Negotiate to lose?

Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 12:00 pm by timfarrar

According to this book, Americans are “the worst negotiators on Earth” and it appears that LightSquared are unlikely to prove the author wrong. I noted last week that LightSquared’s contract with Inmarsat apparently permitted Inmarsat to assert completion of its Phase 1 spectrum transition (under which it is paid $250M to fit filters to its terminals) without actually retrofitting any terminals. Specifically the Cooperation Agreement with Inmarsat signed in Dec 2007 states that:

In accordance with the provisions of this Agreement, each Party shall expedite the development of an implementation plan, which shall be coordinated with each of the other Parties, that will reflect all such actions as shall be necessary or advisable to effect the implementation of the L-band frequency ITU Region 2 use arrangements set forth in the respective Spectrum Plan, including, but not limited to (i) replacement or modification of user terminals, including in the case of the Phase 1 and Phase 2 Spectrum Plans, adding appropriate filters to all terminals operating on the Inmarsat system that might otherwise receive interference from or cause interference to the operation of the systems of the MSV Parties operating in accordance with this Agreement (or otherwise addressing such interference by other appropriate means, including at the absolute discretion of Inmarsat by discontinuance or replacement of any affected service or terminal)…

While at first sight it would appear that this clause requires Inmarsat to actually fit some filters, I believe that Inmarsat will argue they are given “absolute discretion” to simply replace any terminal that is affected by LightSquared’s operations, using the new filter technology it has developed, and of course no terminals will be affected if LightSquared never operate a terrestrial network.

In addition, Section 4.4 Payment on Completion of Implementation of Phase 1 Transition states:

The MSV Parties shall not be entitled to operate under the Phase 2 Spectrum Plan or benefit from the operational parameters set forth in Section 3.5 [ATC Operations] until such time as the payment under this Section 4.4 is made to Inmarsat.

Thus if LightSquared do not make the $56.25M payment that they skipped on February 18, they are not allowed under the terms of the Cooperation Agreement to actually operate a terrestrial (ATC) network. Of course its not only LightSquared’s agreement with Inmarsat that is a bad sign for potential investor recoveries after the inevitable bankruptcy filing, but also the status of its agreement with Sprint, as revealed today in Sprint’s 10-K for 2011, which states:

The arrangement contains contingencies related to possible interference issues with LightSquared’s spectrum, including the right of Sprint to terminate the arrangement if certain conditions are not met by LightSquared. As of December 31, 2011, the Company had received $310 million of advanced payments from LightSquared for future services to be performed under the spectrum hosting agreement.

Beginning in December 2011, through a series of amendments, the arrangement was modified to, among other things, extend the date in which Sprint has the right to terminate the arrangement and suspend Sprint’s obligation to incur any further cost or expense related to performance under the original agreement. Under the amended arrangement, Sprint, for any reason, including but not limited to FCC action or inaction, or no reason at all, may terminate the agreement after March 15, 2012 and before April 30, 2012. If LightSquared secures lender’s consent for modifications to the agreement, Sprint’s right to terminate will be deferred until June 25, 2012 and will continue through December 31, 2012. In addition, the parties definitively agreed that approximately $236 million of the total $310 million of advanced payments made by LightSquared represent payment for incremental costs or obligations incurred by Sprint under the original agreement in support of LightSquared. The parties agreed that this amount is irrevocably and unconditionally paid and will not be subject to dispute or claim by LightSquared. Accordingly, Sprint will refund up to approximately $74 million of Lightsquared’s initial prepayments, of which $65 million will be paid on the earlier of LightSquared’s lender’s consent or March 15, 2012, and the remaining $9 million will remain subject to the termination and unwind provisions of the original agreement and will be returned to LightSquared upon termination, less any additional incremental cost or obligations incurred by Sprint in support of LightSquared. In the event the arrangement is terminated for LightSquared’s material breach, non-payment or insolvency, Sprint maintains a second lien on certain of LightSquared’s assets, including spectrum assets.

Thus in December 2011, LightSquared definitively agreed to forfeit $236M of its advance payments to Sprint if they were unable to move forward which the agreement, which seems a huge sum of money when it appears Sprint had done basically nothing in terms of deployment apart from some initial network planning. Clearly LightSquared were deluding themselves as well as investors in December when they insisted that approval was going to be forthcoming in early 2012. However, this now puts further pressure on LightSquared to file for bankruptcy within the next two weeks, so that the December 15 revision to the Sprint agreement does not fall outside the 90 day bankruptcy window for review of recent contracts and payments.

Fundamentally I think that what both of these problems come down to is that in its negotiations LightSquared appear to have only considered the outcome if they were successful in deploying a network. I’m told that Inmarsat certainly focused most intently on the default provisions, because they always expected LightSquared to fail, and Sprint appear to have done likewise in demanding an upfront payment and then concentrating on retaining that money once LightSquared failed to get approval for their network. Both Harbinger and LightSquared were truly putting it all on red.

1 Comment »

  1. TMF Associates MSS blog » Busman’s holiday… said,

    March 14, 2014 at 9:35 am

    [...] prior to the bankruptcy, to pay Inmarsat for fitting filters to its existing terminals (as I’ve noted before Inmarsat concluded this wasn’t actually required, so they kept the money). If Global Xpress [...]

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