04.22.13

Inmarsat throws its weight around…

Posted in Globalstar, Handheld, Inmarsat, Iridium, KVH, Maritime, Operators, Services, VSAT at 9:22 am by timfarrar

Its interesting to note that Inmarsat has been competing much more aggressively against key competitors in the last few months. First, I’m told that Inmarsat offered a bounty to Telemar to capture Anglo Eastern, a key Iridium Open Port customer with 350 ships, from Globe Wireless, in the fourth quarter of 2012.

Then Inmarsat announced in March that Nordic Tankers, one of KVH’s earliest headline customers, was migrating to XpressLink “for enhanced reliability”. Apparently the pricing on that deal is well below the standard list price for XpressLink, but Inmarsat was very keen to demonstrate its ability to take customers away from KVH.

Now (perhaps showing a little pique at losing the recent tender for the AT&T Genus replacement contract) Inmarsat is going after Globalstar, with new North American ISatPhone Pro regional voice plans which will start on May 1, and match Globalstar’s recently announced Orbit and Galaxy plans (though without Globalstar’s “double time minutes” promotional offer). Inmarsat is once again offering a huge bounty to service providers for these new signups, equivalent to multiple months of service revenue.

All of these developments suggest that Inmarsat is determined to seek topline growth in its L-band business and is no longer reluctant (as in the past) to explicitly target its competitors with selective pricing, even though this runs counter to Inmarsat’s recent tendency to increase list prices. Of course, it is less clear whether the new deals will be profitable for Inmarsat, given the incentives needed to achieve these sales.

But with Inmarsat’s investors focused intently on whether the wholesale L-band Inmarsat Global business has returned to growth, and apparently willing to overlook the recent significant contraction in margins within Inmarsat’s Solutions business unit (blamed on a transfer of margin from retail to wholesale operations), that might not matter for now. However, if Inmarsat wants to make more acquisitions (and it is hard to see in the long term who else might end up operating LightSquared’s satellites), then regulators might wonder whether industry consolidation could give Inmarsat even more market power.

04.12.13

FCC budget shreds LightSquared’s spectrum swap proposal…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 10:18 am by timfarrar

The FCC’s proposed FY2014 budget, released on Wednesday, now appears to have sounded the death knell for LightSquared’s September 2012 spectrum swap proposal, that it should be granted access to the 1675-80MHz band, in exchange for giving up “rights” to deploy a terrestrial network in the 1545-55MHz downlink part of the L-band. Instead, the budget proposes that NOAA’s radiosondes should be relocated (presumably to the 400-406MHz band which is also used by weather balloons) and that the 1675-80MHz should then be repurposed using “either auction or fee authority” in 2017 to raise $230M.

This news seems to confirm what happened at the February 20 meeting between the FCC and LightSquared’s lawyers, is that the FCC told Latham & Watkins that they were going to propose reallocation of the 1675-80MHz spectrum for commercial use, but would deny the requested spectrum “swap”, so LightSquared would have to bid in an auction just like anyone else. Although the FCC has not yet issued a ruling (perhaps to avoid tarnishing Chairman Genachowski’s recent speeches about his legacy), release of an order may now be quite close, given the public disclosure of the FCC’s intentions in this week’s budget document.

That presumably explains why Latham & Watkins considered withdrawing LightSquared’s application for access to this spectrum, and why the FCC has basically ignored LightSquared’s March 5 application for experimental authority to test relocation issues. It also suggests why LightSquared has since focused on lobbying Congress, presumably with a view to pushing legislation to amend the FCC’s final budget authorization.

In a statement to Communications Daily (who first reported this issue), LightSquared continued its usual practice of pretending that all is well, asserting that “What happened today is certainly consistent with our filings” because there would be costs associated with any “sharing agreement”. However, even if LightSquared did pay $230M for the spectrum (and I find it hard to conceive that the FCC would simply award the spectrum to LightSquared if other operators want to bid on it at auction), the 2017 allocation date is obviously far too late for LightSquared to proceed with its fantasy of an LTE network buildout.

UPDATE 3 (4/13): LightSquared’s ex parte for an April 3 meeting with Commissioner Pai indicates a different (and more telling) story, going back to LightSquared’s generic appeals from 12 months ago about the “compelling need to find spectrum-based, technical, legal, or other solutions to the current issues” and abandoning the 1675-80MHz proposed “swap”. Notably, this ex parte was not even filed in IB Docket 12-340, relating to LightSquared’s September 2012 request to modify its ATC Authorization, which would have been required if the 1675-80MHz “swap” was part of this discusssion. Instead LightSquared is now apparently going back to its demand for “regulatory approvals” to move forward with its original L-band plan and threatening legal action if that is not forthcoming.

