Some observers may be wondering if Charlie Ergen is serious when he suggests using LightSquared spectrum as an alternative to Clearwire, as suggested by today’s news that DISH made a $2B cash bid last week to buy LightSquared (note that the offer is for LightSquared LP not Inc, i.e. ignoring the 1670-75MHz Crown Castle lease). After all, some might think this is yet another in a series of increasingly implausible maneuvers, as DISH tries desperately to find a way to exploit its spectrum assets.
However, its important to note that this story comes immediately before Clearwire shareholders were set to vote on Sprint’s bid for the company. That’s curiously similar to the leak of news that DISH was interested in buying T-Mobile (also to Bloomberg), just a few days before DISH made its bid for Sprint last month, so I wonder what Charlie Ergen has in mind this time around.
In the case of LightSquared, the company still has exclusivity to propose a plan until the end of this month, while DISH has indicated that its offer only remains valid until May 31, so DISH has plenty of outs if it wants. In addition, its hardly likely that Harbinger would accept an offer that would wipe out their equity, even if value is left for preferred holders (where Sound Point owns an 80% stake and would thus control the fulcrum security in any reorganization) after paying off the $1.7B plus interest due on the term loan.
LightSquared’s spectrum is certainly not a near term alternative to Clearwire, given that it will take years for use to be approved, and an L-band ecosystem won’t develop until well after that for DISH’s AWS-4 spectrum. On the other hand, the L-band has near term value to DISH because of the Mexican situation, and could be a long term backup option, if DISH plans to sit on its AWS-4 holdings for the next several years and wants to reband it to downlink spectrum, so its worth forcing Harbinger’s hand and ensuring that LightSquared’s assets are ultimately auctioned off.
However, just as the T-Mobile story was a red herring to distract from DISH’s planned bid for Sprint (even though it remains a possible alternative option for DISH), I wonder if the LightSquared story indicates that DISH has another plan to announce in the next few days. Could it be a deal to buy spectrum from Clearwire, if Sprint’s bid is unsuccessful? Certainly the suggestion that LightSquared is a viable option might help DISH in negotiations with Clearwire over price.
Another possibility is that DISH is trying to persuade Clearwire shareholders to sell out to Sprint for a relatively lower price, on the basis that DISH could then go all out to buy Sprint, without worrying about Crest trying to hold out for more money for Clearwire investors. Finally, and perhaps the biggest stretch: could DISH be poised to reach an understanding with SoftBank that it will gain control of some of Clearwire’s spectrum if SoftBank succeeds in buying Sprint and Clearwire without a significant increase in the current bids?
News tonight that Clearwire may decide to delay the vote on Sprint’s bid certainly suggests that Sprint might now succeed in securing the votes to buy Clearwire with only a modest increase in its bid price (to say $3.30 to $3.50 per share). In that case, DISH would have to either negotiate with or outbid SoftBank if it is to secure access to the Clearwire spectrum it wants, unless DISH succeeds in persuading the FCC that Sprint should be forced to dispose of some of Clearwire’s spectrum as a condition of closing the deal.
At least from SoftBank’s point of view, DISH would certainly be a more palatable purchaser of Clearwire’s spectrum than Verizon. If that presents too much of a problem (from the point of view of Sprint shareholders who would then be unable to realize the benefit of a rival DISH bid), could Sprint sell some 2.5GHz spectrum to T-Mobile instead, presenting DISH with another indirect route to acquire this spectrum?
Many epitaphs are being written today, and perhaps even a few pitches for book deals, bringing back memories of my comments to Bethany McLean for her Vanity Fair article two years ago. However, some apparently think the LightSquared saga has a few more chapters to be written, after Chairman Genachowski’s comments yesterday that “he expects LightSquared Inc. to eventually win approval for using its airwaves”. Since I actually asked him the question that prompted this statement (at the Jefferies conference) about what lessons he took from the LightSquared debacle (a characterization he disputed), I thought it would be useful to set the comment in context.
It was prefaced by the statement that Genachowski believed all satellite and broadcast spectrum was underused and should be reallocated for flexible terrestrial mobile broadband use, to meet the “obvious” spectrum crisis, and because of this “crisis” the L-band spectrum was “too valuable to be left unused”. Of course, he didn’t state any timeframe for action, and acknowledged that it was not possible to use the L-band spectrum without new receiver standards or similar changes to protect GPS (which will take years).
