You say you want a revolution…

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 10:47 am by timfarrar

You say you want a revolution
Well you know
we all want to change the world
You tell me that it’s evolution
Well you know
We all want to change the world
But when you talk about destruction
Don’t you know that you can count me out

So now Sprint has confirmed a network sharing deal with LightSquared, under which LightSquared plans to pay Sprint $9B in cash plus $4.5B in service credits to cover spectrum hosting fees for a period of 11 years. Indeed, as I mentioned last week, LightSquared has already paid Sprint a total of $290M in prepayments to secure the deal. However, there are various contingencies which could cause the deal to be terminated if LightSquared does not secure approval from the FCC or is unable to raise the money to pay Sprint to undertake the rollout. Sprint has also not committed at this stage to actually use LightSquared’s capacity, and is deferring until October 7 a more detailed announcement of its 4G strategy, partly to allow the FCC to rule on LightSquared’s plan, but also to see if Sprint can add a “fourth chapter” to its strategy (perhaps providing support to Charlie Ergen’s potential new venture?).

Unfortunately the LightSquared-Sprint deal was pre-empted by the leaking of a new FAA report which estimates that LightSquared’s deployment “would result in an estimated impact to the aviation community of at least $70 billion” and could cause the loss of approximately 800 lives over a 10 year period. More bad news for LightSquared is also expected to emerge in the next few weeks as other federal agencies have been asked to give their own estimates of the cost impact that LightSquared’s plans would have.

You say you got a real solution
Well you know
we’d all love to see the plan
You ask me for a contribution
Well you know
We’re all doing what we can
But when you want money while making our planes run late
All I can tell you is brother you have to wait

LightSquared has reacted to the FAA report by claiming that it “discusses a LightSquared plan that is no longer on the table” but of course LightSquared stated in its June 30 submission that it intends to ultimately use all frequencies the FCC authorized, and indicated at the time that use of only the lower 2x10MHz block would only be adequate for “the next several years“.

Now according to Sprint’s CFO, “during this period of time that [LightSquared] are trying to achieve clearance, they’re going to be out in the marketplace going to raise money” because Sprint “will be getting pre-funding of any work that we would be doing for LightSquared”. Notably, LightSquared is paying its $9B of cash over 9 years, even though it covers an 11 year hosting period, which seems to imply that LightSquared may need to pre-fund up to 2 years of network buildout in advance. Judging by Crown Castle’s expectations that it will receive substantial incremental revenues from Sprint in the second half of 2011 (over and above what it had expected 3 months ago), but the option to add LightSquared has not yet been exercised, Sprint also does not appear to be waiting for LightSquared before it moves ahead with the Network Vision buildout.

It therefore definitely appears that LightSquared will now have to raise at least $1B+ of the $3.5B it claims is its peak funding requirement very soon and more than likely before Sprint announces how it will move forward on October 7. This would fit with LightSquared’s assertion that it expects the FCC “to issue an order within four or five weeks [after the completion of the consultation], and that is by mid-September” and any outcome other than approval to move forward on the basis of the June 30 plan “is not a scenario we contemplate”. Although LightSquared indicated that the only way Sprint can terminate the deal is if it fails to get FCC clearance, that of course omits to mention that if LightSquared is unable to meet its payment obligations then Sprint could declare a default and foreclose on LightSquared’s prepayments and the second lien on its spectrum assets. Potentially this could happen as soon as early October, given the timetable set out by Sprint’s CFO, especially if Sprint is able to come up with the “fourth chapter” to its strategy, which could provide it with a more interesting alternative to LightSquared.

However, with the FAA Administrator stating publicly that “I’m very comfortable in saying that we are going to protect the GPS signal”, it seems “almost inconceivable” as Craig Moffett of Sanford C. Bernstein put it that the FCC would do anything other than ask for a period of further testing and it is therefore hard to imagine how LightSquared could be able to raise a very substantial sum from outside investors by early October.

You say you’ll change the constitution
Well you know
We all want to change your head
You tell me it’s the institution
Well you know
You better free your mind instead
But if you go saying our farms can’t plow
You ain’t going to make it with anyone anyhow

Of course, even if the FCC could be persuaded to give LightSquared approval to operate, then its seems highly likely that Congress would overrule the FCC and forbid LightSquared from commencing service. Indeed if further testing pushes a decision point into next year, then it seems inconceivable that LightSquared would be allowed to operate even in the lower 2x10MHz band given the impact that would have on precision agricultural equipment, and the power of the farming lobby in an election year.

Perhaps that is why LightSquared has now pushed back its date for commencing operations yet again, until the second half of 2012, presumably after the November election. However, it seems clear from the emphasis that LightSquared is placing on its 2015 obligation to cover 260M people that it is now certain to miss the 100M coverage obligation at the end of 2012, which would require further cooperation from the FCC if LightSquared’s authorizations are not to become null and void.

In conclusion it seems that while Sprint benefits from the pre-payments it is receiving from LightSquared, nothing in yesterday’s announcement really solves LightSquared’s key regulatory and financing problems. In fact I think that this announcement makes it less likely that the LightSquared saga will drag on into next year, and instead it could all come to a head by October 7. Perhaps it will therefore soon be time to tell the GPS industry (but not LightSquared’s investors) don’t you know it’s gonna be alright.

POSTSCRIPT: A well-known telecom analyst suggested to me that this would be a more appropriate song.

1 Comment »

  1. TMF Associates MSS blog » Start planning now… said,

    September 8, 2011 at 6:00 pm

    [...] with a full network deployment. My guess is that LightSquared’s payments to Sprint under the hosting agreement announced at the end of July include a regular quarterly payment plus a lump sum payable before Sprint begins the actual [...]

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