04.07.11

LightSquared’s new four step path to success?

Posted in Financials, LightSquared, Operators, Spectrum at 10:17 am by timfarrar

After a difficult March, when Harbinger failed to buy DBSD in partnership with MetroPCS, and Sprint decided not to make the expected announcement of a network sharing agreement at CTIA, it is now becoming possible to discern how LightSquared might plan to move forward.

As I noted previously, the key challenge for LightSquared at this point in time is to persuade Sprint that it should undertake a network sharing arrangement, rather than Sprint focusing solely on its partnership with Clearwire. This will only happen if LightSquared can convince Sprint of its ability to bring substantial funding to the table, which would reduce the cost of Sprint’s Network Vision buildout, and mitigate the risk of leaving Sprint holding the bag for increased tower lease costs that would result from adding the LightSquared frequencies. However, LightSquared has already raised $1.5B of first lien debt, and so any further fundraising would have to be subordinated to that, and would therefore likely have to rely on a take-or-pay capacity commitment from a partner.

As a result, I think the four steps LightSquared will now need to execute, in order to move forward, are as follows:
1) Strike a multi-billion dollar take-or-pay contract with one or more major “anchor tenant” customers
2) Raise $1B+ of additional external equity investments based on the take-or-pay commitment (perhaps even including an IPO???)
3) Convince Sprint that the network sharing agreement is therefore a better deal than going with Clearwire alone
4) Sign a contract with Ericsson for buildout of the network (replacing NSN).

Of course all of these steps are fraught with risk and need to be executed simultaneously, since they are mutually interdependent. Some of the most obvious risks include:
a) How solid can the take-or-pay contract be when there are still interference risks to be resolved?
b) Does the LightSquared equity have any value, when there is $1.5B of first lien debt plus a $2B+ spectrum lease/rebanding commitment to Inmarsat ahead of the equity?
c) Would it be better for Sprint from a regulatory point of view if (one of) LightSquared or Clearwire folded?

However, the overarching issue is where such a huge take-or-pay contract would come from. Could it one of the “top three global consumer electronics companies” that LightSquared claimed to be in “advanced talks” with (these 3 are Samsung, HP and Sony)? However, “connections for services such as wireless photo uploads and wireless multiplayer gaming” seem unlikely to generate that much money. Similarly the deal that LightSquared “has already signed…with a maker of tablet computers and smartphones that could start using LightSquared’s network as soon as the fourth quarter” would require an enormous commitment to come close to billions of dollars in value, which is hard to envisage while the LightSquared network has limited national coverage. If neither of these is a realistic option for more than a fraction of the capacity contracts that are needed, then that brings us back to wireless operators or new entrants – MetroPCS or Leap? One of the potential partners that has been talked about in the past? Who knows? But with T-Mobile out of the picture, the list of possible anchor tenants is pretty short, and both Sprint and skeptical journalists will need to see some concrete progress on LightSquared’s part fairly soon, amounting to more than just a roaming or sales agreement with no hard volume commitments.

UPDATE: Credit Suisse is now suggesting that LightSquared would pay 50% of its network sharing costs to Sprint in capacity, which clearly represents multiple billions of dollars of capacity over time. However, in order to convince Sprint to move forward, I think LightSquared’s deals would still have to include major capacity commitments from one or more third parties, so that it can raise the money to pay for the hosting agreement with Sprint. If LightSquared paid $500M upfront in cash, plus $1200 per month per base station in cash for 45,000 base stations as Credit Suisse suggests, it would need to pay Sprint about $650M per year in cash for these hosting fees once the network was fully rolled out, and in excess of a billion dollars in cash in total over the next three years before it can generate much revenue. Given that this does not include LightSquared’s other core network development and operating costs (including the ongoing payments to Inmarsat), and as Credit Suisse admits, Sprint would spend an extra $1.2B between LightSquared and Clearwire before it started to make money from the hosting agreement (and is liable for ongoing payments to tower companies of $700 per tower per month), I think Sprint will want to see that LightSquared is able to fund at the very least the next several years of payments before committing to a deal. This clearly puts the onus back on LightSquared to secure substantial additional capacity commitments from companies other than Sprint, and raise significant equity funding ($1B+) in the very near future.

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