Recent actions, such as tomorrow’s NPRM on Qualcomm’s plan to use Ku-band satellite spectrum for Air-To-Ground communications and the effort to allocate C-band spectrum for small cells certainly bear out Genachowski’s lack of regard for satellite services, and so its not surprising that Globalstar has been urging him in recent days to move forward with an NPRM on its TLPS plan “prior to the Chairman’s expected departure later this month”.
In contrast, observers I’ve spoken with expect his successor, Tom Wheeler, to have a keen appreciation of the challenges associated with reallocation of spectrum, by virtue of his chairmanship of the FCC’s Technological Advisory Committee (whose February 2013 white paper on harm claim thresholds notably didn’t even mention attempting to solve the LightSquared/GPS conflict). I’m also told that given the battle that will take place with the DoD over gaining access to the 1755-80MHz spectrum for an auction next year, it is highly unlikely to be worth extending this fight to cover LightSquared/GPS as well.
So why was Sound Point, which is widely believed to be backed by Charlie Ergen, buying up LightSquared’s debt and preferred shares last month? After 3 days of meetings with dozens of investors in New York this week, I’ve been refining my view of Ergen’s plan for Sprint, Clearwire, LightSquared etc and will shortly be issuing the next update to last week’s report on DISH’s wireless ambitions. On the LightSquared front, what has emerged is that Sound Point has now acquired the majority of LightSquared’s Term Loan debt, and there appears to be reasonably wide consensus that both Ergen and Carlos Slim are backing Sound Point. I’ve also concluded that the near term focus is likely to be on the leverage that gaining control of LightSquared would give Slim to get a Mexican broadcast license, as part of a settlement with the Mexican government to resolve the dispute over spectrum allocation for MEXSAT. That could provide a windfall for Slim (and DISH Mexico) that is worth far more than the $600M-$700M that Sound Point has paid for what is likely to be a controlling stake in a reorganized LightSquared.
In those circumstances, there would be little point in Sound Point offering to buy out the rest of the term loan holders, and instead a debt for equity conversion of the LP Term Loan seems much more plausible. That would leave the remaining Term Loan holders with illiquid equity in an entity with only a very long term possibility of owning valuable spectrum (assuming that any further payments to Inmarsat can be deferred indefinitely until terrestrial usage rights can be established in the L-band) and perhaps some optionality based on future litigation. That might come as a big shock to those who believe that the only outcome is that the Term Loan will get taken out at par plus accrued interest, because of how important LightSquared’s spectrum assets are to Ergen!
Softbank has been downplaying the prospects of an increase in its bid for Clearwire, and my guess is that it will be prepared to let Sprint’s current bid be rejected in the May 21 vote, because its hard to see Clearwire’s shareholders approving a deal with Sprint with only a modest bump in the price (say to match DISH’s $3.30 offer). Then the question is whether Sprint (and SoftBank) would allow Clearwire to sell DISH the 40MHz of 2.5GHz spectrum that DISH has been seeking (with the likelihood that Ergen might then withdraw his bid for Sprint)?
Tonight an analyst report from Macquarie is speculating that DISH will instead team up with American Movil and bid for LightSquared, as an alternative to Clearwire (whose spectrum could then be sold to Verizon). While a partnership between Ergen and Slim is plausible (and indeed is something I’ve been writing about for the last year), using LightSquared’s spectrum as an alternative to Clearwire makes little sense (even if Verizon was able to buy all of Clearwire’s spectrum, which of course it can’t because the BRS spectrum is counted in the spectrum screen). Strangely, Macquarie thinks DISH could get 20MHz of uplink and 10MHz of downlink spectrum from LightSquared, but the 1675-80MHz spectrum won’t be allocated until 2017, and even if it were available, only 10MHz of downlink spectrum would be insufficient for DISH’s plans.
