Lee Hobson's Highside Capital Doubles Clearwire (CLWR) Stake

Lee Hobson's hedge fund Highside Capital filed a 13G with the SEC regarding shares of Clearwire (CLWR). In it, Highside reveals a 5.5% ownership stake in CLWR with 16,174,400 shares.

This marks a 129% increase in their position size since the end of the second quarter.

Clearwire Volatile Lately

Highside crossed the 5% threshold that required disclosure to the SEC on October 7th, the day Sprint (S) held their investor day .
This is relevant because that day Sprint signaled that they might cease purchases of CLWR's services after next year. Sprint owns almost 54% of Clearwire equity (but just 49.7% of voting rights).

This news, coupled with a CLWR downgrade from Moody's on October 14th, triggered speculation that Clearwire could possibly miss interest payments and caused the company's bonds to plunge.

This is the second major hedge fund we've seen take a sizable stake in Clearwire (CLWR). We highlighted how Larry Robbins' Glenview Capital bought the stock and you can read their CLWR investment thesis here.


About Highside Capital

Prior to founding Highside, Hobson was at Lee Ainslie's Maverick Capital. Highside employs a long/short equity strategy and invests in public markets. Hobson received his MBA from Harvard Business School and attended undergrad at Princeton University.


About Clearwire

Per Google Finance, Clearwire is "a provider of fourth generation (4G) wireless broadband services. Clearwire builds and operates next generation mobile broadband networks that provide high-speed mobile Internet and residential access services, as well as residential voice services. Its 4G mobile broadband network provides a connection anywhere within its coverage area."

For more hedge fund updates, be sure to check our extensive notes from the Value Investing Congress.

Larry Robbins' Glenview Capital Buys Clearwire (CLWR): Investment Thesis

Larry Robbins' hedge fund firm Glenview Capital just filed a 13G with the SEC regarding shares of Clearwire (CLWR). Due to portfolio activity on July 28th, Glenview has disclosed a 6.53% ownership stake in CLWR with 16,228,264 shares.

This activity marks a 76.5% increase in their position size since the end of the first quarter. So while they were buying as recently as the end of July, the crazy market volatility that has followed in August makes it hard to know if they've battened down the hatches and held onto these recently acquired shares, or if they instead chose to reduce risk. We've also detailed how Glenview bought Flextronics (FLEX) as well.

Glenview's Thesis on Clearwire

Glenview's previous letter outlined their thesis on Clearwire (CLWR) as they own equity and debt. The company owns 45 billion MHz of wireless spectrum and was the first true '4G' wireless network. They like CLWR under the notion that capex was behind the company ($20 billion) and growth was ahead. The stock currently trades around $1.52.

Robbins goes on to say that the main backdrop for investing in CLWR is that, "over the next four years, mobile traffic growth is expected to increase 40 times, driven by increased video usage and data plans on PCs/tablets/smartphones ... The appeal of Clearwire is therefore simple; Clearwire has aggregated an unmatched amount and a sufficient quality of spectrum to be a viable 4G offering for a wireless carrier."

The hedge fund likes Clearwire because: "a) there is significant downside support from asset value, b) the investment to build those assets is substantially behind them, and c) the wireless industry is at an inflection point in terms of demand for these assets."

Another bit worth noting: CLWR is owned mainly by strategic investors (~84%), primarily by Sprint (S). Glenview hypothesizes that should the AT&T (T) and T-Mobile merger be approved, Sprint could compete by moving to purchase the rest of Clearwire. Either way, Glenview likes the risk/reward of CLWR.

To see the rest of Glenview's investments, be sure to subscribe to our Hedge Fund Wisdom newsletter, as a new issue will be released in the next two weeks that updates top hedge fund portfolios.

Why A Hedge Fund Manager Sold Sprint Nextel (S)

The following is extracted from Amit Chokshi's Kinnaras Capital Management fourth quarter letter:

"Investors may also be curious regarding the divestiture of Sprint-Nextel ("S"), our highest conviction holding in 2010. When Greenlight Capital founder David Einhorn revealed a stake in Sprint Nextel in early December (a few weeks after we had sold), I received a few "what do you think about that" emails, not surprising when one considers Greenlight Capital's 21.5% annualized return since inception in 1996. One of the reasons I sold S was simply due to a flurry of much more attractive prospects that arose in Q3. The limited capital we control allows us to invest in any segment of the market and I wanted to take advantage of that opportunity in Q3.

Nonetheless, I would have considered holding on to a small stake in S if I had greater confidence in its management team, marketing efforts, and competitive dynamics. When establishing our stake in S in early 2010, one component of my investment thesis was the head start S had on its rivals in deploying next generation ("nextgen") cellular capabilities. S's 4G service is provided through its majority stake in Clearwire ("CLWR"). S would also be releasing two spectacular phones using Google's Android Operating System in the summer -- the HTC EVO ("EVO") and Samsung Epic. Sales data was demonstrating that Android phones were gaining considerable momentum and the EVO and Epic were two of the most widely anticipated smartphones of 2010.

