08.31.10

Untangling the mystery of the 1.4GHz spectrum

Posted in Financials, LightSquared, Operators, Regulatory, TerreStar at 10:50 am by timfarrar

In early August, LightSquared announced an agreement with Airspan Networks, under which Airspan will “exclusively market LightSquared’s 1.4 GHz wireless spectrum” to the utilities industry as “a comprehensive solution for Smart Grid and Smart Utility applications”.

The spectrum will be managed by Airspan and used in conjunction with “Airspan’s proven, reliable and robust broadband and next generation 4G products”. Notably, Airspan’s products appear to be WiMAX-based, so it appears that any buildout by Airspan in the 1.4GHz band will now be totally decoupled from LightSquared’s nationwide LTE-based ATC network deployment, and will instead depend on the individual contracts that Airspan is able to secure with “utilities in their distinct geographic markets”.

Financial details of how this exclusive agreement will work have not been released, although Harbinger/LightSquared has committed to pay TerreStar $2M per month to lease the spectrum, with an option to buy the spectrum for up to $250M. However, it seems unlikely that Airspan would have the resources to take over these lease payments, as according to SEC filings, Airspan’s revenues declined to $70M in 2008, with an annual loss of $50M, before the company was delisted.

This means that any utility that would contemplate a deal with Airspan faces considerable uncertainty about whether it can rely on the spectrum being available for the long term (given that the lifetime of any Smart Grid solution would be a decade or more). Not only is TerreStar (the ultimate owner of the spectrum) in financial difficulties, but the prospects for LightSquared are also hard to determine. In addition, Airspan has clearly been experiencing financial challenges, given its history of losses and declining revenues, and the future of its WiMAX technology is therefore somewhat uncertain. One contact of ours, who has been looking to acquire spectrum for wireless backhaul, suggested that these complexities would make it very hard to consider partnering with Airspan at this point in time.

As a result, it is unclear how much if any revenues will flow from the LightSquared-Airspan agreement, and the valuation that can be attributed to the 8MHz of 1.4GHz spectrum (and will need to be assessed if TerreStar files for bankruptcy) is similarly difficult to establish. In this context, the history of the 1.4GHz spectrum is quite interesting. It was originally auctioned by the FCC in Auction 69 in Feb/Mar 2007 for a total of $123.6M, with half the spectrum acquired by Echostar (through Port LLC) and half the spectrum acquired by CCTV Wireless (backed by Columbia Capital). In spring 2008, TerreStar purchased Echostar’s share of the 1.4GHz spectrum in exchange for 30M shares of common stock (valued then at ~$140M), while Harbinger bought the remaining 1.4GHz spectrum from CCTV Wireless for $212.5M, before contributing the spectrum to TerreStar in exchange for non-voting Junior Preferred Shares convertible into 30M share of common stock. Jefferies provided a fairness opinion at that time, and TerreStar suggested that the spectrum could be used in combination with its satellite spectrum “to service projected demand in the machine-to-machine market” and that it contemplated using the 1.4GHz spectrum “to enter the emerging femtocell market by alleviating spectrum interference issues”.

Subsequently in September 2009, Harbinger agreed to lease the 1.4GHz spectrum from TerreStar for an initial amount of $1M per month, increasing to $2M per month in June 2010. Harbinger could purchase the spectrum initially for $150M, later increasing to $250M, with credit for 50% of lease payments and with 40% of the purchase price paid in TerreStar debt or preferred stock. The agreement also contemplated pairing the 1.4GHz spectrum with other spectrum (the details of which were not specified in the publicly filed version of the agreement), although it is not clear that permission was ever sought from the FCC for such a change.

