Clearwire (CLWR) avoided a potential default on an interest payment and secured its near-term future through a new agreement with parent company Sprint Nextel (S). The deal also guarantees the availability of WiMAX services through at least 2015 and ties Sprint Nextel into Clearwire’s TDD-LTE plans.
Clearwire’s stock surged more than 25% early Wednesday on the news, while Sprint Nextel saw its stock price dip slightly.
The two companies noted the agreement could provide Clearwire with up to $1.6 billion over the next four years from Sprint Nextel for payments on WiMAX services, potential “pre-payments” for LTE services and “potential” equity investments. As such, Clearwire said it has made the $237 million interest payment that was due today, which it had previously wavered on paying due to the impact it would have on its cash reserves.
The payment structure modifies a previous wholesale arrangement between the two companies, with Sprint Nextel to now pay $926 million for “unlimited access” to Clearwire’s WiMAX network in 2012 and 2013, with two-thirds of that payment to be paid in 2012. The agreement also establishes usage-based pricing for WiMAX services beginning in 2014.
Sprint Nextel earlier this year agreed to pay a minimum of $1 billion to Clearwire in 2011 and 2012 for 4G wholesale services. That agreement called for Sprint Nextel to pay $300 million this year; $550 million in 2012 and $175 million in “pre-payments” for 4G services to be used in 2011, 2012 and beyond.
Sprint Nextel, which owns a controlling stake in Clearwire and relies on Clearwire’s current WiMAX network to support the carrier’s “4G” service offering, said the new agreement will provide “improved pricing” for its WiMAX service. In addition, the agreement calls for Clearwire to continue supporting the WiMAX network through at least 2015, with Sprint Nextel saying it will continue selling WiMAX-enabled devices with two-year contracts through at least the end of next year and “support those devices through the life of the contract.” Clearwire has said it would stop expansion of its WiMAX network, which covers approximately 130 million potential customers in favor of moving towards LTE technology.
Sprint Nextel also gained a “competitive pricing” agreement that will allow the carrier to re-wholesale WiMAX services to customers.
As for Clearwire’s TDD-LTE future, the new agreement calls for Sprint Nextel to pay up to $350 million over a two-year period for LTE capacity “if Clearwire achieves certain build-out targets and network specifications by June 2013.” Clearwire has said it would start rolling out LTE services across its 2.5 GHz spectrum assets once it secures the approximately $600 million in funding needed to build out the network. Sprint Nextel said it would chip in up to $347 million in additional equity funding if Clearwire manages to secure $400 million to $700 million in funding.
Details of the build-out targets could be the most interesting aspect of the agreement as many note Clearwire’s 2.5 GHz spectrum portfolio makes for a challenging coverage proposition. While the carrier has ample capacity in that band, up to 150 megahertz in some markets, the propagation characteristics of that spectrum makes it difficult to get more than a few miles of coverage from traditional cell sites. Analysts have noted that the spectrum is a good fit for urban environments as there is less chance for interference between cell sites, but the spectrum does not penetrate buildings as well as lower spectrum bands, which could require Clearwire to rely on alternative distribution channels like distributed antenna systems.
As for rural environments, the 2.5 GHz band could require several times more cell sites to provide coverage equal to the 700 MHz spectrum bands being used by Verizon Wireless and AT&T Mobility for their LTE builds. This has so far limited Clearwire’s WiMAX build to urban environments, with coverage rarely available once outside of those markets.
Sprint Nextel also gains a “long-term, usage-based pricing model for LTE services for 2012 and beyond,” with the new agreement. Sprint Nextel has already said it plans to begin offering commercial LTE services using its 1.9 GHz spectrum by mid-2012. By adding Clearwire to the mix the companies said they would collaborate on a network build plan that would cover Sprint Nextel’s higher usage markets. While Sprint Nextel’s Network Vision initiative was not mentioned directly, it’s assumed that the collaboration will include possible use of those network assets should coverage requirements fall outside of Clearwire’s current network.
Sprint Nextel added that it expects to begin launching devices compatible with Clearwire’s TDD-LTE network in 2013. Clearwire previously announced an agreement with Chinese telecom giant China Mobile to support the TDD-LTE ecosystem.
Overall, the new agreement provides a clear path for Clearwire to secure much needed funds and clears up to an extent its future. The deal also shows the reliance Sprint Nextel continues to place on Clearwire for its next-generation network future and lessens the perceived tension between the two operators.
“This announcement is consistent with our long-term thesis that Clearwire is the best long-term solution to Sprint’s spectrum needs,” said Wells Fargo Securities in a research note. “We believe this agreement provides Clearwire the necessary support from Sprint that it needs to raise the capital for its LTE build out.”
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