By Sinead Carew and Sayantani Ghosh
(Reuters) - Sprint Nextel Corp's $2.2 billion offer for Clearwire Corp is likely to face resistance from Clearwire's minority shareholders, but accepting the offer may prove to be their best option.
Clearwire Chief Executive Erik Prusch said the company could face a restructuring if shareholders fail to approve the acquisition, which calls for majority shareholder Sprint to pay $2.97 per share for the roughly outstanding 50 percent of Clearwire it doesn't already own.
Clearwire, which has been seeking financing to upgrade its network and stay afloat, had no other attractive alternatives to Sprint's offer on the table, Prusch told analysts on a conference call announcing the deal.
The transaction requires approval from the majority of Clearwire's minority shareholders.
Sprint said it already has support for the deal from owners of 13 percent of Clearwire shares - Comcast Corp, Intel Corp and Bright House Networks LLC.
Still, Sprint's offer of $2.97 per share is only 7 cents per share higher than a bid that several minority shareholders said last week was both too low and undervalued the company. Some of those shareholders had suggested Sprint offer at least $5 per share.
Crest Financial, which also owns more than 3 percent of Clearwire, on Monday sought class action support for its lawsuit against the deal.
One investor, Mount Kellett, which owns 3.6 percent of Clearwire's shares, said last week that Sprint's original $2.90 per-share offer "grossly" undervalued Clearwire, for instance.
Mount Kellett did not immediately respond to requests for comment on Monday.
And one of Clearwire's biggest minority shareholders told Reuters they were still hoping for a higher offer.
"It's not the right price," said this minority shareholder, who asked to remain anonymous due to a company policy to not speak publicly about investments.
This source argued that owning Clearwire is important enough to Sprint that it would raise the offer if shareholders reject it rather than let it go bankrupt and let even a portion of its spectrum fall into the hands of another company.
"The minority holders have some real leverage here," the person said.
Acquiring full ownership of Clearwire spectrum would help Sprint, the nation's third-largest wireless service provider, in its efforts to offer high-speed wireless services to compete better with its bigger rivals.
Verizon Wireless and AT&T Inc are the largest and second-largest U.S. wireless service providers.
But based on Monday's trade in Clearwire that minority shareholder's view appeared to be in the minority. Clearwire shares tumbled 12.4 percent to $2.94 in mid-afternoon trading, below Sprint's offer price as investors appear to be betting against any hope of receiving a higher offer.
Sprint shares were roughly flat at $5.56 in early afternoon trading on the Nasdaq.
Analysts also say that Sprint's offer will prove to be the best available option for shareholders. Pacific Crest analyst Michael Bowen said in a research note, that the Sprint offer is "more than fair."
Clearwire's Prusch said on the call that the deal was the best alternative to other options he explored such as: signing up new wholesale customers; raising financing through a debt or an equity offering; selling a portion of spectrum; or taking an investment from other potential partners.
"Despite our efforts we have been unable to secure new partnerships," said Prusch, adding that part of the problem with a new investment was its governance agreements with Sprint.
"Our existing governance agreements prevented us from offering third parties the governance rights they desired in a partnership," Prusch said.
Clearwire, which also counts Sprint as its biggest customer, has been trying to attract new wholesale customers for years, but Prusch said it couldn't attract enough big customers to support it as an independent company.
Clearwire had recently received a credible, but preliminary proposal for the purchase of a portion of its spectrum from a third party that it "worked hard to improve," but its board concluded Sprint's offer was better, Prusch said.
Clearwire's comments "should be a huge bucket of cold water on the loud minority shareholders who are agitating for at least $5 per share," Pacific Crest's Bowen said.
Stifel Nicolaus analyst Christopher King said: "The odds are against minority shareholders winning the battle."
King said he still expects more lawsuits and a "very ugly" proxy battle. But since Sprint already has roughly half the support its needs from minority shareholders he does not expect investors against the deal to win enough support to block it.
As part of the deal, Sprint also agreed to provide Clearwire with up to $800 million of additional financing, which would be exchangeable for Clearwire common stock at $1.50 per share. Under that agreement Sprint will buy $80 million of exchangeable notes per month for up to 10 months beginning in January.
King said that this offering tips the balance of power further in Sprint's favor as the convertibles would dilute existing minority shareholders' voting power.
Moreover, one hedge fund manager who was listed as a Clearwire shareholder in the latest public filings said that the deal value is good news for investors who owned Clearwire shares for more than two months.
"From many investors' perspectives they were very pleased to see the announcement and see some realization of value for the Clearwire shares," said the hedge fund manager, who would not confirm if they are still a Clearwire shareholder.
Clearwire shares rose sharply in October as investors speculated that a Sprint agreement to sell a 70 percent stake to SoftBank Corp for $20 billion, would lead to a sale as that deal gives Sprint the resources it needs to buy Clearwire.
The Clearwire deal is contingent on both the closing of Sprint's deal with SoftBank and approval from Japan's SoftBank.
Reuters reported last week that SoftBank told Sprint it would not support a Clearwire deal unless it was for no more than $2.97 per share.
Both the SoftBank deal and the Clearwire deal require approval from government regulators.
Sprint's Chief Executive Dan Hesse said he does not expect the Clearwire proposal to delay the closing of the SoftBank deal provided the approval process for the Clearwire deal begins quickly. Sprint expects the Clearwire deal to close around the middle of next year, about same time as the SoftBank deal.
Citigroup acted as financial advisers and Skadden, Arps, Slate, Meagher & Flom LLP and King & Spalding LLP acted as legal counsel to Sprint. Evercore Partners acted as financial adviser and Kirkland & Ellis LLP acted as legal counsel for Clearwire.
The special committee of Clearwire's board used Centerview Partners as financial advisor and Simpson Thacher & Bartlett LLP and Richards, Layton & Finger, P.A. for legal advice. Blackstone Advisory Partners L.P. advised Clearwire on restructuring matters.
The Raine Group acted as financial adviser and Morrison Foerster LLP acted as counsel to SoftBank. Credit Suisse acted as financial advisor and Gibson Dunn & Crutcher LLP acted as counsel to Intel.
(Additional reporting by Jennifer Saba and Herb Lash. Editing by Peter Lauria, Rodney Joyce, Sriraj Kalluvila, Lisa Von Ahn and Leslie Gevirtz)