(S) Sprint-Nextel Eyes Majority Stake in Clearwire

Third largest wireless carrier in the U.S. – Sprint-Nextel Corporation (S) – has been striving to achieve majority control over mobile virtual network operator (MVNO) Clearwire Corporation (CLWR). Recently, the third largest telecom operator of Japan Softbank entered into an agreement to purchase a 70% stake in Sprint for about $20.1 billion, which in turn, is believed to have fuelled Sprint’s stake buying decision.

Sprint is attempting to buy out Clearwire owner Craig McCaw’s holding stake in the company. This will place Sprint as a major owner of the MVNO with a stake of 50.45% up from 48.15% earlier. The additional 2.3% stake will cost Sprint around $100 million.

However, if the other major shareholders of Clearwire – like Comcast Corporation (CMCSA), Bright House Network as well as chipmaker Intel Corporation (INTC) – exercise their option of buying some of McCaw’s share, then Sprint’s majority stake would stand at 50.02%.

Sprint offers fourth generation (4G) services utilizing the Worldwide Interoperability for Microwave Access (WiMAX) technology through a wholesale agreement with Clearwire. As a part of the agreement Sprint will pay Clearwire $926 million to use its unlimited WiMAX network and would also make prepayments of $350 million for LTE capacity, provided Clearwire meets certain build-out targets by June 2013.

Clearwire is building 4G LTE network using Time Division (TD) LTE duplex technology in the 2.5 GHz spectrum band — the same technology that Softbank uses in Japan. This is slated to help both the companies to improve their handset related ecosystems.

The most attractive proposition from Clearwire is that it has access to a large chunk of spectrum. On the other hand, it lacks the financial resources to modernize its network.

We believe that as Sprint now has the financial back up commitment from Softbank, it will strive for control over Clearwire. Such a move would give it access to the MVNO’s additional spectrum which will put the third largest U.S. carrier in a much stronger position as compared to Verizon Communications Inc. (VZ) and AT&T Inc. (T).

We maintain our long-term Neutral recommendation on Sprint-Nextel Corp. The company also retains a Zacks #3 Rank, implying a short-term Hold rating.

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