OK, I suppose I should really wait until they file, but this story detailing Crest Financial’s planned Petition to Deny in Sprint/Softbank/CLWR appears to be, in my humble opinion, the single dumbest grounds for a Petition to Deny. EVAR. For those just tuning in, Sprint, backed by Softbank, has offered approximately $3/share for the outstanding shares of Clearwire (CLWR). Because some analysts with no understanding of the actual spectrum market think CLWR is sitting on a spectrum pot ‘o gold, Crest is pissed and wants more money. It has already filed a shareholder derivative suit claiming that Sprint leveraged its insider position to buy out Clearwire below fair market value. Given how corporate law has crapped all over minority shareholder rights in recent decades, I am not giving this much hope. Apparently, Crest feels the same way, because they are now taking the fight to the FCC.
According to the story: “In going to the FCC, Crest will argue that the Clearwire deal artificially undervalues the company’s spectrum holdings, Schumacher said. That in turn potentially devalues future revenue for the U.S. government when it auctions off spectrum licenses.” Crest apparently thinks CLWR’s spectrum holdings are worth $30 billion, prompting me to wonder what planet they live on and whether they share it with House Republicans who keep thinking spectrum auctions are automatic pots of gold.
What makes this utterly dumb is the combination of a false factual premise combined with an utter lack of legal grounds, on top of a near zero chance of holding things up politically (unless AT&T or possibly DISH file, which might introduce greater political uncertainty). I would normally confine myself to simply snickering but there is a rather important point to be made here — especially for all those listening to analysts telling broadcasters they can make gajillions in the upcoming incentive auction –about spectrum valuations.
More below . . . .
Lets start with the legal side. There is absolutely no precedent for considering spectrum “undervaluation” as a public interest harm. Arguably, the FCC is prohibited from considering the value of spectrum at auction as a public interest factor at all. See 47 U.S.C. 309(j)(7)(A). Second, as a factual matter, even if we accepted the premise that CLWR’s spectrum is undervalued by Sprint, the idea that this would impact the upcoming H Block or 600 MHz auction is laughable. It’s like saying that a short sale below market value of my house in Silver Spring, MD is going to impact valuations in Old Town Alexandria.
But lets move on to the actual issue that makes this important, the question of spectrum valuations. There seems to be this belief out there that spectrum is like oil; it has an intrinsic value and is fungible for everyone. Sure, there can be better or worse “grades” of spectrum based on physical characteristics, just like there are better or worse crude oil deposits based on the level of contaminates. But at bottom spectrum is spectrum and therefore has a fixed value to everyone.
I’ve explained at considerable length in the past why this just isn’t true. Spectrum developments in the market over the last few years further emphasize just how quirky the spectrum market it and how very particular buyers have become. Verizon quite willingly agreed to sell off 700 MHz spectrum and do a bunch of swaps with T-Mobile to seal the deal on its Spectrumco AWS purchase so that it could rationalize its spectrum holdings. By contrast, despite having lots and lots of spectrum, AT&T needs to invest a boatload of money to repurpose some bands and clean up others so that their network can handle the increasing demand for broadband traffic. Yes, the physical characteristics of spectrum still matter a lot, but a number of other factors play into valuation of any specific set of licenses or other spectrum access rights.
So how should we value Clearwire’s holdings? Lets start with “are there any buyers other than Sprint?” The answer appears to be “not really.” Clearwire tried to sell off some of its spectrum holdings in 2010 and got no takers. An examination of CLWR’s holdings shows why they don’t attract a lot of interest from other carriers. CLWR’s holdings are in the 2.5 GHz band. On the plus side for CLWR, it has some big blocks of contiguous spectrum useful for high bandwidth. But several factors reduce the value. First, the penetration characteristics are only so-so. Wet leaves can cause serious signal fade, let alone solid walls. It takes more energy to push signal in this band the same distance in a lower band, requiring more cell sites. Yes, small-cell architecture helps, but you have to spend money to build that — a cost which any buyer will discount when valuing the spectrum.
