DISH's effort to gain leverage on Sprint in acquisition bid may have backfired

Charlie Ergen, DISH Network Corp. (DISH) CEO, has met with silence a demand by Sprint Nextel Corp. (S) to sweeten his $25.5B* USD bid for majority ownership of the U.S. carrier.  Sprint had given Mr. Ergen until June 18 to respond, calling his previous bid "not actionable".

*(based on current share prices)

I. DISH Scores Board Endorsement of Clearwire Offer, Gains Leverage 

DISH is offering $17.3B USD in cash, plus $8.2B USD in stock for a 68 percent stake in Sprint.  However, Softbank Corp. (TYO:9984) -- who bid first -- raised its own offer to $21.6B USD, including $16.6B USD in cash, for a 78 percent stake in Sprint.  While the DISH offer looks more attractive, analysts (and Sprint's management) seem to believe Softbank offers slightly better value due to its deep experience as an active wireless carrier.

Mr. Ergen, who owns large amounts of spectrum and has long been rumored to be considering the launch of a fifth major carrier in the U.S., while refusing to up his bid did make an aggressive move.  He raised his bid for Clearwire Corp. (CLWR), the wireless broadband firm who sells service to Sprint.

DISH's offer for Clearwire won board approval last week. [Image Source: TNW]
DISH and Sprint have been locked in a bidding war over Clearwire, but DISH's bid has been largely considered unlikely to pass due to onerous debt/equity swap conditions and commercial agreements.  As of Feb. 2013 Sprint was offering $2.97 USD/share for Clearwire, while DISH was offering $3.30 USD/share.

Sprint already owns a 50 percent stake in Clearwire.

Since DISH has bumped its offer by a third to $4.40 USD/share, while Sprint has bumped its offer only 14 percent to $3.40 USD/share.  As DISH has sweetened its bid, investors are starting to take the offer seriously.  Last week Clearwire's board urged shareholders to accept the offer, which will soon be put to a vote.

II. Sprint Fires Back With Lawsuit

Sprint responded this week by filing a suit in the Delaware Court of Chancery.  Sprint claims the DISH bid is illegal as it violates Clearwire's Equity Holders Agreement (EHA), which requires tender offers to be approved by 75 percent of shareholders.  As Sprint, who has "invested billions" in Clearwire, controls half the company, that's not going to happen.

Further, the lawsuit is based on part of DISH's terms, which would place a number of DISH designees on the company's board.  The EHA states that Sprint gets to nominate 7 board members, the Significant Investors Group gets to nominate 4, and the remaining 2 board members.

Sprint sign
Sprint contends DISH's offer violates company terms. [Image Source: Scott Lippincott]

Sprint's board members were not allowed to vote on the recommendation regarding the DISH offer, which passed 7-0.

The company's terms references in its legal complaint trace back to its bailout of Clearwire back in 2008.  At the time investors took on the arguably favorable terms, in exchange for a $3.2B USD investment from Sprint which arguably saved the struggling entity.  Now those terms have come back to haunt shareholders who want to cash out via DISH's offer.

Billionaire John Paulson, whose hedge fund Paulson & Comp., Inc. is the second largest owner of Sprint stock, appears to be growing tired of DISH's antics.  He has formally announced he will back Softbank's proposal.

Charlie Ergen v. Masayoshi Son
Charlie Ergen (Dish/Echostar) and Masayoshi Son (Softbank) both serve as joint chairman and CEOs of their firms.  Both have a penchant for driving a hard deal.  And both hate to lose.
[Image Source: Sawyer Speaks (left); Bloomberg (right)]

If Softbank wins, it would be the largest acquisition of an American company by a Japanese investor to date.

Sources: Sprint, Clearwire, BusinessWire [PDF]

"This is about the Internet.  Everything on the Internet is encrypted. This is not a BlackBerry-only issue. If they can't deal with the Internet, they should shut it off." -- RIM co-CEO Michael Lazaridis

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