Clearwire rallies support for Sprint deal

To rally support for his company's $2.2 billion sale of a minority position to Sprint Nextel Corp., Clearwire Corp. chairman John Stanton sent a letter on Monday to shareholders along with a definitive proxy filing.

The sale to Sprint also received approval from Egan-Jones Ratings Co., the second proxy advisory firm to endorse the transaction.

Still, the outlook for the deal is hardly clear. Rejection could have wide-ranging effects and implications for a number of telecoms, potentially opening up Clearwire shareholders to greater value or to more dire circumstances.

Clearwire shares closed down 9 cents, or 2.7%, to $3.16 on Monday afternoon, which is still well above Sprint's offer of $2.97 per share for the minority shares it does not own.

"Clearly the market expects the vote to fail," said Chris King of Stifel, Nicolaus & Co. Both sides have good points, said King, who suggested that minority investors may be playing a dangerous game of chicken with Sprint.

"Clearwire needs funding sooner rather than later," he said. "If Sprint throws up its hands and walks away, bankruptcy is a possible scenario."

Kevin Smithen of Macquarie Group Ltd. wrote in a Monday note that "absent a last minute 'sweetener,' Sprint could lose the vote next week."

A rejection could open doors for Dish Network Corp., which has offered $3.30 per share, or $2.3 billion, for the 48.30% stake, and Verizon Wireless, which has shown interest in some of Clearwire's wireless spectrum.

It could also raise questions for Japan's Softbank Corp., which has proposed a $20.1 billion investment in Sprint that would give it a 70% stake in the third-largest U.S. wireless carrier. Softbank deploys wireless broadband on the same spectrum that Clearwire deploys, and has great interest in the carrier.

"We believe that several of [Clearwire]'s top shareholders think that Sprint/Softbank will not be able to keep [Clearwire] out of bankruptcy, and that in a Chapter 11 process, Dish, Verizon and potentially other suitors could bid on the assets," Smithen wrote.

Sprint holds more than 50% of Clearwire's equity. A majority of the target's minority holders will have to approve the deal.

Crest Financial Ltd., which holds more than 8% of Clearwire's Class A shares, has put forward a rival proxy. A bloc of minority shareholders with more than 18% of the Class A equity has formed to talk with Sprint and rival bidder Dish.

The offer by Charlie Ergen's Dish would leave Sprint as the majority shareholder of Clearwire. Highlighting the strategic fluidity, and incestuousness, of the strategic gaming, Dish has also lodged a $25.5 billion offer for a controlling position in Sprint itself.

In his letter to shareholders, Stanton noted that Sprint's $2.97 per share offer represents a 130% premium to Clearwire's price before October speculation that Sprint and Softbank would pursue Clearwire.

The standing offer marks a 177% premium to the price that Sprint paid co-investor Time Warner Cable Inc. for its Clearwire shares in October 2012, and is 31% higher than the price that Google Inc. accepted in March 2012.

Stanton also addressed several "misperceptions," including that the sale undervalues Clearwire's spectrum and that the company could attract other large wholesale customers besides Sprint.

On Monday, Egan-Jones joined Institutional Shareholder Services Inc. in recommending that shareholders vote for the deal.

"These recommendations from two leading proxy advisory firms affirm the board's unanimous belief, based on a rigorous multiyear strategic review, that this combination is the best strategic alternative for Clearwire's minority stockholders, delivering certain, fair and attractive value," a company statement asserted.

The recommendation from ISS is less than a ringing endorsement, however. In its May 9 report, ISS stated that Sprint's offer is "likely the most compelling offer shareholders will see."

ISS based its recommendation more on the reality of the agreement formed by Clearwire's so-called strategic investor group in 2008 than on the economics of Sprint's $2.97 per share bid. Google, Intel Corp., Comcast Corp., Time Warner Cable and Bright House Networks LLC joined Sprint and Craig McCaw's Eagle River Holdings LLC in the $14.5 billion deal backing Clearwire. Some of the investors have exited through sales to Sprint.

"What unaffiliated public shareholders now face, essentially, is not merely a struggle against a would-be buyer which has a controlling stake," ISS wrote. "It is also the long-tail effect of a set of governance provisions which protected the interests of the initial strategic investor group with little regard for the minority public holders, and may ultimately -- despite the majority-of-the-minority vote provision -- have stripped public shareholders of what little leverage a minority ever has to pursue an alternative not decreed by the controller."

Glass, Lewis & Co. LLC has suggested that Clearwire investors vote down the deal.

The proxy adviser observed that the minority activism "might otherwise be considered the orchestrated saber rattling of a minority shareholder group attempting to extract some incremental value from a firm's controlling shareholder" in its May 9 recommendation.

However, the proxy firm concluded that there is a "well-supported series of arguments to suggest Sprint is not offering a compelling value and has actively obstructed potentially compelling alternatives, including the possibility that Clearwire would be better served continuing to operate as a stand-alone firm."

Glass Lewis observed that the target's board has maintained a "markedly disproportionate fealty to the interests of Sprint," and noted that Clearwire's stock has consistently traded above Sprint's offer since early January.

Clearwire said May 10 that Glass Lewis failed to recognize the extent of the review that its board undertook.

Since the December conference call to announce the deal with Sprint, Clearwire's leadership has maintained that the deal was the best option even it doesn't match the expectations of minority holders.

When announcing the deal with Sprint, Clearwire CEO Erik Prusch said Clearwire explored a wide range of options in recent years, including a 2010 auction. The bids had not been as high as speculated by shareholders and the media. "We do not have luxury of unlimited time," Prusch said.

Clearwire reiterated the urgency on Monday. Stanton's letter to shareholders warned, "there will be substantial doubt about Clearwire's ability to continue operations, especially as the company projects that it will run out of liquidity in the first quarter of 2014."

Keep in mind that alongside its bid for Clearwire equity, Dish has been acquiring debt in the wireless broadband provider. In its latest quarterly report, Dish said that, as of March 31, it had purchased Clearwire debt with a fair value of $950 million.

If shareholders reject the bid, Smithen wrote that Clearwire could elect not to make a June 1 interest payment.

Things would get even more interesting. As Prusch said in December, the clock is ticking. Sprint and Clearwire's minority shareholders have a week from Tuesday to make their choice.

Sprint declined to comment on the possibility that it would increase its offer. Clearwire declined to comment on the possibility of a bankruptcy. However, in its merger proxy the company said it could restructure through the courts if it cannot complete the Sprint deal. The proxy states that Clearwire's board is considering whether to make the June interest payment.