Putting everything on red

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 9:35 am by timfarrar

In a recent Vanity Fair profile, Phil Falcone was summed up by a rival fund manager as “A roll-the-dice, put-everything-on-red kind of guy”. However, with the report on GPS interference coming up tomorrow, it also appears that the GPS industry is united in putting all their efforts into pushing the emergency stop button on LightSquared. Particularly significant is the decision of the PNT Advisory Board last week to file comments with the FCC:

The formal recommendation reads: “The PNT Advisory Board recommends the PNT Executive Committee (EXCOM) should file formal comments with the Federal Communications Commission (FCC) regarding the interference issues.

“1. Based upon information and test results provided to the PNT Advisory Board at the meeting of June 8-10, 2011, the provision of GPS services cannot be assured if the LightSquared proposal for satellite and terrestrial broadband provision using the MSS L-Band receives final approval.

“2. The only reasonable and viable option to continue ubiquitous availability of GPS and the provision of a new 4G wireless broadband capability would be for the FCC to assign an alternate frequency spectrum to LightSquared that has little or no probability of affecting the delivery or utilization of GPS/GNSS services.”

The recently passed House version of the National Defense Authorization Act (NDAA) would block the FCC from authorizing LightSquared operations until GPS interference concerns have been resolved. Thus, if the GPS community continues to receive strong Congressional backing, it may become impossible for the FCC to authorize commercial operation of LightSquared’s planned terrestrial network, whatever LightSquared decides to recommend in its June 15 report (note that this report will undoubtedly not have any meaningful consensus recommendations about how to proceed). Of course it is implausible that the FCC would simply assign “alternate frequency spectrum” to LightSquared, and the other spectrum controlled by LightSquared (8MHz in the 1.4GHz band, leased from TerreStar Corporation, and 5MHz in the 1670-75MHz band) is unlikely to be usable for a large scale mobile LTE buildout.

As a result, LightSquared and the FCC both face a dilemma about how to move forward. Perhaps Harbinger could partner with the first lien debt holders (other than Echostar) (or even partner once again with MetroPCS and Solus) to make a run at TerreStar Networks, similar to its efforts in the DBSD bankruptcy auction back in March. Although providing LightSquared with a waiver of the ATC rules in the 2GHz band might be one option for the FCC, that would not solve LightSquared’s funding problem, and more likely would exacerbate it, because LightSquared would potentially then have to lease TerreStar’s 2GHz MSS spectrum from the consortium buying the assets out of bankruptcy. Granting TerreStar a waiver of the ATC gating criteria would also potentially disrupt the FCC’s current consultation process, which seeks to persuade DBSD and TerreStar to give up their spectrum for incentive auctions. Even more problematically, a decision to use TerreStar’s spectrum initially might give the Congress the excuse they are looking for to completely prohibit LightSquared from using the L-band for future terrestrial operations, as the GPS industry is requesting.

As I noted a few days ago, Harbinger therefore needs to announce something big to turn around perceptions of LightSquared. At this point, some sort of deal with Sprint (with Sprint expressing confidence that the interference issues are manageable) appears to be the best option with a chance of achieving that, with a potential partnership with MetroPCS and Solus to bid for TerreStar a rather less attractive backup choice.


  1. spectrum said,

    June 14, 2011 at 12:02 pm

    Hi..It is also wonderful to see your posts. What do you think that who will be the stalking horse bidder for TSTR. Will Harbinger and Echsostar will be interested in buying TSTR as tomorrow (June 15) is the final date to submit Bid for TSTR. Thanks…

  2. timfarrar said,

    June 14, 2011 at 12:15 pm

    The fact that the bidding deadlines were postponed for a week tends to suggest that there is some competition to be the stalking horse bidders. It would be logical to assume that the other first lien holders (i.e. not Echostar) would be bidding to at least assure that the first lien debt is covered (i.e. a stalking horse bid of ~$1.1B). Possibly they might team up with Harbinger, in which case they would presumably also cover the exchangeable notes, where Harbinger owns a majority stake (i.e. a stalking horse bid of ~$1.3B).

    The alternative stalking horse bidder is unclear, but most observers have assumed that DISH is interested, even though Echostar has said previously that it does not intend to bid.