Our report on DISH sorts through the options for DISH, and discusses the reality of what can be done with LightSquared’s spectrum. We also consider the relative advantages of DISH and SoftBank’s plans for Clearwire’s spectrum. In particular, we consider one question that appears to have escaped all of the analysts looking at this situation: what is the value of DISH’s 14M potential cellsites?
The CTIA released its latest semi-annual survey of the US wireless industry this morning, and for the firsttime in years, the press release did not focus on growth in data traffic. That’s perhaps not surprising, given that traffic growth has now fallen sharply (to only 69% in 2012 over the 2011 total and 59% in 2012H2 compared to 2011H2) and these statistics are hardly supportive of the message that there is an impending spectrum crisis.
Ironically, CTIA instead trumpet how high US wireless capex is compared to the rest of the world and how the number of cell sites is growing rapidly, when previously the message of those (including the FCC Chairman) campaigning for more spectrum was that unless 300MHz of spectrum was made available, operators would be forced to invest far too much in their networks and build an implausibly high number of cellsites. Amusingly enough, the FCC’s erroneous model from October 2010 asserting that this economic cost would be $120B (which the authors took their name off), has just been disinterred, and supposedly updated (with the same errors as the FCC made), by those seeking to ensure that no limits are placed on AT&T and Verizon’s participation in the broadcast incentive auctions.
The lack of discussion of data traffic is a shame, because the CTIA survey actually shows an interesting rebound in the growth of traffic per device in the second half of 2012, with 15% growth compared to only 3% in the first half of 2012, as shown in the chart above. That resulted in 2012 traffic growth coming at almost 70% compared to the 60% growth that would have resulted from a continuation of the trend seen in the first half of the year. The two primary factors causing this rebound are likely to be that:
1) data caps caused a rapid one-off adjustment in offloading to WiFi during the first half of the year (which did not repeat in the second half, even though WiFi usage continued to grow), and
2) take-up of LTE increased significantly in the second half of the year (after the launch of the LTE iPhone), and higher average speeds meant that users of LTE devices consumed more wireless data than on their previous 3G devices.
Interestingly the 69% year on year growth appears broadly consistent with the 62% growth in US wireless data traffic estimated by Cisco between December 2011 and December 2012, although the CTIA survey also indicates that Cisco’s traffic estimates are around 30% higher than the actual amount of wireless data traffic in these months.
Looking forward, the most intriguing question is whether this pickup in traffic growth per device will be sustained into 2013. If it is then we could see year-on-year traffic growth in the US for 2013 come in as high as 70%, but if it doesn’t, then traffic growth will fall to 50-60%. My assessment is that traffic growth per device will be faster than in the first half of 2012, now the adjustment to capped data has taken place. However, once the early adopters have mostly switched to LTE and as customers start to predict and control their data usage, the rate of growth will likely be slower than in the second half of 2012.
So a reasonable estimate for overall US wireless traffic growth in 2013 is around 60%, falling to 50% or less in 2014, as smartphone penetration reaches saturation, assuming that there is no step change in data pricing. That appears unlikely, because AT&T and Verizon’s family data plans limit their room for maneuver: if Verizon or AT&T offered more wireless data for the same amount of money, then many customers would trade down to a less expensive plan.
Its interesting to see that two papers have recently emerged focusing on the loss of LightSquared’s spectrum “rights”. One of these, by Lenard and White of the “Technology Policy Institute” is little more than a puff-piece for LightSquared, apparently paid for by the company (the bills submitted by LightSquared’s lawyers document their meetings with the “economist” writing a paper for them), though the authors never state that this is the case. This report was released on Tuesday (April 30) as LightSquared attempts to ramp-up its PR efforts once again in the wake of the FCC granting LightSquared the Special Temporary Authorization it has been seeking for the last two months to test LTE in the 1675-80MHz band (apparently a farewell gift that Chairman Genachowski decided to leave on his successor’s desk).
The Lenard and White paper uncritically recites LightSquared talking points, without any understanding of either MSS or GPS services, and simply recommends that the FCC do as LightSquared requests. There is no mention whatsoever of MSS providers such as Inmarsat and Iridium (implying instead that LightSquared and Globalstar are the only licensees of the L-band and Big LEO band spectrum), and bizarrely the paper asserts that for the last 25 years the MSS spectrum “was, for all practical purposes, unused”. Similarly for GPS, the paper simply asserts that the “least cost option” would have been for LightSquared to have been allowed to go ahead, leaving “individual GPS owners” to be “responsible for retrofitting or replacing their GPS devices so that they would work properly”. Of course, no mention is made of the use of GPS in aviation and the timeline and costs involved in changing out safety critical equipment.