Given the Mexican coordination issues, the implausibility of LightSquared gaining any more spectrum for free, and the potential costs for continuing LightSquared’s Cooperation Agreement with Inmarsat after March 2014, its fascinating to see how much excitement has built in the distressed debt community in the wake of the WSJ’s report last week that Sound Point had been buying up LightSquared’s debt and preferred stock. That is despite the fact that several large holders in the Ad Hoc Secured Group (not just Fortress) have now exited their positions.

I’m told that a target valuation of 130 cents on the dollar for LightSquared’s LP Term Loan debt is now being floated by some people, based on an assumption that Ergen would convert the secured debt to equity. Even if one believes that Ergen will get involved (as opposed to using LightSquared as a bluff to secure a deal with T-Mobile, MetroPCS, CLWR or Sprint), then that seems excessive, given that buying out the TL debt at par plus accrued interest would only give a valuation of 115 cents on the dollar at present, and any bankruptcy auction will presumably look a lot like TerreStar, where DISH bid just enough to buy out the secured debt (including Echostar’s holdings) at par, just as DISH would presumably buy out Sound Point and other holders for cash at par in a LightSquared auction.

After all, DISH has $10B in cash, and potentially not much to spend it on right now. Any DISH deal with T-Mobile would most likely have come before the recent price adjustment to TMO’s MetroPCS bid (not least because it would have made it more difficult for Paulson and PSAM to hold out for alternative suitors), and a counterbid for MetroPCS is harder now that MetroPCS’s stock price has risen. Similarly, a potential deal with Clearwire seems to be slipping away, as it takes more money from Sprint, despite the efforts of Crest to block Sprint’s bid.

UPDATE (4/12): News is now emerging that DISH approached DT about a potential merger with T-Mobile a few weeks ago, likely in late March when I reported rumors of a possible deal after DISH’s stock price surged. However, DT reportedly wants to wait until after the MetroPCS merger closes and it has determined whether a merger with Sprint is feasible, which explains why nothing has happened yet. DISH’s case has therefore been immeasurably strengthened by the DOJ’s filing yesterday with the FCC, which highlighted its commitment to competition in the wireless market (presumably through maintaining the current four player market).

What would be the form of a DISH deal with TMO? The four possibilities are:
a) a joint venture (like Clearwire) which wholesales capacity to DISH, TMO and potentially other players
b) a hosting agreement (like Sprint and LightSquared) with TMO taking payment in the form of capacity
c) an investment by DISH in T-Mobile (like Softbank and Sprint) through the contribution of cash and spectrum in exchange for a majority equity stake
d) a full merger of DISH and T-Mobile.

Of these, I think the first can be ruled out, for the same reasons that Clearwire has had so many problems: TMO would take most of the capacity, so would have too much influence, and it would have an incentive to only use the JV capacity after exhausting its own resources. The second can also potentially be ruled out, simply because the deal would have to be more advantageous to DISH than the LightSquared-Sprint agreement: TMO would cover most of the costs and take payment in capacity, not cash, and then DISH wouldn’t need $10B in cash. The fourth option is probably also less appealing (as DISH has hinted previously), because DT might insist that Ergen gives up the dual class share structure which gives him tight control over DISH, and the synergies between DISH’s satellite TV business and T-Mobile’s wireless business are far less compelling than a merger between DISH and AT&T (with its fixed line and U-verse business) would have been. If DISH stays as a separate company then a merger with DirecTV also remains a possibility, perhaps with DISH’s T-Mobile stake being spun off to Ergen if DirecTV buys out DISH.

So the third option sounds like the most plausible, and the question is whether Ergen can purchase a majority stake in a merged T-Mobile/MetroPCS in exchange for $10B in cash and potentially $8B to $10B in contributed spectrum value. This becomes a harder task after the MetroPCS merger goes through and the merged company has a larger enterprise value (estimated at $28B-$30B by BTIG). However, depending on the remaining debt load after DISH’s investment, it still seems like a reasonable objective. Having a public market valuation for T-Mobile also makes DT’s decision about what share of the company DISH would receive a lot more transparent.

Of course, this new development also makes it rather more reasonable to regard a potential DISH bid for LightSquared as another bluff by Ergen, or at the very least a far less attractive fallback option (and if you think a deal might still be done with LightSquared as well as T-Mobile, note that DT is currently embroiled in its own LightSquared-like ATC scandal in India, with some of the original SkyTerra investors). It also confirms that DISH has moved on from its interest in Clearwire, and will most likely just look to cash in its sizeable profits (of up to $300M) on Clearwire’s debt when the Sprint merger eventually goes through.