Add to this that a lot of CLWR’s spectrum is leased from educational institutions, the EBRS spectrum. That means regular lease payments and a low-level nuisance of dealing with the actual licensees and renegotiating the lease terms every now and then. Hardly a show-stopper, but its one more thing that lowers the value of CLWR’s actual holdings as against some theoretical value of the spectrum overall.
Finally, who else would buy it? Potentially, Ergen might. This band is not so far off from the AWs-4 the FCC just authorized DISH to use terrestrially. But Ergen would face several challenges developing the band. To successfully develop the band, Ergen and Sprint (which still holds a majority share in CLWR’s stock) would need to cooperate to some degree. Even if Crest blocks the transfer of spectrum from CLWR to Sprint, Sprint can block a bid by Ergen — or at least trigger a very messy and expensive fight that ties the spectrum up completely. (As Tim Farrar over at TMF Associates pointed out to me, Sprint transferred all its 2.5 GHz licenses to CLWR as part of the 2008 deal. I would need to dig up the old application to work through how the corporate governance works out for CLWR to sell its licenses if Sprint actively opposes. I assume, however, that if it is even possible, it is not easy.)
Meanwhile, the H Block auction will happen, which is also rumored to be a target for DISH. While it would not surprise me to see Ergen file something in Sprint/Softbank/CLWR to make Sprint’s life difficult in the pending transfer proceeding (after all, Ergen is pissed at Sprint over Sprint’s meddling in the AWS-4 proceeding to protect H Block), I would be surprised if Ergen wanted to tie up capital with a bid for CLWR spectrum given the above-stated drags on its valuation, especially for anything close to what Crest says it thinks CLWR spectrum is worth. (Although God knows with Charlie Ergen, you never know.)
After Ergen, it’s hard to think of anyone else interested in the spectrum. VZ, AT&T and T-Mo have no interest because it doesn’t fit with their existing spectrum holdings or network deployment plans. The smaller carriers can’t afford it and can’t get financing. No White Knight in the form of a hedge fund or other outsider has popped up to put in a counter-bid. taken together, this leaves Sprint as the only possible buyer. So Sprint’s valuation, rather than some theoretical valuation in the abstract, is the actual market value since Sprint is the actual market.
Now in fairness to CLWR, it should be noted that Sprint gains significant benefits from the deal in the form of eliminating transfer payments for its use of the spectrum, and better integration of the facilities into Sprint’s network so it can use the 2.5 GHz in more efficient combination with its other holdings (including any potential H Block acquisitions and the WCS stuff now that the interference issues in that band are resolved). OTOH, Sprint could always wait for CLWR to go bankrupt and pick up the assets in bankruptcy court. But sorting through all these pluses and minuses to determine whether Sprint has behaved in accordance with its fiduciary duties to the minority shareholders is a corporate law matter best dealt with through the shareholder suit Crest brought separately.
A Broader Point About Spectrum Valuations
As I noted above, this would mean very little beyond amusement value were it not for the apparently incurable belief among some that spectrum licenses are licenses to print money because demand for wireless capacity keeps going up. This myth continues to reverberate in Policyland — especially among House Commerce Committee Republicans. Much foolishness is spouted about how much money is supposedly lost by recent policy shifts in favor of sharing federal spectrum rather than just focusing on clearing and auctioning (as if clearing and auctioning could be managed at no cost if only that Socialist Obama were not coddling federal users or something) and how permitting unlicensed use in the guard bands of spectrum recovered for incentive auctions will purportedly forgo billions of dollars in auction revenue. Worse, because the Republican Party has gone from “the Party of Ideas” to “the Party of Parrots,” both Republican FCC Commissioners appear intent on disregarding any contrary evidence in favor of toe-ing the party line.
If we are to develop a realistic spectrum policy, we need to take the first step in recognizing that spectrum does not equal gold. There is no cousin of the Tooth Fairy called the “Spectrum Fairy.” Putting a bunch of licenses under your pillow does not guarantee a visit from the magic Spectrum Fairies who will replace your licenses with pots of gold while you sleep. Until policymakers finally understand that and start making realistic evaluations about the trade offs in spectrum policy, we are going to keep waking up disappointed.
Stay tuned . . . .