A more serious academic paper was issued the previous week by Hazlett and Skorup of George Mason University, which makes some broadly similar points, but comes to a rather more nuanced conclusion. However, this paper also suffers from similar defects, particularly when it dismisses the cost estimates attributed to GPS disruption by asserting that “Simple Coasian analysis establishes this [$10B LightSquared license] valuation as a cap on costs to GPS users” because the “cost of any “harmful effect” is “bounded by the most efficient (least costly) mitigation technology” which would be buying LightSquared’s license. The “cost estimate” of “an astounding $245 billion” (and the similar estimates by the FAA of $60B for aeronautical users) is of course nothing of the sort, it is a loss of social welfare benefits to GPS users if GPS service was rendered unusable. Hazlett and Skorup assert later in the paper that that “easily more than $100 billion in social losses [were caused] by pre-empting the creation of new LTE band” without apparently any thought that their purported $10B cap should obviously bound these losses in exactly the same way (as an aside the $10B number was actually the windfall to LightSquared from the FCC’s waiver, not the value of the licenses themselves). If it does not bound either estimate, then of course Hazlett and Skorup are implying that the social loss of “a new LTE band” is less than the social loss that would be caused by eliminating GPS service (which hardly seems surprising given that there are many other LTE bands available), but the question of what approach minimizes the overall social losses (e.g. requiring many years of transition) is left completely unresolved.
More importantly, Hazlett and Skorup then go on to compare the situation between LightSquared and GPS (which they describe as a “tragedy of the regulatory commons”) with what they suppose was the “successful rationalization of the L-band” achieved between LightSquared and Inmarsat, in the form of the December 2007 Cooperation Agreement, which supposedly resolved the “severe in-band interference problems”. This meant that “the FCC did not test radios, seek more clarity of “harmful interference,” or determine what reliability level Inmarsat’s customers would receive due to potential “harmful interference” from LightSquared’s operations. They trusted the parties to make efficient choices with respect to these concerns.”
Of course, while that interpretation might accord with LightSquared’s portrayal of the Cooperation Agreement, it is far from reality. Up until 2007, independent of the interference disputes, LightSquared’s predecessor (MSV) and Inmarsat had been engaged in a series of disputes over 3MHz of spectrum that MSV had previously loaned to Inmarsat and which Inmarsat was keen to retain for its new I4 MSS services (note that the previous year, when Inmarsat was unable to reclaim spectrum that it had loaned to Thuraya, Inmarsat was forced to suspend certain services in the South Atlantic ocean). By signing the Cooperation Agreement, Inmarsat was granted the right to retain this “disputed” spectrum until MSV raised funding to pay Inmarsat the spectrum lease fees due under the agreement, and if MSV defaulted (which was seen as the most likely option at that time, given the enormous amount that would need to be paid to Inmarsat), Inmarsat would retain the disputed spectrum in perpetuity.
When MSV actually secured substantial further investment from Harbinger, I understand that Inmarsat came to the conclusion after internal testing and analysis, that there was no chance that the deployment of MSV’s network would actually happen, under the parameters agreed in the Cooperation Agreement, because of the interference that would be caused to GPS systems. As a result, Inmarsat decided that even if LightSquared did actually initiate payments under the Cooperation Agreement (Inmarsat was to be paid $250M to cover its costs for fitting filters to its own terminals in addition to other very substantial rebanding and lease payments), there was no point in rushing to develop and fit these filters. Indeed the process required to gain regulatory approval for new aeronautical filters was sufficiently long that approval wouldn’t even be possible until 2013 or beyond. The Cooperation Agreement was cleverly worded: Inmarsat was given absolute discretion to simply replace the affected terminals if LightSquared’s network was ever deployed, and so Inmarsat simply banked LightSquared’s payments, and incurred virtually no costs. Then in April 2012, with the deployment of a new MEXSAT system on the horizon, Inmarsat kept the Cooperation Agreement in place, because of more subtle wording which requires LightSquared to hold Inmarsat harmless from any requirement to give spectrum back to the Mexican government when MEXSAT becomes operational.
