Sprint's Clearwire Offer Raises New Spending Questions

NEW YORK (TheStreet) - After AT&T (T) unveiled an ambitious $22 billion-a-year capital spending plan earlier in December, it took less than a week for industry also-ran Sprint (S) to jump on the bandwagon, according Craig Moffett, a telecoms analyst at Bernstein Research and a noted industry bear.

Early on Thursday, Sprint offered to buy a remaining 48% stake in 4G wireless broadband service Clearwire (CLWR) for $2.90 a share, or roughly $2.1 billion in cash. While the proposed deal would cement a long-expected takeover drama and turn Clearwire into one of the top arbitrage trades of 2012, the bigger implication may be on Sprint.

The deal may signal Sprint is poised to dramatically boost its capital spending in coming years, after being the thriftiest of players in a telecom sector marked by the big ticket wireless spending plans of AT&T (T) and Verizon (VZ). For Sprint investors and, most notably, Softbank - the Japanese investing conglomerate that just announced a deal to buy the company - a bump-up in spending may come as a surprise and hit bottom line earnings metrics.

"Perhaps the biggest take-away from the announcement this morning that Sprint's Board of Directors has authorized a take-over of the remaining 49% of Clearwire is this: Sprint's capital intensity will rise," wrote Moffett, in a Thursday note to clients.

Now that Sprint is unequivocally placing its network bets on Clearwire, the issue is the corresponding spending needed to convert the service into a national 4G option. Notably, Clearwire's 2.5-GHz spectrum will require significant cell tower spending - roughly double the lower band spectrum of MetroPCS (PCS)-T-Mobile - to reach a nationwide audience, according to Moffett's calculations.

"[Reaching] the next 133 million POPs - if they intend to do so - would mean covering far more land mass, and therefore would take even more capital to build out. In total, it will take a dizzying amount of new capital investment to turn Clearwire's spectrum trove into a usable Asset," writes Moffett.

[In a separate Thursday note, Moffett gave MetroPCS shares an outperform rating and $16 price target on expectations that its proposed merger with T-Mobile will drive margin growth and cost synergies.]

A full takeover of Clearwire and the prospect that Sprint foots the bill on a cell-tower heavy nationwide 4G rollout may have a big impact on the company's margins. Notably, Sprint may see itself fall from generating some free cash flow in 2012 to none. In coming years, the proposed full takeover is forecast to cut Sprint's free cash flow profile by 15%, according to Moffett's calculations.

The bigger issue is whether Clearwire represents just one area where Sprint will have to dramatically increase its spending in coming years, depressing free cash flow.

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