Clearwire Questions

The big IPO prices at $25, but is the timing right?
Author:
Publish date:

Investors must be hoping that

Clearwire's

(CLWR)

timing is better this time around.

Shares of the wireless broadband outfit priced at the top of their range Wednesday evening, setting the stage for a grand debut on Nasdaq Thursday morning. Clearwire sold 24 million shares at $25 apiece, raising $600 million.

But it's hard to ignore the fact that leading up to today, each time the Craig McCaw venture has made its move for a public listing, the markets have taken a step back.

Since the company last updated its prospectus with the

Securities and Exchange Commission

on Feb. 22, the

Nasdaq

has lost 6.4% of its value. Not exactly the calm waters you'd hope for when launching a huge stock offering. Market turmoil tends to make investors second-guess their risky bets, and Clearwire is nothing if not

a risky bet.

Even more awkward, it wouldn't be its first public-market setback. The WiMax company first filed for an IPO last year on May 11, when the Nasdaq was trading at 2320. When it withdrew its IPO on July 5, the index had dropped 7.7%.

Of course, the word back then was that it was

Vonage

(VG) - Get Report

, not the overall market, that prompted Clearwire to yank its IPO from the pipeline. Vonage was trading at less than half its $17-a-share offering price when Clearwire backed out of its IPO plans.

Clearwire has disputed that the Vonage fiasco prompted the delay in its IPO. The real reason seems to be to give preferential treatment to other investors: Rather than raising a few paltry hundreds of millions from the public, Clearwire sold a $600 million stake to

Intel

(INTC) - Get Report

and another $300 million to

Motorola

(MOT)

. (More on that in a bit.)

But it's easy to see why the ghost of Vonage would still haunt Clearwire.

Both companies set out to raise half a billion dollars despite looming losses, onerous loans and negative operating cash flow. Both persevered, citing fast-growing subscribers and low churn rates. Both had governance issues that could give investors pause. Both were investing heavily in an emerging technology facing stiff competition. Both -- well, you get the idea.

To be clear, Clearwire offers a good deal of promise. And it's up front about the risk involved.

More disconcerting is the complacency with which the market is celebrating that promise while overlooking the risk.

Read the prospectus while keeping in mind Ben Graham's rule of thumb that if you can't see a satisfactory return in the financials, then it's not an investment -- it's speculation. This IPO is pure speculation. It may pay off wildly, but it's still speculation.

On the positive side, Clearwire saw revenue triple to $100 million in 2006 after rising 120% in 2005. Revenue from subscriptions grew even faster: to $68 million last year from $8.4 million. But in the prospectus, Clearwire estimates that its subscribers "will reach as many as 375,000 to 400,000" at the end of 2007, or less than double the 206,000 last year. So revenue growth will slow dramatically this year.

At the same time, Clearwire will see expenses rise as it continues to roll out into new markets. Cost of service, which includes items such as leasing towers, rose to 50% of revenue in 2006 from 40% a year earlier. Similarly, depreciation and amortization grew to 41% of revenue from 36%.

The biggest expense area, SG&A, more than doubled last year to $215 million, twice the size of revenue. These costs were driven by new staff and marketing expenses, which are sure to keep rising as Clearwire reaches out to new potential subscribers.

Then there's the issue of interest payments, which will grow more significant over the next few years. Interest expenses rose more than five times over last year to $42 million, equal to nearly half its revenue.

And those loan payments are going to keep rising. Clearwire has built up $756 million in debt so far. It's facing $314 million in interest payments alone, the bulk of which will be paid over the next two or three years.

All told, the company faces $2.5 billion in payments under contractual obligations, half of which are required within five years. And that doesn't include the $150 million in infrastructure it agreed to buy from Motorola when that company bought a stake in Clearwire last summer.

Which brings us to another thing investors in the Clearwire IPO should know: They are buying the corporate equivalent of a coach seat on a flight where most investors are luxuriating in business class.

When Clearwire pulled its IPO last summer and sold $1 billion to Intel, Motorola and others, it sold them shares at $18 apiece. Now, the company wants to let the public in on a diluted stake at a much higher price. In elementary school, this was known as cutting in line.

Another 16 million shares may be exercised by warrant holders after the IPO. Those shares would be valued at either $15 or at the trading price after the lockup expires, whichever is lower.

So the investors most at risk are the ones buying into the IPO and paying $25 a share, a significant premium to what Intel, Motorola and others paid. Those investors can unload shares at a profit as long as the stock holds above $18. If Clearwire sinks after its offering, IPO investors won't be so lucky.

And they won't be getting voting rights either. Owners of Class B shares -- an elite club limited to Intel and Clearwire founder Craig McCaw -- will have 10 times the votes as Class A shareholders. All told, Intel and McCaw will control 83% of the votes after the IPO.

As speculative IPOs go, Clearwire looks better than Vonage, if for no other reason than it's being groomed as an acquisition candidate. Clearwire will sign up subscribers and sell to a bigger player, probably

AT&T

(T) - Get Report

or

Sprint Nextel

(S) - Get Report

. Whether it sells at a discount or a premium of its current value is impossible to tell right now.