Investors Divided Over 4G Fall Out

Two themes spring to mind from last week’s Web 2.0 summit in California. All businesses were put on notice to harness social media or go the way of the dinosaur. The other interesting statistic came from a Morgan Stanley presentation showing how the sale of smartphones is set to overtake sales of all types of PCs by the end of 2012. It stands to reason that delivering data to mobile phones as fast as possible is the order of the day. Does this crown those companies who can offer 4G bandwidth given we have been using 3G for the last 8 years? Such speed does not exist yet according to the governing body and so we’ll take a look at some of the companies perusing and offering this technology: Clearwire (NASDAQ:CLWR), Sprint Nextel (NYSE:S).

From their company description: “Clearwire’s service WiMAX, referred to as 4G mobile broadband services, offer the services both on a retail basis and through the wholesale partners, including Sprint, Comcast, Time Warner Cable and Bright House.” But, the International Telecommunications Union have well and truly rained on this parade by announcing this month that official 4G wireless only refers to a future technology (LTE-Advanced or WirelessMAN Advanced) that is not ready until 2014 at the earliest.

So, CLWR are NOT offering 4G after all!

This is a further piece of bad news for Clearwire (CLWR) on top of an already distressed situation. They raised over a billion USD in the summer from their major shareholder and client – Sprint – and their debt was recently downgraded by S&P to CCC. If we look at how short sellers and long only funds are positioning themselves, opinion is split.

Short interest in CLWR peaked in June, and then reduced significantly by mid-July, presumably in light of Sprint’s cash injection. In early October, short sellers reopened their positions and borrowed 13m shares. Today, the figure is just off a 52 week high of 17m shares or 2.4% of the company. This is a large proportion of the borrowable supply given the lack of ownership of CLWR by those fund managers who lend their shares. Interestingly, these investors have been buying more Clearwire over the last 6 months showing a degree of optimism.

The Clearwire corporate bond with the most activity in our database is the 12% Dec 2015 issue. The bond market sentiment we can view by analyzing holdings and demand from securities lending data is positive. The amount being borrowed went from 80m to 10m over the summer and has not rebounded very far. Sixteen percent of the issue value sits with investment managers who lend and this number has been rising since the summer.
Sprint Nextel (S) clearly benefit from the wi:fi speed that Clearwire can offer as a shareholder and client. Not surprisingly given CLWR’s headwinds, short sellers are pretty active in Sprint. Shares on loan recently spiked up to close to a 52 week high at 4.2% of all shares. Counterbalancing this is the fact that funds who lend have been buying more shares and their ownership has hit a new 3-year high of 30% of the company. Investors who are long the Sprint Nextel 5.95% 2014 bond are less confident; they have halved their holdings in this bond over the past 3 years and have never owned less. Yet again we see conflicting sentiment.

Since social media is about harnessing the collective sharing enabled by the internet, and the fact that smartphones are “smart” due to their internet connectivity, there is money to be made by offering the fastest bandwidth. The challenge, not lost on investors in CLWR and S, is picking the company who will offer this.

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