Tuesday, November 10, 2009

Clearwire, the "on-purpose" money-loser (CLWR)

Clearwire (CLWR)builds and operates wireless broadband networks both domestically and internationally.

Today they announced an
equity investment of $1.5billion from Sprint, Comcast, Time Warner Cable, Intel, and others:

"This additional level of strategic funding marks another important milestone in the progress of Clearwire, and will enable us to maintain our leadership and aggressive 4G WiMAX network build plans," said Bill Morrow, CEO of Clearwire. "Today's news is also further validation of the importance of our 4G network to our strategic investors. We all benefit from this robust, all-IP, high-bandwidth network that delivers an unmatched combination of Internet speed and mobility.”

Morrow continued, “While we are very pleased to have every one of our investors, we are particularly pleased and honored that Sprint Nextel, Comcast, Time Warner Cable, Intel, Eagle River and Bright House Networks have decided to provide this additional round of strategic financing. Together, we share a common vision of providing consumers and businesses with a new category of Internet service capable of meeting the growing demand for mobile data.”

It is NOT common to single out a certain group of investors in a capital raising press release. But Clearwire is not an ordinary company.

their 10k:

We started operations on January 1, 2007 as a developmental stage company representing a collection of assets, related liabilities and activities accounted for in various legal entities that were wholly-owned subsidiaries of Sprint Nextel Corporation, which we refer to as Sprint or the Parent. The nature of the assets held by the Sprint legal entities was primarily 2.5 GHz Federal Communications Commission, which we refer to as FCC, licenses and certain property, plant and equipment related to the Worldwide Interoperability of Microwave Access, which we refer to as WiMAX, network. The acquisition of the assets was funded by the Parent. As Sprint had acquired significant amounts of FCC licenses on our behalf in the past, these purchases have been presented as part of the opening business equity as principal operations did not commence until January 1, 2007, at which time the operations qualified as a business pursuant to Rule 11-01(d) of Regulation S-X. From January 1, 2007 through November 28, 2008, we conducted our business as the WiMAX Operations of Sprint, which we refer to as the Sprint WiMAX Business, with the objective of developing a next generation wireless broadband network.

On May 7, 2008, Sprint announced that it had entered into a definitive agreement with the legacy Clearwire Corporation, which we refer to as Old Clearwire, to combine both of their next generation wireless broadband businesses to form a new independent company to be called Clearwire Corporation, which we refer to as Clearwire. In addition, five independent partners, including Intel Corporation through Intel Capital, Google Inc., Comcast Corporation, Time Warner Cable Inc. and Bright House Networks LLC, collectively, whom we refer to as the Investors, agreed to invest $3.2 billion in Clearwire and its subsidiary Clearwire Communications LLC, which we refer to as Clearwire Communications

Sprint convinced other industry participants to put up money to fund the massively unprofitable operations of Clearwire. Far from being a bad thing, this is effectively a way for these firms to "outsource" their operating expenses, while keeping losses off their own books. And who know, maybe even reap some capital gains one day. Instead of increasing their own operating expenses by building out their wireless networks individually, they pool money to have Clearwire do it. The Clearwire "losses" are fine, as they'd be expenses to these firms anyway.

The one thing necessary to keep Clearwire going, of course, is equity infusions like today's. With giant operating losses, Clearwire would have no access to debt markets. One thing I like is that this deal (which leaked over the weekend) was priced at $7.33 per share, a very healthy premium to Friday's closing price near $6.50. Equity infusions to troubled money losers are usually done a discount, as a "thank you" for the investment. That's unnecessary in this case of course, as these new investors are Clearwire's major investors, so they'll benefit from the higher stock price anyway.

The terms of the above ownership are actually quite friendly to the rest of us, who own class A shares. The class B shares owned by the huge investors have no rights to dividends, and no upside in liquidation:

"Sprint and the Investors, other than Google, own shares of Clearwire Class B Common Stock, which have equal voting rights to Clearwire Class A Common Stock, but have only limited economic rights. Unlike the holders of Clearwire Class A Common Stock, the holders of Clearwire Class B Common Stock have no right to dividends and no right to any proceeds on liquidation other than the par value of the Clearwire Class B Common Stock. Sprint and the Investors, other than Google, hold their economic rights through ownership of Clearwire Communications Class B Common Interests. Google owns shares of Clearwire Class A Common Stock."

Copyright 2009

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