Here’s why Sprint offered $2.1B to buy the rest of Clearwire

Sprint(s S) disclosed on Thursday that it was in discussions with Clearwire(s clwr) to buy the remaining chunk of stock in the company in a deal valued at $2.1 billion. The nation’s third largest wireless carrier is an investor and majority stockholder in Clearwire with 51.7 percent of the stock. This proposed transaction makes sense as Sprint needs the depth of spectrum Clearwire has, while Clearwire needs cash.

Sprint now has cash because of an investment by Japan’s mobile operator SoftBank, which spent $20.1 billion buying a stake in Sprint. As part of that purchase Sprint scored $8 billion in cash. Under the terms of the proposed deal with Clearwire, Sprint would pay $2.90 for the shares it doesn’t already own, which values Clearwire at $4 billion.

The rationale behind the deal is simple. Our growing demand for data means that mobile operators need the capacity on their networks to support their users. And that means they need spectrum — all those web pages hitting your iPhone travel over the spectrum. At the moment AT&T (s t) and Verizon (s vz) have some of the best spectrum assets around, but even AT&T was trying to buy T-Mobile in order to get more airwaves.

Data from the FCC's 15th Annual Competition report published in June 2011.
Data from the FCC’s 15th Annual Competition report published in June 2011.

For Sprint, which is building out an LTE network later than its rivals, capacity is key. The company is trying to free up as much spectrum as possible by getting some of its older Nextel subscribers off its older iDEN network technology. But with its investment in Clearwire, Sprint has access to many megahertz of spectrum –albeit in a band that’s not as ideal as the 700 Mhz and AWS bands that AT&T and Verizon own. Clearwire has more than 100 Mhz of spectrum in many of its markets. That’s roughly a third as much as AT&T and Verizon have in many of theirs.

Not all airwaves are created equal, and Clearwire’s 2.5 GHz airwaves don’t have quite the range and ability to punch through walls of lower frequency spectrum. But with enough capital, Sprint can overcome those limitations and  build out a dense competitive network to ride the demand for data and keep its subscribers happy.

This deal is far from done given that SoftBank would need to approve it as well as Clearwire’s board and the FCC. The faster Sprint closes the deal, though, the sooner it can start shift Clearwire’s focus away for its older WiMAX technology and on to new LTE networks.