All of that hardly seems to be a “successful rationalization of the L-band” as Hazlett and Skorup suggest. It sounds to me more like a sophisticated player (Inmarsat) taking advantage of another operator that is desperate to have some agreement to show to a gullible hedge fund manager, so that he would invest more money to keep them afloat.
I guess at least from that point of view it was successful for MSV’s then-management, because Falcone proceeded to commit a further $600M in the following seven months to complete and launch the MSV satellites, presumably taking advice from his due diligence advisers (who I’m told specialized in analyzing “fast food restaurants”). My guess is that by the time the GPS problems became apparent to Harbinger, all their money had been spent, so all that was left was to persuade other hedge funds to put their money in alongside Harbinger’s and try to keep up the pretense that all was well. After all, LightSquared’s CEO repeatedly told investors that GPS was not a problem, so that more money could be raised, when it was clear to me and others that was simply not the case.
The real question is when LightSquared came up with the end game of litigation or a spectrum swap to escape from this self-inflicted debacle. Was Falcone so delusional that he thought it wouldn’t matter if there was interference to the GPS system? Or was he expecting compensation from the government all along, once Harbinger’s money had all been spent in 2009?
If you’ve been wondering what I’ve been up to for the last couple of weeks (like Phil), I’m pleased to announce that I’ve been hard at work on a new report, released today, on DISH’s bid for Sprint, which discusses DISH’s plans, alternatives and the most likely outcomes from the battle with SoftBank. You can also read some of my thoughts in a GigaOm article (though its not very accurately titled – that wasn’t my choice) or listen to my interview on CNBC last week.
If you are interested in getting a copy of the report, and discussing my conclusions, then an order form and report summary can be found here or please email me for more details. If you’d like to meet in person, then do get in touch: I’ll be in New York next week from May 7-9, on a panel session discussing “Wifi – Friend or Foe of the Mobile Network?” at the Jefferies TMT conference (May 8th) and then at CTIA in Las Vegas from May 21-22, speaking at a Tower and Small Cell Summit panel on “Spectrum Acquisitions and Their Impact on Cell Towers” (May 21st).
UPDATE: A few early comments on the report:
“It was excellent; a really deep analysis. I cannot fault your conclusions and I actually learnt a lot from reading it.” Wireless company CEO
“Read your report this morning. It’s very good…I think your ideas are dead on” National tech reporter
Its interesting to note that Inmarsat has been competing much more aggressively against key competitors in the last few months. First, I’m told that Inmarsat offered a bounty to Telemar to capture Anglo Eastern, a key Iridium Open Port customer with 350 ships, from Globe Wireless, in the fourth quarter of 2012.
All of these developments suggest that Inmarsat is determined to seek topline growth in its L-band business and is no longer reluctant (as in the past) to explicitly target its competitors with selective pricing, even though this runs counter to Inmarsat’s recent tendency to increase list prices. Of course, it is less clear whether the new deals will be profitable for Inmarsat, given the incentives needed to achieve these sales.
But with Inmarsat’s investors focused intently on whether the wholesale L-band Inmarsat Global business has returned to growth, and apparently willing to overlook the recent significant contraction in margins within Inmarsat’s Solutions business unit (blamed on a transfer of margin from retail to wholesale operations), that might not matter for now. However, if Inmarsat wants to make more acquisitions (and it is hard to see in the long term who else might end up operating LightSquared’s satellites), then regulators might wonder whether industry consolidation could give Inmarsat even more market power.
The FCC’s proposed FY2014 budget, released on Wednesday, now appears to have sounded the death knell for LightSquared’s September 2012 spectrum swap proposal, that it should be granted access to the 1675-80MHz band, in exchange for giving up “rights” to deploy a terrestrial network in the 1545-55MHz downlink part of the L-band. Instead, the budget proposes that NOAA’s radiosondes should be relocated (presumably to the 400-406MHz band which is also used by weather balloons) and that the 1675-80MHz should then be repurposed using “either auction or fee authority” in 2017 to raise $230M.