UPDATE 2 (4/12): Clearwire has filed a proxy statement this evening, noting that it was approached by Party J, a strategic (i.e. non-financial) buyer, earlier this week with an offer to buy 5B MHzPOPs “in large markets” for $1.0B-$1.5B minus the NPV of the associated lease payments. Given the NPV of Clearwire’s lease payments is $1.8B of which I’d guess at least two-thirds is in large markets, and 5B MHz POPs would be around half of the leased spectrum in these markets (assuming this is the top 100M POPs in the US), that would mean a deduction of $600M or more, leaving a net price of ~$400M-$900M.

Walt Piecyk at BTIG thinks that Party J might be Ergen once again and I tend to agree (perhaps this approach is through Echostar?). It would fit with the move on LightSquared last week as another effort to establish a potential backup to T-Mobile, by persuading Clearwire stakeholders to hold out for more money and reject the Sprint bid. Clearwire seems to be hinting that it will file for bankruptcy on June 1 if the Sprint bid is rejected and that would also provide Ergen with far more options in the event that he can’t pull off a deal with T-Mobile, because of his substantial holdings of Clearwire debt. However, given the difficult relationship between Sprint and DISH and the numerous challenges associated with LightSquared, both look far less attractive options than a deal with DT for DISH to invest in T-Mobile.

04.09.13

This time will be different?

Posted in Globalstar, Operators, Regulatory, Spectrum, TerreStar at 11:38 am by timfarrar

For those of you not following my Twitter feed (@TMFAssociates), last week there were a couple of interesting developments related to Globalstar, which is currently negotiating with its noteholders under a forbearance agreement (lasting until April 15), after holders of $70.6M of the 5.75% notes exercised their rights to require repurchase of the notes, and Globalstar did not pay the $2M of interest due on April 1.

Firstly, Globalstar has been granted received approval from the FCC for the experimental authority it was seeking for tests of its proposed S-band TLPS service, on March 25 for testing in Cambridge, MA and on April 1 (no joke) for testing in Cupertino and Sunnyvale, CA. Globalstar has also told the FCC that it intends to submit further experimental applications “in the near future”. However, the authorizations are for testing only and are “subject to prior coordination with the Society of Broadcast Engineers”, because both locations are within BAS Channel A10 pickup areas. This coordination has apparently not yet taken place, and because the BAS community is rumored to be very unhappy with the situation, it could take some time to reach an agreement. The timeline for the FCC to issue an NPRM setting out the proposed rule changes to permit commercial use of TLPS also remains unclear, but it seems to be taking longer than originally hoped.

A second recent development is that last week AT&T notified the (less than 1000) subscribers to the TerreStar Satellite Augmented Mobility (SAM) service, that DISH has decided to shut down the service effective May 1, via the letter below, and has “made an arrangement with Globalstar” to offer a discounted replacement rate plan and Globalstar satellite phone.

Of course, those with long memories will recall that TerreStar Networks filed for bankruptcy in October 2010, less than a month after AT&T started selling the Genus phone. Given Globalstar’s current financial challenges, let’s hope that AT&T’s decision to start selling Globalstar service now is not a bad omen for the company.

04.08.13

The worst satellite public offering since Worldspace?

Posted in Aeronautical, Financials at 10:02 am by timfarrar

No I’m not talking about Intelsat’s current IPO! Although some might raise questions about the company’s debt levels, its also pretty clear that Intelsat’s mobility strategy and its high throughput Epic satellites are the envy of its FSS competitors. What I’m actually referring to is Row44, which went public at the end of January through a merger with Global Eagle, which had raised $190M in a blank check IPO. The end of year results from Row44 and Global Eagle have gone completed unreported, but were filed with the SEC last month, and highlighted just what a disastrous business Row44 really is.

In particular, as installations of the Southwest fleet neared completion, Row44′s revenues in Q4 dropped by 27% compared to Q3 (from $20.1M to $14.8M). Moreover, Row44 only generated total Internet connectivity revenues of $11.4M in 2012 while spending $19.6M on buying bandwidth from Hughes, and produced no revenues from its much ballyhooed content and portal services (despite spending $1.9M on video licensing fees).

In 2013, Row44′s satellite connectivity commitment to Hughes will go up to a minimum of $28M (and more likely well over $30M, because of additional commitments made in early 2013 to add coverage in Russia, and additional trans-Pacific coverage planned later this year). Row44 has also changed its deal with Southwest, so it now only receives fees for passengers using connectivity (between $5 and $6 per user, while Southwest charges $8 for the service), rather than Southwest paying for every boarded passenger under the original agreement, and as part of the new contract, Row44 is adding more capacity, apparently to counter passenger complaints about “slow or restricted services”.