Heading into 2010, S would be the first to 4G with a significant lead time over its rivals, had two highly rated phones that could compete against any of the top smartphones, had a very compelling price point relative to other carriers, experienced massive improvements in customer service, and had already demonstrated success in rationalizing parts of its business to drive operational improvements. S also faced few financing constraints with most of its debt maturities far into the future. The stock was cheap across a number of valuation metrics and had a number of catalysts in place that could drive improvements in valuation.

Here's where the train started to get off the tracks. The telecom business is highly competitive and I believe companies have to go for the jugular when it comes to advertising to demonstrate their key strengths over their competitors. For example, Verizon ("VZ") directly mocks AT&T's ("T") network coverage in its television ads, leading the viewer to believe that VZ has the best coverage while T has overpriced and weak network coverage. S intended to release the EVO in June and a number of third party sources considered it to be the best smartphone available. S had for the first time a legitimate top-shelf product and had also developed a very competitive pricing plan offering far more value to a subscriber relative to VZ and T. I had expected some aggressive and smart advertising to promote the EVO functionality and S phone plans directly against its competition.

Instead there appeared to be little to no advertising until the final two weeks of the release and the marketing was very mundane. Effective marketing "shows" rather than "tells" and the EVO commercials were far too convoluted, doing nothing to effectively demonstrate the powerful capabilities of the phone. The video below is one of the initial EVO commercials and should illustrate my point (email readers will need to come to the site to view the videos):



I felt S had squandered a huge opportunity when there were no other competitors to market leading up to the introduction of the EVO and from that point on I began to question S's advertising efforts. For example, S runs advertisements before the coming attractions start in movie theaters. As theaters are usually pretty empty before the coming attractions start, I would wonder how effective the use of these ad dollars were in attracting new subscribers. I also was skeptical of the company's sponsorship of CBS's NFL halftime show and sponsorship of the Sprint Cup for NASCAR. My personal view was that S could be far more effective with advertising that demonstrates what its network and exclusive phones could do rather than spend ad dollars on blanket sponsorship.

The next problem arose with S's handling of CLWR. CLWR is majority owned by S but was also competing directly against its parent company by offering CLWR-branded service as well as specific connection devices such as the iSpot which competed against the S Overdrive. Considering that CLWR burns considerable cash, much of it from S, it was bizarre that S sat idly by for so long allowing CLWR to use S cash to develop products to compete against its parent. In Q4 it became apparent that CLWR would need more capital setting up additional tension between S and CLWR.

At this point S needs CLWR as it provides S with its 4G service but CLWR will still require billions to further expand coverage in the US. It will be challenging for S to fund CLWR's needs while also executing its own capital spending plans. S took far too long to decide to rationalize its iDEN and CDMA networks but it intends to start in 2011. This project will require billions and excludes the roughly $2B+ needed on maintenance capex and FCC license expenditures. These are not immaterial expenditures considering S generates under $6B in EBITDA.

What exacerbates this problem is that competitors are now coming to market with 4G services. While S had a large lead in terms of time, it squandered that lead with ineffectual marketing and poor management of CLWR. The company has a compromised operational and financial strategy and is now facing competition with far better marketing and deeper resources.

For example, S marketing executives could learn a lot from T-Mobile. T-Mobile has released some excellent ads which are exactly what I envisioned S would have done but did not. The T-Mobile ads copy the "I'm a Mac, I'm a PC" commercials Apple developed whereby T-Mobile goes directly after AT&T and the iPhone, highlighting AT&T's poor network performance and limitations of the iPhone 4. S could easily have done similar ads but for whatever reason, S CEO Dan Hesse has been reluctant to highlight any design and operational advantages the EVO and Epic have over the iPhone or the S network has over competitors. T-Mobile has had no such qualms and it would be little surprise if sales of T-Mobile 4G devices (even though T-Mobile really does not have 4G) accelerate due to the smart advertising (video below):



Aside from T-Mobile, VZ is also beginning to market its 4G service. VZ has the deepest pockets of US telecoms and will be rolling out its coverage network at an aggressive clip while S and CLWR struggle to address financing and operational aspects. In addition, 4G smartphones appear to be slated for wide availability across carriers in 2011. While the EVO and Epic were two of the best phones released in 2010, there are a host of very impressive phones set to be released in 2011 such as the Motorola Droid BIONIC, Samsung 4G LTE Smartphone (nextgen Galaxy S), and HTC Thunderbolt. What will make this challenging for S is the cost subsidies associated with increasingly advanced phones will not be as easily absorbed by S relative to its peers as the Company's current plans yield lower ARPU relative to its peers. This could result in further margin pressures.

When entering 2010, S has a number of tangible opportunities and I felt if the company successfully executed on these, operations would improve significantly and thus yield a better valuation for the stock. S had its chances but I believe they missed what was essentially the one "open year" they had to increase subscribers with a relatively light competitive field. As Q3 and Q4 passed, the window between S and its competition was virtually eliminated. I expect that 2011 will be a year where its deeper pocket rivals like VZ flex their muscles and offer 4G services with other attractive smartphones. S may still pay off handsomely for investors but I felt we had better places to invest and that the outlook for S was getting increasingly more challenging.

Disclosure: Author manages a hedge fund and managed accounts with no position in any of the companies mentioned above. "

The above was extracted from Amit Chokshi and Kinnaras Capital Management's fourth quarter letter.