When the news broke that Clearwire (Nasdaq: CLWR) might skip a $237 million interest payment next week, investors ran for the door as Standard & Poor's hit the downgrade button on the company's debt. The stock fell more than 21% immediately and is off more than 70% year to date. Further losses and perhaps even a bankruptcy loom if Clearwire can't find a way to cover its interest payments.
History says it won't happen. Here's why:
Clearwire Corporation EBITDA TTM Chart by YCharts
Clearwire has failed to produce an operating profit in each of the past five years. Interest costs have soared over the same period. Management's choices are default, recapitalize, or negotiate a bailout on the order of what Liberty Capital provided to Sirius XM Radio (Nasdaq: SIRI) in 2009. Current investors lose something in every scenario.
Gentlemen, you can bring in the crow now...
Fools who've read my coverage of Clearwire know this take is a reversal for me. Back in March, I wrote of how the WiMAX provider was selling for well below what it could command in an asset sale.
"For months now, outgoing CEO Bill Morrow has shopped as much as one-third of Clearwire's regional capacity in an effort to raise $2.5 billion to $5 billion in cash. Several carriers have expressed interest, which means that Clearwire's key asset would fetch somewhere between $7.5 billion and $15 billion in an acquisition," I wrote at the time.
No clear choices for ClearSprint
Today, Clearwire's market cap is just $385 million. The whole business -- including more than $4 billion in debt -- is worth $6.5 billion in enterprise value. Little has changed. Except, of course, Clearwire's ability to pay its obligations.
I should have seen this coming. Who cares if Clearwire controls billions worth of wireless spectrum for delivering broadband signals? No one is going to pay a premium if the alternative is to let the company go bankrupt and purchase the assets on the cheap in a liquidation sale. Don't believe me? Look at what paying a premium for a rapidly deteriorating Palm did for Hewlett-Packard. History hasn't been kind to those who've paid up for underperformers.
Among the obviously interested parties, only Sprint Nextel (NYSE: S) cares if Clearwire survives. The two are partners in serving high-speed wireless broadband via WiMAX and they've agreed to cooperate in building a national LTE network to compete with AT&T (NYSE: T) and Verizon (NYSE: VZ). Both have said they'll seek outside financing for the buildout. What we don't know is who would offer terms.
Who might benefit if Clearwire builds the LTE network it envisions? There's the feds, certainly. U.S. officials who want to blanket the nation in broadband probably loathe the idea of allowing a would-be national provider to fail.
We can probably rule out the other U.S. carriers as benefactors. Regulators are already grousing over AT&T's proposed hookup with T-Mobile. Any plan that includes a Verizon bid would no doubt face the same scrutiny. A partnerless Sprint could fall into bankruptcy in the meantime.
What the bailout might look like
Sirius XM's lifeline took the form of $250 million in loans paying 15% per annum as well as convertible notes that gave Liberty a 40% stake in the satellite radio operator. Here, any deal would probably carry similarly stringent terms but also allow for creative ways to defer or convert interest payments -- giving Clearwire breathing space to invest in operations as it works toward profitability.
The other option is an asset sale. Clearwire has more licensed spectrum for broadband delivery than any of its competitors. A combination deal that includes an investment in convertible or preferred equity, cheap spectrum leasing, and dividends or interest could entice a suitor with a spectrum need.
So who takes this deal?
My guesses are China Mobile (NYSE: CHL) and Google (Nasdaq: GOOG). Here's why:
- Both companies are flush. China Mobile has more than $50 billion in cash and short-term investments versus $4.5 billion in debt. Google has $42 billion in liquid assets versus roughly $3 billion in debt. Clearwire is small fry by comparison.
- China Mobile already does business with Clearwire. The two companies inked a deal in September related to building out the Sino Superpower's derivative LTE network, which operates in the same 2.5-megahertz band that Clearwire's service has operated in for years.
- Google, meanwhile, is interested in owning a high-speed network for delivering data to the home for -- among other things -- transforming Google TV and YouTube into viable cable alternatives. Thus far its efforts include the Google Fiber project and a long-ago investment in Broadband Over Power Lines. The Big G also had an 11% stake in Clearwire as of May and was still an investor as of last month.
Imagine if either or both of these companies made a strategic bet on Clearwire per the terms above while at the same time purchasing some of Sprint's shares. Both carriers would enjoy at least some relief while China Mobile and Google would get cheap access to high-speed wireless technology.
Think I'm crazy? Is there a better plan? Please weigh in using the comments section below and then pick up your copy of a new special report that includes our analysts' top profit play on the rise of wireless broadband. Click here to download now -- the report is 100% free for the asking.
