03.02.11

Show me the money…

Posted in Financials, ICO/DBSD, LightSquared, Operators, Spectrum, TerreStar at 1:13 pm by timfarrar

The last couple of weeks have been filled with news about LightSquared, with the company first disclosing that it had secured five customers, and then announcing that it had raised $586M to build out its network (despite indicating just a few days earlier that it was “not going to raise more [money] in the short term”). It has also been reported that LightSquared “is in discussions to use Sprint Nextel Corp.’s cell sites and equipment to help build out its network” and that Harbinger’s LightSquared holding is being restructured “to make it easier to make ‘direct investments’” in the company, or alternatively to “manage…redemption requests” so that “Instead of doling out lots of cash, [Harbinger] could give investors a combination of dollars and an interest in the new class of LightSquared shares”.

Most significantly, now comes news that Solus and Harbinger have teamed up to make an alternative offer to buy DBSD and TerreStar, at a total combined valuation for the two companies of $2.6B. Whether or not the “non-binding” bid for DBSD will be considered at today’s court hearing is unclear, as is the timing of when the bid for TerreStar will be made official. This comes after the withdrawal of Echostar’s bid for TerreStar, but at a point when DISH is still trying to get approval for its proposed takeover of DBSD.

Notably, Solus has been interested in both DBSD and TerreStar for a long time, making a DIP financing offer for DBSD back in October 2009 and providing DIP financing to TerreStar Corporation when it filed for bankruptcy in February. Solus has substantial holdings in TerreStar’s Corporation’s preferred shares (86,000 shares of Series B preferred stock) and TerreStar Networks’ 6.5% exchangeable notes, and also holds some amount of TerreStar Networks’ 15% first lien notes, although it is not clear if holds any of DBSD’s second lien notes.

The big question is what Solus and Harbinger would do with the DBSD and TerreStar assets if they were successful in acquiring both companies. This could be a defensive move on Harbinger’s part, seeking to prevent DISH from assembling a spectrum portfolio to compete with LightSquared. However, it could also be an attempt to acquire more spectrum to boost the capacity of the LightSquared network, while it waits for Inmarsat to make the Phase 2 L-band spectrum available in mid-2013, or perhaps even as a backup plan in case any limitations on use of its L-band spectrum result from the GPS interference issues.

The discussions between LightSquared and Sprint appear to be focused on a “network sharing agreement”, which would presumably allow both companies to save money on the costs of their network rollout/upgrades and share backhaul, etc. It is much less clear whether this would involve Sprint committing to purchase capacity from LightSquared, although it might well have the option to do so, and it does not appear that Sprint would become an investor in LightSquared (indeed the money might actually flow in the other direction to pay Sprint for use of its backhaul capacity). Likewise, its rather unclear whether the five customers apparently signed by LightSquared will guarantee a certain level of capacity purchases, or simply have the opportunity to buy capacity once it is available. Some of the mooted partners, such as MetroPCS, apparently envisage a mutual roaming agreement, where again the money might well flow from LightSquared to MetroPCS, at least until LightSquared’s coverage exceeds that of MetroPCS.

All of this brings us back to the question of where the money is going to come from for network buildout at either LightSquared or TerreStar. Back in the first half of 2010, TerreStar had contemplated a spectrum pooling agreement with Harbinger and LightSquared, but this was never consummated, in my view at least partly because it was unclear how a terrestrial network buildout in TerreStar’s spectrum could have been funded. While the recent debt raise at LightSquared is certainly good news, we’re still a long way from seeing some validation of the equity valuation that Harbinger has put on the company. It is also becoming less and less clear whether Nokia Siemens Networks will provide substantial vendor financing for the buildout as was originally expected.

Clearwire was lucky in that much of its original funding was provided by strategic equity investors, such as Intel, Comcast and Google, who (fortunately for Clearwire) were not just considering their return in terms of the increase in Clearwire’s share price. From what we have seen so far, LightSquared may need to rely more heavily on purely financial investors, who would expect to drive a much harder bargain. Perhaps LightSquared would be able to access large amounts of junior debt (as we saw with Iridium and Globalstar in the late 1990s and McCaw Cellular a few years earlier)? However, given the 12% interest rate on what is now $1.5B of first lien debt, any subordinated debt might be extraordinarily expensive, unless LightSquared can strike true take-or-pay contracts with its customers.

Thus the next test for LightSquared will be not only whether it can announce credible customers, but also whether these customers commit either to an equity investment in the company or to some take-or-pay arrangement which can be used to secure funding for the buildout. With LightSquared indicating that it “has an agreement with a major retailer that it will name before the end of March”, this might become clear sooner rather than later.

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