This news seems to confirm what happened at the February 20 meeting between the FCC and LightSquared’s lawyers, is that the FCC told Latham & Watkins that they were going to propose reallocation of the 1675-80MHz spectrum for commercial use, but would deny the requested spectrum “swap”, so LightSquared would have to bid in an auction just like anyone else. Although the FCC has not yet issued a ruling (perhaps to avoid tarnishing Chairman Genachowski’s recent speeches about his legacy), release of an order may now be quite close, given the public disclosure of the FCC’s intentions in this week’s budget document.
In a statement to Communications Daily (who first reported this issue), LightSquared continued its usual practice of pretending that all is well, asserting that “What happened today is certainly consistent with our filings” because there would be costs associated with any “sharing agreement”. However, even if LightSquared did pay $230M for the spectrum (and I find it hard to conceive that the FCC would simply award the spectrum to LightSquared if other operators want to bid on it at auction), the 2017 allocation date is obviously far too late for LightSquared to proceed with its fantasy of an LTE network buildout.
UPDATE 3 (4/13): LightSquared’s ex parte for an April 3 meeting with Commissioner Pai indicates a different (and more telling) story, going back to LightSquared’s generic appeals from 12 months ago about the “compelling need to find spectrum-based, technical, legal, or other solutions to the current issues” and abandoning the 1675-80MHz proposed “swap”. Notably, this ex parte was not even filed in IB Docket 12-340, relating to LightSquared’s September 2012 request to modify its ATC Authorization, which would have been required if the 1675-80MHz “swap” was part of this discusssion. Instead LightSquared is now apparently going back to its demand for “regulatory approvals” to move forward with its original L-band plan and threatening legal action if that is not forthcoming.
Given the Mexican coordination issues, the implausibility of LightSquared gaining any more spectrum for free, and the potential costs for continuing LightSquared’s Cooperation Agreement with Inmarsat after March 2014, its fascinating to see how much excitement has built in the distressed debt community in the wake of the WSJ’s report last week that Sound Point had been buying up LightSquared’s debt and preferred stock. That is despite the fact that several large holders in the Ad Hoc Secured Group (not just Fortress) have now exited their positions.
I’m told that a target valuation of 130 cents on the dollar for LightSquared’s LP Term Loan debt is now being floated by some people, based on an assumption that Ergen would convert the secured debt to equity. Even if one believes that Ergen will get involved (as opposed to using LightSquared as a bluff to secure a deal with T-Mobile, MetroPCS, CLWR or Sprint), then that seems excessive, given that buying out the TL debt at par plus accrued interest would only give a valuation of 115 cents on the dollar at present, and any bankruptcy auction will presumably look a lot like TerreStar, where DISH bid just enough to buy out the secured debt (including Echostar’s holdings) at par, just as DISH would presumably buy out Sound Point and other holders for cash at par in a LightSquared auction.
After all, DISH has $10B in cash, and potentially not much to spend it on right now. Any DISH deal with T-Mobile would most likely have come before the recent price adjustment to TMO’s MetroPCS bid (not least because it would have made it more difficult for Paulson and PSAM to hold out for alternative suitors), and a counterbid for MetroPCS is harder now that MetroPCS’s stock price has risen. Similarly, a potential deal with Clearwire seems to be slipping away, as it takes more money from Sprint, despite the efforts of Crest to block Sprint’s bid.
What would be the form of a DISH deal with TMO? The four possibilities are:
a) a joint venture (like Clearwire) which wholesales capacity to DISH, TMO and potentially other players
b) a hosting agreement (like Sprint and LightSquared) with TMO taking payment in the form of capacity
c) an investment by DISH in T-Mobile (like Softbank and Sprint) through the contribution of cash and spectrum in exchange for a majority equity stake
d) a full merger of DISH and T-Mobile.
