Clearwire: Buy The Exchange Notes, Says BTIG

BTIG Llc research analyst Walter Piecyk today initiated coverage of the 8.25% exchangeable notes of Clearwire (CLWR) due 2040, urging investors buy the notes, writing that it’s a less volatile alternative to owning Clearwire shares outright. (Piecyk also has a Buy rating on Clearwire common stock and a $10 price target.)

Clearwire, whose main investor has been Sprint (S), with 54% ownership, is a classic “story stock,” writes Piecyk, running up on rumors, and, more often these days, falling as Sprint hesitates to just buy the company. “The exchangeable note provides a less volatile alternative to the equity while still providing the opportunity to benefit from the fundamental and strategic events that could drive Clearwire’s stock higher.”

Sprint is likely to buy Clearwire in the next six to twelve months for $15 per share or more, thinks Piecyk. Any indications to the contrary are positioning by Sprint, which is trying to deal carefully with Clearwire investor Eagle River, owned by legendary telecom backer Craig McCaw. Sprint needs Clearwire’s spectrum, in Piecyk’s view. Sprint has a deadline of January 3rd to decide if it’s going to invest an additional $850 million in Clearwire.

Piecyk argues the return of buying the convert, in the event of a take-out by Sprint, is more stable, even though it’s smaller than what holders of the equity out-right would get:

If there is a change of control at Clearwire, investors in the notes would receive the value of the bond (take-out price x 141.2429 common shares) plus a make-whole premium (present value of coupon payments and the remaining optionality of the embedded call, which comes in the form of additional common shares …). We believe an acquisition of Clearwire would happen at a price above $10 per common share.

And what if Sprint doesn’t do the sensible thing, and declines to buy Clearwire? Then the value of Clearwire would likely drop down to the value of the spectrum it controls. But even at that, $10 billion worth of spectrum, by Piecyk’s estimate, would cover the 8.25% notes more than two times over.

Cleawire shares today are up 5 cents, or 0.6%, at $5.13. Sprint shares are up a penny at $4.28.