Despite the spectrum craze, Sprint's bid for Clearwire may be right on

Shareholders say Sprint isn't paying enough, but there are limits on the value of Clearwire's frequencies, analysts say

An investor in Clearwire has stepped up its fight to get a better price for the mobile operator, but Clearwire's alternatives to a Sprint Nextel buyout may be limited due to the nature of its spectrum and its business.

Though U.S. mobile operators have been scrambling for more spectrum, saying they will need it to support fast-growing network demands from smartphones and tablets, Clearwire's ample frequency holdings may not be as valuable as some investors think, industry analysts said.

On Monday, investment company Crest Financial has expanded a suit filed last Thursday into a class action on behalf of other minority shareholders. It says Sprint's planned acquisition of Clearwire undervalues the company's assets and would unfairly enrich Sprint. Crest wants the Chancery Court of Delaware to block the deal and let Clearwire pursue its own sale of spectrum. The company says it owns about 6.6 percent of Clearwire.

Clearwire announced on Monday that its board had unanimously approved the US$2.2 billion deal under which Sprint would acquire all the shares of Clearwire that it doesn't already own. It holds just over 50 percent now. Sprint would also assume Clearwire's debt and spectrum leases, valued at about $6.3 billion. The agreement still needs to be approved by a majority vote of Clearwire's minority investors.

In its complaint, Crest said "market commentary" indicates Clearwire's extensive spectrum licenses are worth more than $30 billion. "While the demand for mobile broadband data is growing exponentially, there is only a finite amount of spectrum available in U.S. markets," the complaint said. At least one other large Clearwire shareholder, Mount Kellett Capital Management, has also attacked Sprint's offer, saying its spectrum is worth as much as $9 billion.

The greatest value in Clearwire lies in its spectrum, according to both the companies and industry analysts. Clearwire holds licenses covering an average of 160MHz of spectrum in many cities around the U.S., one of the largest allocations of spectrum for commercial mobile service in the country. However, the type of spectrum Clearwire owns, as well as its close relationship with Sprint, probably limits how much it could get for those frequencies, industry analysts say.

The company holds licenses for frequencies around 2.5GHz, where signals don't travel as far or penetrate walls as well as in lower bands. By contrast, Verizon Wireless and AT&T are running their flagship LTE networks mostly in the 700MHz band. Shorter range means more radios and higher buildout costs, said ABI Research analyst Philip Solis.

"It's already difficult enough and expensive enough to build out a network from scratch, but using 2.5GHz, it starts to get more impossible ... capitalwise," Solis said.

That probably explains why, as Clearwire's CEO said on a Monday conference call to discuss the Sprint deal, the company tried and failed to sell excess spectrum to other service providers. Combined with the fact that Sprint was not interested in selling the company whole, and that Clearwire has never found another large carrier partner in addition to Sprint, its best bet was to sell out to Sprint, CEO Erik Prusch said.

Other factors also hold down the value of Clearwire's spectrum as a market commodity, Ovum analyst Daryl Schoolar said. Carriers that already have spectrum in lower bands might use the high frequencies for extra capacity in crowded areas. But two of those potential buyers, Verizon and AT&T, might be blocked from buying it because they are already too dominant in the market, he said.

Plus, Clearwire's holdings aren't uniform across the country. Picking frequencies in all the different markets that a carrier wanted to serve, with Sprint possibly holding onto some of them, could be a headache, Schoolar said.

Sprint and Clearwire executives may have been right on Monday when they said that the spectrum's highest value will lie in a Clearwire LTE network that augments Sprint's, analysts said. Sprint expects that to come to fruition in 2014 when there are enough devices available that can run on both sets of frequencies.

Stephen Lawson covers mobile, storage and networking technologies for The IDG News Service. Follow Stephen on Twitter at @sdlawsonmedia. Stephen's e-mail address is stephen_lawson@idg.com

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