    It is possible that there could be further bids in the auction next week, but it is equally possible that there might be no further challenge to the successful stalking horse bidder.

  3. spectrum said,

    June 14, 2011 at 1:26 pm

    Thanks a lot for your prompt reply. How much percentage do you think TSC will be getting from this sale. In March, DBSD went for 1.5B after the auction so don’t you think that TSN is worth atleast 1.5B or more.

  4. spectrum said,

    June 14, 2011 at 1:41 pm

    Just found this great news… What do u think …I think it can easily go more than 1.5B. What do u think… In that case what TSC will get…

  5. sandy_s157 said,

    June 14, 2011 at 1:45 pm

    Adding to the above comment….now it seems that we have multiple competitors and for sure there will now be multiple bids. I am looking forward for your comments on above news and questions..

  6. timfarrar said,

    June 14, 2011 at 1:49 pm

    Unless the auction results in proceeds of more than ~$1.3B-$1.4B (i.e. TSN’s debts are paid in full), nothing will flow to TSC (apart from some of TSC’s claims asserted in the TSN bankruptcy for ~$50M or so). Above that level, 88% of proceeds go to TSC and 12% to LightSquared. The TSC proceeds first go to the TSC debtholders and then the Preferred Stock holders in TSC and only after these are fully paid (~$500M) would the common stockholders in TSC benefit.

    Thus by my calculations you would need the TSN auction (plus the sale of TSC’s 1.4GHz spectrum assets) to result in total proceeds approaching $2B before the common equity holders in TSC saw any return on their investment.

    Unfortunately a $1.2B-$1.4B deal for TSN (unless it went much higher during a subsequent auction) would almost certainly leave the TSC common equity holders with nothing. If the other first lien holders are being taken out at full value for cash (as would be implied by a stalking horse bid from DISH at this level), then there is not much incentive for them to bid more. Whether MetroPCS is prepared to bid more is unclear, but its worth noting that it was only with the support of Harbinger and Solus that they were able to make a $1.475B bid for DBSD back in March, and the contemplated total bid for DBSD and TerreStar combined at that time was $2.6B.

  7. spectrum said,

    June 14, 2011 at 2:08 pm

    Did you mean that if TSN goes above 1.4B then 88% of the proceeds will go to TSC. In that case, I assume that common equity holders will get something as TSC will be having some diffrent plan to cover their debtholders which might include sale of 1.4Ghz spectrum. How much do you 1.4Ghz is valued. Thanks a lot for your replies.

  8. timfarrar said,

    June 14, 2011 at 2:16 pm

    The only other meaningful asset of TSC is the 1.4GHz spectrum. See this post: http://tmfassociates.com/blog/2010/08/31/untangling-the-mystery-of-the-1-4ghz-spectrum/ for details of that spectrum.

    Harbinger has the option to buy that spectrum for $250M minus credit for lease payments to date and pay part of this sum in TSC preferred shares at face value. The FCC sold this spectrum in 2007 for $123.6M. Neither of these valuations would come close to paying off the ~$500M of TSC debts and preferred stock.

  9. sandy_s157 said,

    June 14, 2011 at 3:15 pm

    Thanks Tim..

    One more question….what about the valuation of Terrestar Satellites? Will that value not contribute to the TSC’s debt? How much do you think both the satellites combines are valued at?

    Total valuation – 1.4 B (2MHz specvtrum) + 250M (1.4 GHz spectrum) + (~300 million for 2 satellites?) .

    For the above case, the debt for both TSN and TSC should be convered…Thoughts?

  10. timfarrar said,

    June 14, 2011 at 3:42 pm

    The in-orbit satellite and 2GHz spectrum cannot be sold separately because the spectrum rights are associated with the in-orbit satellite (thus a purchase of TSN is essentially a purchase of the satellite with its spectrum rights included).

    The ground spare satellite (secured by a ~$100M PMCF) could be sold separately, but there is no indication that this is additional to the bid range that has been published, and every likelihood that $1.4B high end of the range incorporates paying off the PMCF and taking ownership of the ground spare. If another bidder wanted to pay more than $100M for the ground spare then that could provide some incremental value to the TSN estate. The ground spare was appraised for $200M last summer, but there is no indication that this could be realized in a sale to a third party, especially given the costs associated with repurposing the satellite for some alternative use.

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