Newly enriched Sprint Nextel Corp. has launched a $2.1 billion bid for its wireless partner Clearwire Corp. and the vital airwaves it controls.
At stake is a valuable cache of wireless radio spectrum — the stuff that cellphone users increasingly gobble up as they stream YouTube videos, download fanciful and functional apps and browse the Internet.
Clearwire has a bunch of it, and Sprint needs it to compete with larger rivals Verizon and AT&T.
Overland Park-based Sprint already owns 51 percent of Clearwire but has said it doesn’t control the company.
The odd arrangement dates back four years to an agreement that allowed Sprint to appoint seven of Clearwire’s 13 directors but requires one of them to be independent of Sprint.
The 2008 deal also allowed Sprint to tap into some of Clearwire’s spectrum. The two companies have danced around the spectrum question ever since, sometimes as uneasy partners.
“At some point you have to move in and take control,” said Berge Ayvazian, an industry consultant at HeavyReading.com.
Sprint, armed with $3.1 billion in funding from its own suitor, Tokyo-based SoftBank Corp., made its move Wednesday to buy the nearly 49 percent of Clearwire it doesn’t already own. The deal, which was disclosed publicly Thursday, values Clearwire shares at $2.90 each.
Sprint’s offer includes providing up to $800 million in interim financing to Clearwire.
Clearwire acknowledged in a filing with the Securities and Exchange Commission that it is discussing “a potential strategic transaction” with Sprint. Neither company would comment beyond their regulatory filings.
Markets and some experts didn’t seem to like the price.
Clearwire shares traded at higher prices throughout the day and closed at $3.16, up 15 percent on the day and nearly 9 percent higher than Sprint’s bid. Sprint shares shed 2 cents to close at $5.64.
Analysts described Sprint’s offer as an opening salvo in negotiations to put a price tag on bringing the companies under one roof.
“They’re determined to make it work,” said Will Power at Robert W. Baird & Co. Inc. “Whether they can purchase it at $2.90 or $4, it appears Sprint is committed to folding in the piece of Clearwire it doesn’t already own.”
Sprint’s move wasn’t possible until two months ago, when it agreed to a $20.1 billion deal that will give SoftBank a 70 percent stake in Sprint. Sprint even conditioned its bid for Clearwire on the SoftBank deal being completed and on SoftBank’s approval.
SoftBank already has pumped $3.1 billion into Sprint’s bank account and is promising $4.9 billion more when their deal is completed, likely in mid-2013.
Softbank’s backing similarly helped Sprint reach agreement last month to a $480 million cash deal with U.S. Cellular that will deliver to Sprint 585,000 new customers and some additional wireless spectrum in the Midwest.
By going after control of Clearwire and its big spectrum holdings, Sprint hopes to recover what was once its own.
Sprint gave the spectrum and its then-budding WiMax wireless network to Clearwire in late 2008 in exchange for about half of Clearwire’s stock. Sprint didn’t have the money to build out the new faster network nationwide.
The spectrum allowed Clearwire to attract $3.2 billion from investors, including the likes of Google, Intel and Time Warner Cable. Google and Time Warner have since sold their stakes.
Clearwire, meanwhile, has struggled to expand its network coverage fully or to update its technology to Long Term Evolution, or LTE, that delivers the fastest mobile data speeds.
Verizon already offers LTE service in more than 400 markets, and AT&T has it in 113. Sprint said its LTE service is available in 43 markets.
Building an LTE network is only one front in the battle for customers. Wireless carriers also need plenty of spectrum to handle the increasing amounts of data traffic, rather than voice traffic, their wireless customers generate.
Think of the stream of data that reaches cellphones — the videos, app downloads and Internet pages — as water surging through a fire hose. Wireless companies’ separate networks of towers, radios and antennas are the water pumps, and the spectrum is the fire hose. If the fire hose is too small, customers’ videos and other data streams will slow down or sputter.
Power said Clearwire has more than twice as much spectrum capacity as Sprint. Combining the two would give Sprint a bigger fire hose than either Verizon or AT&T, he said. Sprint won’t need all that capacity for a while, but it could become a competitive advantage, Power said.
Not all spectrum, however, is created equally, and Clearwire’s has limitations.
It doesn’t carry signals as far from a wireless tower as other spectrum that Sprint, AT&T and Verizon use. Nor does it burrow deep into buildings like the other spectrums.
And that means Sprint would need a costly number of extra towers, wireless radios and antennas to make full use of Clearwire’s spectrum nationwide, according to Craig Moffett, an analyst at Sanford C. Bernstein.
“In total, it will take a dizzying amount of new capital investment to turn Clearwire’s spectrum trove into a usable asset,” Moffett wrote in a note to clients Thursday.
Adding to the cost of the deal, Clearwire’s other owners “very likely” won’t settle for the $2.90 a share that Sprint has offered, said Jennifer Fritzsche, who tracks both companies at Wells Fargo Securities.
The bid undervalues Clearwire’s wireless spectrum and the potential customers it could reach when compared with other deals that have involved buying spectrum, she said in a note to clients.
A similar claim appeared in a letter that one large Clearwire investor filed with the Securities and Exchange Commission in early November amid rumors that Sprint was talking with some large Clearwire owners about buying their stakes.
Mount Kellett Capital Management L.P., which owns 7.3 percent of Clearwire shares not controlled by Sprint, said in the letter that Clearwire should consider selling its extra spectrum in an auction to avoid letting Sprint buy it too cheaply.
Its letter also challenged Sprint to either back away from Clearwire or make an offer “to all stockholders to allow them to evaluate the offer and the future of the company under Sprint’s control.”
Sprint did that Wednesday.