is not national, half a network is not worth much except to Sprint. There exists all sorts of technical questions which are way above my pay grade as to the the value of their spectrum because of some techincal deficiencies in its position {the signal does not penetrate buildings as well as others because of wave length} There is someone smart here who can look at the balance sheet and see what security stands to benefit the most in a bancruptcy and load up on that at the right price as I think substantial dilution a take under or a zero are all possible outcomes for the equity holders here. The game was changed when Deutsche Tel sold their wireless assets to a competitor. Another outcome of this I think will be the downfall of Harbinger capital and Mr Falcone http://www.reuters.com/article/2011/03/21/falcone-hedgefunds-idUSN2119487820110321 who I suspect will try to short CLWR to zero if it will help him with his endeavors he is an expert by the way in distressed debt.

[S2S]

Whatever strategical advantages they (allegedly) attained from being the first to market with 4G are well squandered away... while their only meaningful customer/owner/financier, Sprint, remains incredibly cash-strapped.

 

Spectrum valuation metrics are useful only to an extent; one also have to consider the less desirable attributes of CLWR's spectrum(vs. T or VZ's) and the significant financial and operating capacity necessary to utilize said assets.

[alertmeipp]

why Intel sells 10% of its holding in the public - I would think if the 50 cents is solid, at least they would broker a deal to do private transactions??

[bmichaud]

"Whatever strategical advantages they (allegedly) attained from being the first to market with 4G are well squandered away... while their only meaningful customer/owner/financier, Sprint, remains incredibly cash-strapped."

 

So worst case scenario let's say Sprint goes away right now leaving CLWR with half a network and further development left - could they not auction off their spectrum to other carriers who must meet the demand of an exploding wireless population? Perhaps senior debt is the most intelligent option, but if there really is growing demand for spectrum, why under a worst case scenario could CLWR not just auction it off even at 25 cents per MHz-POP? Equity holders would still be in the black.

 

I am extremely new to understanding this industry, so perhaps someone could provide a spectrum-for-idiots explanation of spectrum in the United States? Are Verizon, ATT/T-Mobile well suited going forward to handle rising demand via making their network more efficient or will they have to purchase more spectrum? Basically what I am asking is can the US wireless industry continue to grow at its current pace without CLWR spectrum? Is there a demand for this stuff?

[Packer16]

I think the issue would be in selling all or most of the spectrum.  Who would buy?  From the auctions I have seen, the bidders are trying to complete or expand an existing network.  So there would need to be a new strategic player who wants to get into the broadband wireless game and have enough money to pay the >$20 billion purchase price referenced.  With T-Mobile being purcashed by ATT, I see the pool of buyers shrinking.  The only guys I can think of are Google and Microsoft but I have not heard about plans to move in this direction.  Clearly, Sprint does not have that kind of money.  This I think is the reason why this may not be a bargain until a buyer materializes.  Please prove me wrong as I would love to own a 25 cent dollar. 

 

Packer

[Myth465]

I looked at this yesterday. I was doing the same thing (scanning 52 week low lists) and noticed this and thought back to the LV3 thread. I have the same concerns as Packer. They should sell a chuck to demonstrate to the market feasibility and value. I mean its a 25 cents dollar, what are they waiting for, things go up in value until they dont....

 

Why not sell 10%, get some cash, pay off some debt, then sell 10% more in 2 -3 quarters. The company would be revalued and they could either keep selling off bit by bit or do something strategic with fairly valued stock.

[bmichaud]

Myth, 100% agree with you. It's similar to CHK - so what if these assets have these implied values, unless ur selling them off they don't generate cash. Sell them off slowly and realize the value.

 

Regardless of what happens, I just don't see these strategic partners letting their 84% combined equity stake go up in flames - am I wrong? Won't these big egos do everything in their power to keep this thing going? I would think the worst case would be the strategic partners step in with some more capital to sustain the operation and start liquidating the spectrum.

 

 

[finetrader]

good point Myth

 

show me the money,don't just tell me

[Myth465]

Myth, 100% agree with you. It's similar to CHK - so what if these assets have these implied values, unless ur selling them off they don't generate cash. Sell them off slowly and realize the value.

 

Regardless of what happens, I just don't see these strategic partners letting their 84% combined equity stake go up in flames - am I wrong? Won't these big egos do everything in their power to keep this thing going? I would think the worst case would be the strategic partners step in with some more capital to sustain the operation and start liquidating the spectrum.

 

 

 

This is my major issue with CHK. He could erase that value discount immediately. He cant drill all the acre which is why there are so many farm outs and JVs, so why not sell a portion. I like the BHP sell, but wise they would sell some acre for cash in hand or more production. Its tough, but Im not running a billion dollar company so what do I know.

 

I think TBone is right though Ichan will find value one way or another.

[S2S]

Packer hit the nail on its head. For the natural consolidators (AT&T and VZW), there is every reason to do wait for Sprint's, Clearwire's, and/or Lightsquare's demise to then pick up assets on the cheap.

 

What about Microsoft and Google? If someone can explain why they would stray from their incredibly profitable core competencies to get into operating wireless networks, an extremely capital intensive business with meager and ever declining ROI, I am listening.

 

 

 

 

Now, if the T-Mobile US acquisition falls apart, things will get interesting. Till then...

