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Trade of the Day: Sprint (S) & Clearwire (CLWR)

Competing offers on S and CLWR should push up their stock prices

   

Sprint (NYSE:S) and Clearwire (NASDAQ:CLWR) have found themselves in the middle of a multi-way acquisition battle that has more to do with spectrum than anything else. As the battle wages on, we see a decisive best bet for the companies that look currently undervalued

Spectrum is a valuable resource allowing smartphones and tablets to stream video and audio. It’s a finite resource, which raises the stakes even more, and all of the telecom players worth their salt are trying to gain more of it. They’ve set their sights on Clearwire, the smallest of the players, because it is seen as being the most viable source to acquire more spectrum. In fact, Clearwire has emerged as somewhat of an industry darling as the larger companies are blanketing it with unsolicited offers. It currently has three suitors that have made bids as high as $5.5 billion.

Everyone Wants a Piece of Clearwire

The players include SoftBank/Sprint, Verizon (NYSE:VZ) and Dish Network (NASDAQ:DISH). Of the three offers, we give the least credence to that of Verizon for no other reason than the significant regulatory hurdles it would face as the largest wireless carrier in the country. Although it’s unlikely to complete, the pressure provided by VZ is welcome for this trade.

That leaves SoftBank/Sprint and Dish. While we see Dish’s jump into the fray as admirable, the Softbank/Sprint deal is the more likely one to complete. There are a myriad of reasons to be cautious about Dish’s deal, including the satellite providers’ ability to finance and run a wireless provider. However, there are many reasons to believe that the offer from SoftBank/Sprint will lead to more growth opportunities for the combined entity as it competes as a distant third player in the wireless communications space.

The advantage for Softbank/Sprint is that Sprint owns about 51% of Clearwire already. However, the deal got cloudier when Dish offered to buy the company for $5.5 billion in January. This was higher than Sprint’s offer in December to buy the remaining stake it has in Clearwire for $2.2 billion.

SoftBank is already in negotiations to buy Sprint for roughly $20.1 billion. The deal, which was supposed to be completed this year, involves several moving parts. One of those entails Sprint buying the remaining stake in Clearwire. Sprint needs this deal because SoftBank would infuse the company with much-needed cash, to the tune of at least $8 billion.

Just as Sprint and Clearwire shareholders were getting used to the idea of being acquired by a Japanese company, Dish threw its hat in the ring. It also upped the ante by offering $25.5 billion to buy Sprint, which trumped SoftBank’s bid.

 M&A Triangle

So, you now have an offer by Sprint to buy Clearwire so that it can in turn be bought by SoftBank. You also have an offer by Dish to buy Clearwire and Sprint.

To get an idea of how much the deal could help Sprint, look no further than its earnings for the last quarter. It reported losses of 22 cents per share, which has become the norm for the last several years. Things weren’t great for Clearwire either. Losses were 31 cents per share last quarter, which also conforms to a multi-year stretch of losses. However, what these companies lack in revenue and earnings they make up for in valuable assets.

Broken down, Sprint’s offer for CLWR is $2.97 a share, while Dish’s is $3.30 a share. Clearwire’s shareholders are balking at Sprint’s offer while management is endorsing it. Dish’s offer, though commendable, raises leverage questions. It will have to raise at least $9 billion to make the deal happen. We think it’s less likely that DISH will prevail but they may do a good job of driving Softbank’s bid up.

Sprint summed up its choice of suitors earlier this year by releasing the following statement:

“… the DISH proposal would require Sprint to voluntarily waive rights that it holds as a stockholder of Clearwire and that it possesses through various vendor and customer contracts that significantly predate Sprint’s proposed acquisition of the remainder of Clearwire. Sprint does not intend to waive any of its rights and looks forward to closing the transaction with Clearwire and helping consumers across the country realize the benefits of this combination.”

Despite management resistance from Sprint and Clearwire, we don’t think Dish’s chairman, Charles Ergen, will back down in the near term. That presents an interesting opportunity for traders. CLWR and S have both fallen on news this week that the executives at Sprint and Clearwire are urging shareholders to take the Sprint/Softbank deal. However, if shareholders resist, it could encourage DISH to up the ante a little and put pressure on Sprint/Softbank to improve their terms.

Recommendation: We anticipate the competing bids for Sprint and Clearwire to push the prices of both stocks back up before May 21. Investors could consider a long position in either stock, although we slightly prefer CLWR if you have to pick one.

Options Alternative: The June at-the-money call options in either stock look very attractive for risk-tolerant investors. The June 3 calls on CLWR or June 7 calls on S have both fallen in value this week as the merger drama has escalated. We like this opportunity to buy the dip.

 

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