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Sprint cozies up to Clearwire after spurning MetroPCS

by Chris Nolter | Published February 27, 2012 at 4:34 PM

Sprint Nextel Corp. and Clearwire Corp. continue to inch closer together.

Sprint announced Monday, Feb. 27, that it would issue $2 billion in notes that could fund the wireless upstart, after its board reportedly squelched a deal with MetroPCS Communications Inc.

Relations between Sprint and Clearwire have at times been contentious, as when the companies negotiated a wholesale pricing agreement. But Sprint remains Clearwire's largest shareholder and customer, despite overtures to MetroPCS and a networking deal with impaired carrier LightSquared Inc.

Google Inc. is selling its Clearwire position and fellow investors Comcast Corp., Time Warner Cable Inc. and Bright House Networks have a pact with Verizon Wireless. "Clearwire should recognize that the only friend it has in the world is Sprint," said Roger Entner of Recon Analytics LLC. "Everybody else is cutting themselves off from it."

Sprint's new bonds would mature in 2017 and 2020. Together with vendor financing for its long-term evolution, or LTE, mobile broadband network, Moody's Investors Service said Monday that the new notes would address most of the questions about its funding. The capital and an improved relationship with Clearwire should allow the carrier to address its spectrum needs, the ratings agency noted, "this still needs to play out."

With MetroPCS, Sprint CEO Dan Hesse would have gained valuable wireless spectrum and diminished his company's need for Clearwire's wireless capacity.

The Richardson, Texas, carrier has wireless licenses in the top markets, uses a compatible wireless standard and owns Advanced Wireless Services spectrum licenses in the 1900 megahertz band, where Sprint also has licenses.

"It would have helped Sprint greatly," Entner said. "It would give them 1900 MHz spectrum in major markets where they could use for their own LTE network."

Walt Piecyk of BTIG Capital LLC suggested in a Monday report that with or without MetroPCS, Sprint will need to spend more than $1 billion on spectrum.

The government could make more licenses available for auction. Spectrum in the so-called H-Block would be an ideal match. Sprint owns licenses in the G-Block, which, as its alphabetical sequence implies, is adjacent to the H-Block.

MetroPCS, of course, could also bid for licenses.

The Dallas carrier could afford to spend $1 billion on spectrum and deploy coverage on the wavelengths, Piecyk wrote. By doing so, the analyst noted, the carrier "would drive up its own strategic value to Sprint in the future."

Shares of Leap Wireless International Inc., a smaller-market version of MetroPCS, jumped 5% on Monday, to $11.24.

Leap and MetroPCS have been on-and-off deal parties for years, with the former publicly spurning the latter.

A merger of the carriers would be an example of consolidation that should actually please the Federal Communications Commission, because it would create a fifth national wireless provider.

But debt could be an issue. Wells Fargo Securities LLC puts MetroPCS's year-end 2011 leverage at 1.9 times Ebitda, compared to a multiple of 4.5 times for Leap. Wells Fargo projects that MetroPCS will have $315 million in positive free cash flow in 2012, while Leap will have a negative $282 million.

Entner suggested that eventually the compelling economics of scale will surmount concerns about debt and management issues that unraveled previous deal talks between MetroPCS and Leap.

"The last couple of times they have tried the sticking point was personalities, not debt," he said.

Shares of Sprint rose more than 7 cents, or 3%, to $2.55, on Monday afternoon.

Instead of a deleveraging transaction with MetroPCS, the carrier can for now look to improved relations with its old sidekick, Clearwire. The more pertinent question for Hesse may be relations with Sprint's board.

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Sprint cozies up to Clearwire after spurning MetroPCS

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