Of these, I think the first can be ruled out, for the same reasons that Clearwire has had so many problems: TMO would take most of the capacity, so would have too much influence, and it would have an incentive to only use the JV capacity after exhausting its own resources. The second can also potentially be ruled out, simply because the deal would have to be more advantageous to DISH than the LightSquared-Sprint agreement: TMO would cover most of the costs and take payment in capacity, not cash, and then DISH wouldn’t need $10B in cash. The fourth option is probably also less appealing (as DISH has hinted previously), because DT might insist that Ergen gives up the dual class share structure which gives him tight control over DISH, and the synergies between DISH’s satellite TV business and T-Mobile’s wireless business are far less compelling than a merger between DISH and AT&T (with its fixed line and U-verse business) would have been. If DISH stays as a separate company then a merger with DirecTV also remains a possibility, perhaps with DISH’s T-Mobile stake being spun off to Ergen if DirecTV buys out DISH.
So the third option sounds like the most plausible, and the question is whether Ergen can purchase a majority stake in a merged T-Mobile/MetroPCS in exchange for $10B in cash and potentially $8B to $10B in contributed spectrum value. This becomes a harder task after the MetroPCS merger goes through and the merged company has a larger enterprise value (estimated at $28B-$30B by BTIG). However, depending on the remaining debt load after DISH’s investment, it still seems like a reasonable objective. Having a public market valuation for T-Mobile also makes DT’s decision about what share of the company DISH would receive a lot more transparent.
Of course, this new development also makes it rather more reasonable to regard a potential DISH bid for LightSquared as another bluff by Ergen, or at the very least a far less attractive fallback option (and if you think a deal might still be done with LightSquared as well as T-Mobile, note that DT is currently embroiled in its own LightSquared-like ATC scandal in India, with some of the original SkyTerra investors). It also confirms that DISH has moved on from its interest in Clearwire, and will most likely just look to cash in its sizeable profits (of up to $300M) on Clearwire’s debt when the Sprint merger eventually goes through.
UPDATE 2 (4/12): Clearwire has filed a proxy statement this evening, noting that it was approached by Party J, a strategic (i.e. non-financial) buyer, earlier this week with an offer to buy 5B MHzPOPs “in large markets” for $1.0B-$1.5B minus the NPV of the associated lease payments. Given the NPV of Clearwire’s lease payments is $1.8B of which I’d guess at least two-thirds is in large markets, and 5B MHz POPs would be around half of the leased spectrum in these markets (assuming this is the top 100M POPs in the US), that would mean a deduction of $600M or more, leaving a net price of ~$400M-$900M.
Walt Piecyk at BTIG thinks that Party J might be Ergen once again and I tend to agree (perhaps this approach is through Echostar?). It would fit with the move on LightSquared last week as another effort to establish a potential backup to T-Mobile, by persuading Clearwire stakeholders to hold out for more money and reject the Sprint bid. Clearwire seems to be hinting that it will file for bankruptcy on June 1 if the Sprint bid is rejected and that would also provide Ergen with far more options in the event that he can’t pull off a deal with T-Mobile, because of his substantial holdings of Clearwire debt. However, given the difficult relationship between Sprint and DISH and the numerous challenges associated with LightSquared, both look far less attractive options than a deal with DT for DISH to invest in T-Mobile.
For those of you not following my Twitter feed (@TMFAssociates), last week there were a couple of interesting developments related to Globalstar, which is currently negotiating with its noteholders under a forbearance agreement (lasting until April 15), after holders of $70.6M of the 5.75% notes exercised their rights to require repurchase of the notes, and Globalstar did not pay the $2M of interest due on April 1.
A second recent development is that last week AT&T notified the (less than 1000) subscribers to the TerreStar Satellite Augmented Mobility (SAM) service, that DISH has decided to shut down the service effective May 1, via the letter below, and has “made an arrangement with Globalstar” to offer a discounted replacement rate plan and Globalstar satellite phone.
No I’m not talking about Intelsat’s current IPO! Although some might raise questions about the company’s debt levels, its also pretty clear that Intelsat’s mobility strategy and its high throughput Epic satellites are the envy of its FSS competitors. What I’m actually referring to is Row44, which went public at the end of January through a merger with Global Eagle, which had raised $190M in a blank check IPO. The end of year results from Row44 and Global Eagle have gone completed unreported, but were filed with the SEC last month, and highlighted just what a disastrous business Row44 really is.
