Clearwire (UNKNOWN: CLWR.DL ) sent a letter to its shareholders today laying out in pessimistic detail the Clearwire board of directors' reasons for agreeing to sell itself to Sprint Nextel (NYSE: S ) for a price some large minority investors feel is a rip off. Here is the company's rationale.
Sprint's bid of $2.97 a share, or $2.2 million, was not the initial price put forward by Sprint. Clearwire had already rejected Sprint's first offer of $2.60 a share.
The $2.97 price, according to Clearwire, was a "~130% premium to Clearwire's closing share price on October 10, 2012," and would give "immediate liquidity to stockholders at transaction close."
According to Clearwire, a special committee made up of directors not beholden to Sprint (Sprint already owns 51% of Clearwire.) hired independent legal and financial advisors that vouched for Sprint's offer of $2.97 a share being a fair price.
As Clearwire explained, Google only received $2.26 a share on March 1, 2012 for its shares of Clearwire, and Time Warner only got $1.37 a share when it sold its Clearwire stock on October 3, 2012, just a month before Sprint's bid jacked up the market's price above $3.00 a share. Bad timing, Time Warner.
"Prospects are risky and highly uncertain"
The company paints a bleak picture of its chances to go it alone. It only had 12 months of liquidity left by the end of the third quarter of 2012, and it would run out of money during the first quarter of 2014 -- even if it stopped building its LTE network.
"The proposed transaction with Sprint provides a clear solution to the substantial funding gap Clearwire is facing," the letter states (emphasis theirs), and without the $2 billion to $4 billion it needs, the company's continuing operations and LTE plans would be in jeopardy. Getting the funding it needs to continue as a stand-alone venture "would be challenging, expensive and highly dilutive to stockholders, if available at all."
Five not-so-easy alternatives to selling to Sprint
1. Getting additional wholesale partners: Sprint is Clearwire's only major wholesale partner, but given "industry dynamics" and potential wholesale partners wanting more spectrum above forming a partnership, finding additional partners is unlikely.
2. Selling excess spectrum: Clearwire talked to a large number of potential spectrum buyers in 2010 and again in 2012 but those discussions "did not result in any compelling offers"
3. Debt/equity financing: Clearwire already pays $510 billion a year in interest. Increasing debt financing would result in more cash payouts and "potentially result in an untenable capital structure." Other than that, it says, more debt would have a dilutive effect on share price.
4. Selling itself to another company: Sprint controls Clearwire and has said it does not want to sell Clearwire. Is it any wonder that DISH Network's (NASDAQ: DISH ) chairman, Charlie Ergen, felt it was unlikely DISH could succeed in its bid for Clearwire? "[T]he deck is stacked against us," he said at an AllThingsD media conference last February. So DISH went for Sprint instead.
5. Bankruptcy: Without Sprint, Clearwire could end up with "financial restructuring [as] the only available alternative." That could mean having to sell off the company's spectrum at distress-sale prices. Restructuring could also result in damage claims. All in all, shareholders would see their investment be much reduced, says Clearwire.
The view from the other side
Some minority shareholders see the Sprint proposal in a very different light.
Hedge fund Crest Financial has been leading the charge against the buyout, claiming it substantially undervalues Clearwire's shares. Last December, Crest, owner of 6.6% of Clearwire Class A common shares, sued Sprint and Clearwire to stop the buyout, and alleged "breaches of fiduciary duty by Clearwire's controlling stockholders and its officers and directors."
The holder of 7.7% of Clearwire shares, hedge fund Mount Kellett Capital Management, sent a letter to Clearwire's board stating it believed "Clearwire's stock to be substantially undervalued."
And another shareholder lawsuit has been served on Clearwire, this one from Aurelius Capital Management. The suit claims that Sprint used its power as Clearwire's majority shareholder to push "manifestly unfair" conditions upon the minority shareholders.
The day of reckoning
Clearwire has sent out its proxy statement in the form of its letter urging a "FOR" vote, and Crest Financial has sent out its proxy statement urging "AGAINST." The vote whether or not to accept the Clearwire board's proposal will be held at a special shareholders' meeting on May 21.
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