The proposed $14.5 billion joint agreement between wireless internet provider Clearwire Corp. and cellular giant Sprint Nextel Corp. hasn’t even closed yet. But that hasn’t stopped Ben Wolff from dreaming about what the new company will look like in just a few years.
“Most importantly, it means not being tethered to your computer anymore,” Wolff says from his chair in a large conference room at Clearwire’s posh headquarters in Kirkland’s Carillon Point development, on the shores of picturesque Lake Washington.
Wolff, a sharply dressed and compact man, can be a bit long winded when he talks about Clearwire, the latest brainchild of wireless mogul Craig McCaw. Speaking in a run-on cadence with little hesitation or inflection in his voice, Wolff comes off like a man who knows exactly what he’s talking about.
He should. A mergers-and-acquisitions lawyer by training, he spent years at Davis Wright Tremaine LLP, where he worked on transactions concerning a number of McCaw-owned entities. He has been directly involved with McCaw since 2003, first as president of McCaw’s personal investment arm, Eagle River Investments. In 2004, he joined Clearwire and became CEO last year.
Wolff envisions a “WiMax” wireless network that enables customers to gain access to the internet from wherever they happen to be and from whatever device they desire, be it a laptop, mobile phone, BlackBerry or iPod—and all at broadband speeds. It’s a grandiose vision, full of hope and the potential to balloon Clearwire’s revenues beyond imagining. (The company, like many in the telecom sector, has never shown a profit.)
But when all the promised whiz-bang wireless services around the deal are stripped away, the proposed merger between Clearwire and Sprint Nextel’s Xohm network—which, at press time, was expected to close by the end of 2008—is really a matter of survival for the two companies. Wireless industry experts say Clearwire is too small to go it alone. By the same token, many think Sprint’s Xohm is fighting a losing battle against competitors AT&T and Verizon Communications.
Together, though, Clearwire and Sprint Nextel could be a potentially powerful entity that is rich in the lifeblood of the wireless telecommunications world: spectrum. The more spectrum a wireless provider has—and Clearwire and Sprint combined have more than any other player—the more customers it can reach with new wireless services.
What the new entity may not have on its side, however, is good luck. This merger is set to occur at perhaps the worst possible time: in the midst of the most severe financial crisis since the Great Depression. As markets around the world plummeted this fall and credit was virtually frozen, the idea of a nationwide wireless service rollout seemed riskier than ever.
For his part, Wolff remains confident that the Clearwire-Sprint deal will weather the turmoil on Wall Street. “The $3.2 billion we expect to bring in as part of the transaction gets us a long way down the road,” he says. “That helps us get a lot of the nation built out with WiMax. If the capital markets get better, we’ll opportunistically raise capital as we have in the past.”
Data On the Go
WiMax, which stands for “worldwide interoperability for microwave access,” is sort of like wi-fi (wireless fidelity) on steroids. While wi-fi covers small geographic areas wherein people can access the internet from their laptops and cell phones, WiMax blankets areas the size of cities with a wireless network.
“You can have unified communications where one number rings all of your devices,” Wolff says. “All the devices that have become mainstream—the laptop, the mobile phone, the iPod—all have to be tethered to a computer or the internet. If you want to download songs onto your iPod, you have to have an internet connection.”
Clearwire’s WiMax network will be designed to deliver much more than MP3 files on the go. Wolff says that when all is said and done, Clearwire customers will actually be able to see one another on their mobile device displays when they talk. “It’ll mean having visual communications anywhere you are at any time,” he says.
Adding more firepower to the merger, search engine giant Google Inc. and Trilogy Equity Partners—a private-equity firm led by wireless pioneer and former McCaw lieutenant John Stanton—joined an investment group that plans to infuse the combined Clearwire-Sprint entity with $3.2 billion in cash to continue the build out of its nationwide WiMax network.
With Google in the house, Clearwire will be able to offer faster, more relevant location-based search results to its customers, Wolff says. But Google remains characteristically mum on how exactly its work with Clearwire will take shape.
“It’s too early to comment on how closely we’ll be working with Clearwire,” Google spokesman Andrew Pederson says. “It’s all still in the planning stages. But we will be providing search applications for users on the Clearwire network.”
The Deal Behind the Deal
In early may—when the subprime mortgage mess was only a growing concern and not yet a full-blown crisis—Clearwire and Sprint Nextel announced their $14.5 billion deal, but it wasn’t the first time Wall Street analysts had heard of the plans. As far back as mid-2006, the two companies had been working to combine their spectrum assets in the 2.5-gigahertz band to build out a nationwide WiMax network.
Though the initial joint venture was eventually called off in November 2007, Clearwire and Sprint never really stopped dancing. Each simply retreated to its respective side of the floor to catch its breath.
Sid Parakh, an equity analyst at Seattle-based brokerage house McAdams Wright Ragen, says management turmoil at Sprint was the main reason that the deal didn’t come together in 2007. When the two sides first started talking, Sprint CEO Gary Forsee was still in charge. Forsee left the company amid a steep decline in its cellular business that continues to this day. “The Sprint board wasn’t going to let an outgoing CEO do that deal,” Parakh says.
Forsee was replaced by MIT grad and wireless executive Dan Hesse in December 2007. Hesse, no stranger to telecommunications, has close ties to the Puget Sound region’s wireless industry. He was president and CEO of Redmond-based AT&T Wireless Services from 1997 to 2000. From 2000 to 2004, he was president and CEO of Redmond-based Terabeam, a heavily funded wireless startup that eventually sold to Falls Church, Va.-based YDI Wireless in April 2004 for $52 million in stock.
