Is Clearwire's Hunger for More Cash Reasonable?

Clearwire (NAS: CLWR) is scouting for more cash yet again. The company said that it would need more capital to survive beyond the next 12 months.

While this might sound unnerving to many investors, I don't think there's any reason to be surprised, or worried for that matter, as Clearwire is still good to go for a year with $1.1 billion in cash and equivalents on its balance sheet.

So, is this a problem? Well, it's not something that I didn't expect.

More cash required...
While the company may still have more than a billion stashed in its coffers, courtesy of a bailout from Sprint (NYS: S) , it would need sufficient funds to operate smoothly beyond the next one year. The costs involved in building a new 4G LTE network would be considerable. According to Clearwire, a new 4G LTE network would cost as much as $600 million. That's not a lot of cash, given that it already has almost twice that amount in its books.

But that's not all. The company's cash flow would not turn positive immediately after the network is built. It would need to market and sell its LTE services to generate revenue, in the face of cutthroat competition from established LTE players such as Verizon (NYS: VZ) and AT&T (NYS: T) .

While Verizon has already stayed ahead of the game with LTE services offered in nearly 200 U.S. cities, AT&T has some catching up to do, as it offers the service in just 28 metropolitan areas. But the catch here is that both these biggies face spectrum shortage, and with the LightSquared option not viable anymore (at least in the short run), they may find it difficult to expand beyond a point. Clearwire, on the other hand, has significant spectrum which can be deployed readily to gain traction in the 4G LTE market.

...to keep it going
So, there is market potential, and the company needs cash to make it there. Debt is not an option, given that the company already carries more debt than its assets can cover, making borrowing costs unfavorable. In fact, the company raised $300 million in January at an exorbitant interest rate of 14.75%.

An alternative to debt would be to raise funds via issuance of common stock. While this would lead to some amount of equity dilution, the risks would be partially offset because Clearwire has a very strong advantage. Its possession of 2.5 Ghz licenses is one of the biggest draws, here. Hopefully the company will be able to garner better pricing for its spectrum in a year's time.

The Foolish bottom line 
The point I am trying to highlight is that Clearwire is well-covered in the short run. The company needs more juice to keep it going in the long run, but I don't think this should give investors the heebie jeebies at the moment. I would give the management more time to prove itself and explore its opportunities before making a hasty call.

Don't forget to stay up to speed with the latest on Clearwire by adding it to your Watchlist. It's free and lets you stay on top of the latest news and analysis for your favorite companies.

At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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