10.06.11

See you in court…

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:02 pm by timfarrar

Despite the ever louder assertions from LightSquared’s CEO that he is “absolutely confident” that the company “can raise the capital that’s needed” and that the FCC “will approve” its buildout later this year, the end game for LightSquared has now become pretty clear. The company is down to its last “several hundred million dollars” and “isn’t actively raising funds”, because as LightSquared admitted at the Goldman Sachs conference last week, they need an FCC approval before any more money can be raised (and even then would need to raise a staggering $3.5B within the next 2 years!).

With payments to Inmarsat totaling $155M due between now and February and $9M of lease payments each quarter for its other spectrum, not to mention interest on its $1.6B of first lien debt and other costs of operating the company, that money will be gone within the next six months, and given the timeline set out by the NTIA, its all but inconceivable that the FCC will be able to give the approval by the end of the year, as LightSquared asserts (and would require in order to have any chance of raising more money before they have to file for bankruptcy).

As I’ve expected for several months, it appears that LightSquared are therefore planning to sue the FCC for what the company will presumably assert is the unconstitutional “taking” of its property rights, as granted in previous FCC rulings dating back to 2005. However, as one regulatory lawyer put it to me, suing the FCC is not like shooting yourself in the foot, its more like shooting yourself in the head. This is especially true in a situation where there are all sorts of references in the various FCC rulings to LightSquared’s obligations to avoid interference, and the problems could easily have been uncovered if LightSquared had decided to test their system back in 2005, rather than waiting until 2011. Indeed the FCC now seems very likely to simply wait this one out, and point to the need for further tests to justify holding off on any decision, which would potentially deprive LightSquared of any cause of action.

Today we’ve also seen further Congressional pressure building on LightSquared, which will be amplified by the GPS industry’s decision to focus attention on LightSquared’s $10B spectrum windfall that I noted two weeks ago. This letter from Trimble even points out that President Obama’s jobs bill “would require the FCC to recover a significant portion of the value of new terrestrial broadband deployment rights in certain spectrum frequencies that were originally set aside for satellite services either through competitive bidding procedures or spectrum fee authority”:

SECTION 274. REQUIREMENTS WHEN REPURPOSING CERTAIN MOBILE SATELLITE SERVICES SPECTRUM FOR TERRESTRIAL BROADBAND USE.
To the extent that the Commission makes available terrestrial broadband rights on spectrum primarily licensed for mobile satellite services, the Commission shall recover a significant portion of the value of such right either through the [auction] authority provided in section 309(j) of the Communications Act of 1934 (47 U.S.C. 309(j)) or by section 278 of this subtitle.

SECTION 278. AUTHORITY TO ESTABLISH SPECTRUM LICENSE USER FEES.

(B) In addition, the Commission shall, by regulation, establish a methodology for assessing annual user fees and a schedule for collection of such fees on entities holding Ancillary Terrestrial Component authority in conjunction with Mobile Satellite Service spectrum licenses, where the Ancillary Terrestrial Component authority was not assigned through use of competitive bidding. The Commission shall not collect less from the holders of such authority than a reasonable estimate of the value of such authority over its term, regardless of whether terrestrial services is actually provided during this term…

As a result, its now going to be much harder for the White House to defend the FCC’s waiver, which provides even more of a reason for the FCC to simply defer any decision authorizing LightSquared’s network and giving rise to such a windfall. Thus I suspect a lot more of LightSquared’s future will be dictated by what happens at 1 Bowling Green, rather than in any DC Circuit Court litigation against the FCC. More importantly, I strongly doubt that buyers will be lining up to take over LightSquared’s spectrum rights and keep paying Inmarsat’s spectrum lease contract, while the GPS interference situation remains unresolved.

3 Comments »

  1. honne said,

    October 8, 2011 at 9:01 am

    Since there is precedent in the law that holds predators (smart opportunists) accountable for driving companies out of business (as AT&T did to @Home), don’t you think it would be foolish for Sprint to do the same to Clearwire? Are you saying that Sprint is better off taking on the risk of expensive legal settlements down the road if it can indeed buy Clearwire’s assets cheaply in bankruptcy?

    How valuable is Clearwire’s spectrum in your view? Can Sprint do OK without Clearwire as the company seems to suggest? Or is it less sensible to convert Clearwire’s Wimax to LTE than building out its own network?

    The way Clearwire bonds are trading certainly indicates a high probability of restructuring. The 2040 convertibles have a bid/ask in the low $20′s; the 2017 bonds are in the $50′s.

    Thanks for this post and thanks in advance for your response.

  2. timfarrar said,

    October 8, 2011 at 9:24 am

    I think that Sprint is well aware of the @Home precedent, which is why they have tried to distance themselves from involvement in Clearwire’s board and strategic decisions (as emphasized again yesterday). In the @Home case the critical issue was that AT&T had been deeply involved in @Home’s operations, and was accused of stealing its secrets. In reality I think the bigger threat is that (in bankruptcy) Clearwire threatens to turn off the Sprint customers unless they improve the current deal significantly. That threat is only meaningful if they file quite soon, before Sprint has its own LTE network up and running and can migrate customers (albeit at significant expense for phone upgrades).

    The main challenge in valuing Clearwire’s spectrum is that two-thirds of it is leased. This is carried at a much lower value on Clearwire’s books, and may or may not be valuable to a purchaser. If you just count their owned spectrum (~17B MHzPOPs), then it would need to be sold for a comparable or higher price to DBSD and TerreStar in order to cover the debt (depending on whether you include the convertibles or not).

    Sprint obviously needs more spectrum. As they’ve said, owners economics are best, so how do they get ownership of more spectrum, in a situation where they are pretty capital constrained? The issue that wasn’t even touched on yesterday is whether there is still a deal to be had whereby the cable companies inject the SpectrumCo AWS holdings into Sprint (presumably in exchange for equity, though of course at Sprint’s current stock price that would be rather dilutive).

  3. TMF Associates MSS blog » Let’s ignore the federal government! said,

    November 21, 2011 at 2:55 pm

    [...] In reality that sounds more like their opening argument in the upcoming litigation (“the FCC ignored the fact that we had tested all these solutions ourselves”) than a realistic way forward, and at this point in time, its hard to imagine LightSquared has anything to lose by waiting much longer to initiate that phase of its strategy. [...]

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