According to Clearwire’s filings with the Securities and Exchange Commission, there were two plans in the hopper meant to bring Clearwire and Sprint Nextel together.
One effort, which began in October 2007 and operated under the clandestine sounding name “Project Grand Slam,” called for a transaction where Sprint would contribute all its assets related to its WiMax business to Clearwire in exchange for a majority equity stake in Clearwire. Together, the two companies would then try to raise more capital.
Then, in mid-November 2007, a cadre of top executives from Clearwire, Sprint, cable giant Comcast and chip maker Intel (the last already heavily invested in Clearwire) had a high-level meeting in Philadelphia, where they discussed the possibility of a strategic partnership among the companies.
Later, two other players in the cable industry—Time Warner Cable and Syracuse, N.Y.-based Bright House Networks—became part of the discussions that had started in Philadelphia. Again, the topics centered on possible investment and commercial agreements between the growing group of companies, an effort that went by the name “Project Rain.”
By early 2008, it was clear that the planned future buildout of a WiMax network had taken on dimensions that went far beyond just Clearwire and Sprint Nextel. In March, Clearwire’s board dropped Project Grand Slam in favor of Project Rain.
A Marriage of Convenience
Back in the late 1990s and early 2000s, the word “convergence” was thrown around a lot in the telecom industry. The term was meant to denote the shrinking number of companies that offer television, residential local and long-distance voice, mobile voice and internet services to its customers.
Many iterations ago, AT&T was a shining example of convergence. Through a series of acquisitions under then-CEO Michael Armstrong, Ma Bell had its fingers in virtually every corner of telecom. The strategy didn’t work, though, and AT&T eventually sold its cable assets and spun out its mobile business into AT&T Wireless Services.
Today, a similar pattern is once again emerging through consolidation in the communications market.
Now, as was true a decade ago, telecom remains a capital-intensive business. “This deal between Clearwire and Sprint is one of necessity,” says Steve Clement, an equity analyst with Portland, Ore.-based Pacific Crest Securities. “They needed to fill a huge funding gap to build a nationwide WiMax network.”
Clement says the fact that Clearwire has commitments to the tune of $3.2 billion from a stable of blue-chip telecom and technology companies is impressive.
However, the new Clearwire will face two challenges: It will need more cash on top of the $3.2 billion to finish its WiMax build out (scheduled to be complete in the top 100 U.S. markets by 2010) and it will need to find a way to make seven powerful entities work together harmoniously under one roof.
Wolff acknowledges that the seven-party structure is extremely complicated. “That was not lost on any of us during negotiations,” he says. “The question is, how do you structurally make sure one company doesn’t try to assert itself too much? If you look at our governance, there isn’t a single party that has the ability to direct the company’s activities. It’ll be an independent company managed by a board of directors with representation from each party. It’s not like a joint venture, wherein each partner has the right to veto. There are no material veto rights that would prevent us from pursuing our business plan.”
Wolff also acknowledges that Clearwire will need to raise more money through the equity and debt markets once the merger is complete. “We’ll need about $2.3 billion more to get to a nationwide footprint and cash-flow-positive status,” he says. “If the debt markets are where they were six months ago, I’d expect we’d be able to raise all the extra capital we need through debt instruments. We’d have so much collateral in the company at that point in terms of spectrum and a growing network.”
Clearer skies ahead?
Regardless of the current economic situation, Verizon and AT&T aren’t resting on their laurels, waiting for Clearwire and Sprint Nextel to gobble the market for mobile broadband services. Both are working on a mobile broadband technology similar to WiMax called LTE, short for “long-term evolution.”
“Verizon’s adamant that they’ll have things launching on a commercial LTE network” by 2010, says Pacific Crest Securities’ Clement.
Wolff doesn’t consider that a probable scenario, however. “LTE doesn’t exist yet,” he says. “There isn’t even a frequency standard for it yet. Today, LTE is where WiMax was in 2004 or 2005. And while I have no doubt that there will be other next-generation mobile broadband networks deployed in the U.S., the biggest single factor in being able to deploy those networks is having enough spectrum.”
And in this game, spectrum is king. “Spectrum is important to think about,” Clement says. “Clearwire has substantial ownership of spectrum in different parts of the country at the 2.5 gigahertz band. The other major owner of that frequency is Sprint.”
Early last summer, the U.S. Department of Justice gave the Clearwire-Sprint deal the green light. Now, it’s in the hands of Clearwire’s board and the Federal Communications Commission (FCC).
McAdams’ Parakh doesn’t anticipate antitrust concerns as a problem for the new company. “My sense is that all the FCC sees is a market with Verizon and AT&T as the only players with the balance sheets to enable nationwide mobile broadband networks,” he says. “I think they’ll see this deal with Clearwire and Sprint as a potential challenger that will be good for customers and competition.”
Despite turmoil in the credit markets, Parakh expresses confidence in Clearwire’s future. “I think the merger is going to happen,” he says. “As for the $3.2 billion initial injection, it’s coming from Intel, Google, Comcast and Time Warner, and it’s very strategic for them. It seems very unlikely that any of them will back out at this point.”
Parakh is also sanguine about the company’s ability to raise more money through debt in 2010 or 2011. “We expect the credit markets will have stabilized by then,” he adds. “Keep in mind there is flexibility within the company to moderate the buildout plans. And existing partners may add more money to this venture if things are going well.”