Presumably such a change would have made the spectrum more useful for LightSquared’s LTE network, but the agreement with Airspan appears to indicate that LightSquared now no longer plans to use the 1.4GHz spectrum itself. This leaves LightSquared with 5MHz of terrestrial-only spectrum between 1670 and 1675MHz, plus rights to use up to 46MHz of L-band satellite spectrum through agreements with Inmarsat. LightSquared has also stated its intention to offer terrestrial-only devices using its terrestrial spectrum. While this could simply refer to Airspan’s network in the 1.4GHz spectrum, it seems more reasonable to assume that this comment was intended to refer to the 1670-75MHz spectrum. Will LightSquared therefore be deploying a 5MHz TDD LTE channel in this band to complement the 5x5MHz FDD LTE channels being used in the L-band satellite spectrum?

08.23.10

What is TerreStar’s satellite spectrum worth?

Posted in Financials, Handheld, ICO/DBSD, LightSquared, Operators, Regulatory, Services, Spectrum, TerreStar at 12:09 pm by timfarrar

That’s the big question facing TerreStar and its investors, as the company moves towards a bankruptcy filing which we assume will come in the next week or so. TerreStar Networks has a very substantial amount of debt secured against its in-orbit satellite and 2GHz spectrum assets, with $857M of 15% Secured Notes and $109M of 6.5% Exchangeable Notes outstanding at June 30, 2010 according to TerreStar’s latest 10-Q.

TerreStar stated in the 10-Q that it had “commenced restructuring discussions with certain holders of our 15% Secured Notes and 6.5% Exchangeable Notes”. However, if these discussions are not successful, and TerreStar and its advisers want to argue that the satellite spectrum is worth considerably more than the outstanding first lien debt, then it is possible that they could try to keep this debt in place and raise DIP funding based on TerreStar’s other assets, such as its 1.4GHz spectrum and the ground spare satellite (which is encumbered by a separate $73M Purchase Money Credit Facility).

The result would likely be a dispute in bankruptcy court over whether it is better to halt TerreStar’s plans to launch commercial service, and sell off its satellite and spectrum assets in the near future (e.g. if the current FCC proceeding permits incentive auctions for the 2GHz MSS spectrum), or to keep the company afloat and moving forward with the launch of the Genus phone, which was recently postponed until September. Of course the second option would require considerably more funding to be made available, and it is extremely questionable whether a feasible business plan could be developed to justify commercial launch of the Genus phone. In our profile of TerreStar, published back in January 2010, we estimated that the handheld Genus phone could generate perhaps $25M in wholesale service revenues by 2014, but after trying out the phone in March, we scaled back our expectations.

It may also be difficult to argue that TerreStar’s in-orbit satellite and spectrum is worth significantly in excess of the $966M of outstanding Secured and Exchangeable Notes, when a judge found in the DBSD bankruptcy case last fall that DBSD (with a satellite in orbit and having chosen its 20MHz of spectrum ahead of TerreStar) should be valued at $492M to $692M.

It is far from clear that either DBSD or TerreStar are better positioned than they were last year to secure a strategic partner (such as a wireless operator) who is prepared to fund the rollout of a multi-billion dollar terrestrial ATC network. Indeed, given the recent decision of Harbinger to go it alone with a wholesale approach for LightSquared, major wireless operators have to date proved unwilling to invest on the basis of the ATC model and associated satellite spectrum (despite five years of trying on the part of SkyTerra, ICO/DBSD and TerreStar).

The FCC’s recent NPRM could potentially enable the 2GHz MSS operators to monetize their spectrum via an incentive auction or similar mechanism once the proceeding is completed in 2011, which does represent a change from last year, but the FCC has also emphasized that it will need to receive compensation for the step-up in value accruing from removal of the current ATC rules in the 2GHz MSS band. If the proceeds of an incentive auction were shared 50/50 between the current spectrum holders and the government, as appears plausible, then (taking into account the delay before an auction could take place, most likely in 2012, and the need for additional funding in the interim) such an auction would need to raise close to $0.50 per MHzPOP in order to repay the Secured and Exchangeable Notes.

Although such a valuation is similar to those mooted by Clearwire and Credit Suisse in recent months, the FCC’s interests are not necessarily supportive of increasing spectrum valuations, and the balance between potential buyers and sellers of spectrum is significantly different to that back in 2006, when the AWS auction raised an average of $0.54 per MHzPOP.