[bmichaud]

I'm not arguing ur point, just trying to sort it out for myself. Why would the strategic investors owning 84% let CLWR fail? If wireless is growing as rapidly as it appears, then eventually won't the natural consolidators be forced into buying CLWR's spectrum? I would think, at least if I was a controlling shareholder, that a controlling sgareholder would doing everything in their power to keep CLWR humming along until other players are forced to buy and/or until CLWR is cash-flow positive.

 

I won't be fully on board with the idea that CLWR will go under until it is explained to me why the strategic investors would let that happen. Again, not trying to be argumentative, just trying to answer that question for myself, bc if there is a good reason/strong prob that they will let it fail, then a position in the equity has very little downside protection and is not a very good idea.

[Cardboard]

IMO, the most likely scenario is a break-up of Clearwire: Sprint retains the network which is then converted to LTE along with some spectrum and the rest of the spectrum is sold off to Verizon Wireless or an attractive price. The sale to Verizon would allow Sprint to swallow the 46% not owned and to reduce its proforma debt. Also, both Sprint and Verizon are on the CDMA standard so there is some common points there.

 

Verizon Wireless is ahead of the pack in the race towards a national LTE 4G network (unless Sprint switches to LTE right away). However, they lack spectrum. If they want to maintain their advance, they will need to resolve that issue. Remember that AT&T bought T-Mobile in part for their spectrum while they are behind Verizon Wireless on their LTE national roll-out. If Verizon Wireless wants to keep its number #1 status, they will need to fight AT&T with technology, speed, service or other since AT&T has chosen to turn #1 by simply acquiring the subscribers of a competitor.

 

I also think that AT&T will need to give up quite a bit to swallow T-Mobile. It is not looking so good at the moment with the various regulators. They also committed to a $6 billion break-up fee which is enormous. If it doesn't go through, you have some idea as to what will happen to its CEO. So expect some significant deals in coming months to realign everything. I believe that both Sprint and Clearwire will look much better than what people perceive right now. 50+ million wireless subscribers and over 3 times more 4G spectrum than Verizon or AT&T is just too good to pass up.

 

As you can see, I also kept the discussion aligned with the big existing wireless players. There is no way to tell what will happen with Google, Microsoft, LightSquared and I would say even Comcast in that discussion. This will be a very dynamic scene and to expect AT&T and Verizon to just let Sprint and Clearwire die does not make sense with so much at stake. Moreover, the latest numbers indicate that both Sprint and Clearwire are growing, so much for their imminent demise.

 

Cardboard

[S2S]

Hi Cardboard,

 

That's a very reasonable 5-year view. The important questions to such a resolution, of course, are when and how it will unfold, and the ensuing benefits to common shareholders (vs. Sprint's and other debtors). There seems to be a bit more clarity on the former: I find it hard to imagine a deal being conceived for the next 12-18 months while the DoJ and the FCC contemplate the AT&T/T-Mobile US merger - smart move by AT&T to albeit at a cost of $6B, the breakup cost promised to Deutsche Telekom.

 

You are correct on the positive signs of an ongoing turnaround at Sprint. I'd watch the explosive capex growth, however, as its attempt to stay open to all (technological) options via a Network Vision build-out comes at a cost.

[ubuy2wron]

In addition INTC are not totally stupid so why are they selling and neither is Craig McCaw and until I see some of the major investors pony up for more equity it makes zero sense to try to be a hero here. I may think I know what the future will bring for CLWR however none of the participants who have a say in the matter are showing their hand at this stage.

[bmichaud]

As Buffett says, you pay a high price for certainty.

 

Attached is a very good research note by BTIG that I got off of Cap IQ.

[beerbaron]

Anybody knows how much the senior notes trade at?

 

BeerBaron

[claphands22]

Clearwire short thesis from VIC

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/44366

[bmichaud]

Clap hands - could you perhaps summarize the thesis for those of us without access to the site?

 

Thanks

[claphands22]

It's available to anyone who signs up for a 45 day account. I really can't do it justice by summarizing it.

[bmichaud]

So good lesson learned after reading the value investor club short theses on CLWR....don't believe someone's cobbled together piece of garbage short thesis unless they have acknowledged they have thoroughly examined all available research on the company they're trashing.

 

This is a lessoned learned for myself as well regarding putting out my own analysis on something without thoroughly looking at both sides. I know there are mixed feelings in the value investing community regarding Street research, but the fact of the matter is if you can comb through some of it to find the quality research that was well thought out, and intelligently put together, it can VERY MUCH speed up the research process, bring a lot more clarity to your own thinking, and help you create a much more well rounded thesis.

 

All that to say - after reading a 137-page Credit Suisse note on Clearwire, my thinking changed on the details of the short thesis dramatically. Not necessarily my thinking on the whether to go long or short, but the actual details that the short theses referred to.

[brker_guy]

Well, looks like CLWR is taking a page out of S' playbook and outsource their service operations:

 

http://newswire.telecomramblings.com/2011/05/clearwire-selects-ericsson-for-managed-services/

 

So, CLWR will soon be a holding company of spectrum and a wholesaler.

 

BTW: bmichaud, I don't know if you notice in that VIC writeup, the author never did any math on the value of spectrum.  That is the hidden asset that everyone misses.  Spectrum is a FINITE resource.  4G eats up a lot of BW.  Just go ask VZ.  The COO and soon to be CEO has admitted to that yesterday...

[Packer16]

Just to play devil's advocate.  What will prevent Clearwire from becoming another Nextwave (a company with alot of spectrum and debt but not much cash flow)?