In particular, as installations of the Southwest fleet neared completion, Row44′s revenues in Q4 dropped by 27% compared to Q3 (from $20.1M to $14.8M). Moreover, Row44 only generated total Internet connectivity revenues of $11.4M in 2012 while spending $19.6M on buying bandwidth from Hughes, and produced no revenues from its much ballyhooed content and portal services (despite spending $1.9M on video licensing fees).
In 2013, Row44′s satellite connectivity commitment to Hughes will go up to a minimum of $28M (and more likely well over $30M, because of additional commitments made in early 2013 to add coverage in Russia, and additional trans-Pacific coverage planned later this year). Row44 has also changed its deal with Southwest, so it now only receives fees for passengers using connectivity (between $5 and $6 per user, while Southwest charges $8 for the service), rather than Southwest paying for every boarded passenger under the original agreement, and as part of the new contract, Row44 is adding more capacity, apparently to counter passenger complaints about “slow or restricted services”.
At an investor conference on March 13, Global Eagle’s CFO suggested that paid take rates for other providers “range from high single digits to high teens” and that inferences could be drawn from that for Row44′s take rates on Southwest. Of course that is completely untrue: take rates for Gogo are around 5%, and Global Eagle itself said back in November that the targeted take rate on Southwest was 6.5% in 2014, so its hardly likely that the take rate is higher than that today. I therefore have to wonder if Global Eagle’s CFO actually understands this business at all.
Indeed, the company seems to have a hard time predicting the outlook for its business even in the very short term: this March 13 presentation indicated that the 2012 adjusted EBITDA from Row44 and AIA respectively was -$26M and +$18M respectively, whereas on November 27, 2012, with just one month left in the year, Global Eagle forecast that the full year adjusted EBITDA results for Row44 and AIA would be -$25M and +$22.3M respectively.
If we look forward to 2013, then it seems certain that Row44′s revenues will decline sharply, because of the slowdown in equipment installations (from $61M of equipment revenues in 2012 to ~$35M in 2013, and potentially to only $20M in 2014, based on Row44′s current business plan). More importantly, the company is set to make another significant loss on provision of connectivity services: I estimate $20M-$25M in revenues, depending on the take rates that Southwest achieves, compared to connectivity costs of well over $30M and more likely close to $40M (just in payments to Hughes, ignoring Row44′s own operational costs). In addition, content revenue is still minimal (Global Eagle described the product as “brand new” in mid March), with a very limited selection available, and by my estimate content and portal revenues will be no more than ~$5M this year.
In the longer term, Row44′s new deal with Southwest has locked the airline into a deeply unfavorable competitive position vis-a-vis JetBlue, who intend to offer Internet access for free. Southwest can’t possibly do the same, if they have to pay Row44 at least $5 for every passenger who uses the service, despite the two airlines competing very actively on other passenger amenities (like free checked bags). Moreover, if Row44 is ever to break even, it may have to cut back on the amount of capacity it buys from Hughes (rather than boosting capacity as Southwest currently plans), making Southwest’s Internet service even less attractive compared to JetBlue, which uses much cheaper Ka-band capacity.
In recent days, we’ve seen yet another report predicting rapid growth for in-flight connectivity deployment and revenues. However, none of these reports have got to grips with the issue of what services can be profitable for providers but still affordable for the airlines. Of course, if there’s one lesson to be learned from the Connexion-by-Boeing debacle, its that you can’t just assume companies will be able to continue providing service at an enormous loss indefinitely. After scraping through 2012, raising money at effective interest rates of up to 421%, Row44 has escaped for the time being by capturing Global Eagle’s cash balance. Perhaps unsurprisingly, given its management’s apparently tenuous connection to reality, Global Eagle now intends to “use its balance sheet” to pursue consolidation of the in-flight connectivity business, which might provide some relief from Row44′s current unsustainable business model, but on the other hand may simply drag down other companies in the sector.
We’ll be publishing our own detailed report on the in-flight connectivity business next month, which takes a very different approach to the analyses we’ve seen so far: instead of simply projecting how many planes might be fitted out with each technology, we’ll look at both the revenue and cost base of the various IFC providers, and discuss which of them may be able to find a sustainable long term business model.