At an investor conference on March 13, Global Eagle’s CFO suggested that paid take rates for other providers “range from high single digits to high teens” and that inferences could be drawn from that for Row44′s take rates on Southwest. Of course that is completely untrue: take rates for Gogo are around 5%, and Global Eagle itself said back in November that the targeted take rate on Southwest was 6.5% in 2014, so its hardly likely that the take rate is higher than that today. I therefore have to wonder if Global Eagle’s CFO actually understands this business at all.

Indeed, the company seems to have a hard time predicting the outlook for its business even in the very short term: this March 13 presentation indicated that the 2012 adjusted EBITDA from Row44 and AIA respectively was -$26M and +$18M respectively, whereas on November 27, 2012, with just one month left in the year, Global Eagle forecast that the full year adjusted EBITDA results for Row44 and AIA would be -$25M and +$22.3M respectively.

If we look forward to 2013, then it seems certain that Row44′s revenues will decline sharply, because of the slowdown in equipment installations (from $61M of equipment revenues in 2012 to ~$35M in 2013, and potentially to only $20M in 2014, based on Row44′s current business plan). More importantly, the company is set to make another significant loss on provision of connectivity services: I estimate $20M-$25M in revenues, depending on the take rates that Southwest achieves, compared to connectivity costs of well over $30M and more likely close to $40M (just in payments to Hughes, ignoring Row44′s own operational costs). In addition, content revenue is still minimal (Global Eagle described the product as “brand new” in mid March), with a very limited selection available, and by my estimate content and portal revenues will be no more than ~$5M this year.

In the longer term, Row44′s new deal with Southwest has locked the airline into a deeply unfavorable competitive position vis-a-vis JetBlue, who intend to offer Internet access for free. Southwest can’t possibly do the same, if they have to pay Row44 at least $5 for every passenger who uses the service, despite the two airlines competing very actively on other passenger amenities (like free checked bags). Moreover, if Row44 is ever to break even, it may have to cut back on the amount of capacity it buys from Hughes (rather than boosting capacity as Southwest currently plans), making Southwest’s Internet service even less attractive compared to JetBlue, which uses much cheaper Ka-band capacity.

In recent days, we’ve seen yet another report predicting rapid growth for in-flight connectivity deployment and revenues. However, none of these reports have got to grips with the issue of what services can be profitable for providers but still affordable for the airlines. Of course, if there’s one lesson to be learned from the Connexion-by-Boeing debacle, its that you can’t just assume companies will be able to continue providing service at an enormous loss indefinitely. After scraping through 2012, raising money at effective interest rates of up to 421%, Row44 has escaped for the time being by capturing Global Eagle’s cash balance. Perhaps unsurprisingly, given its management’s apparently tenuous connection to reality, Global Eagle now intends to “use its balance sheet” to pursue consolidation of the in-flight connectivity business, which might provide some relief from Row44′s current unsustainable business model, but on the other hand may simply drag down other companies in the sector.

We’ll be publishing our own detailed report on the in-flight connectivity business next month, which takes a very different approach to the analyses we’ve seen so far: instead of simply projecting how many planes might be fitted out with each technology, we’ll look at both the revenue and cost base of the various IFC providers, and discuss which of them may be able to find a sustainable long term business model.

04.05.13

Is there a Sound Point to investing in LightSquared?

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 4:01 pm by timfarrar

That’s an interesting question after the WSJ reported yesterday that Sound Point had now acquired over $600M of LightSquared’s $1.7B LP secured debt. Speculation has been rampant once again that Ergen is behind this move, which involved buying all of Fortress’s $161M of LP secured debt (as the WSJ noted – indeed if Sound Point now owns over $600M of secured debt, then it must have bought around $100M of secured debt elsewhere in recent weeks, as Providence only owned $7.4M of this debt), but I was told also Fortress’s $87M and Providence’s $38M of LP Preferred Units. The secured debt was apparently bought at par, and the preferred units at 95 cents on the dollar, and assuming the Preferred units turn out to be the fulcrum security, this $125M will give the owner over 80% of the $164.6M that is outstanding in the LP Preferred class, and potential control over LightSquared’s bankruptcy reorganization plan.

Most people appear to believe that Ergen is behind Sound Point’s investment, despite the doubts that were expressed by people close to the situation last May. The fact that the deal was apparently struck immediately after the end of Q1 (and therefore any public company, such as DISH, would not have to reveal a substantial stake until the second quarter 10-Q in August) might support that possibility: although DISH could not hold the LightSquared LP debt itself due to limitations in the debt agreements (and therefore Sound Point would be the vehicle for this investment), Ergen might well decide to acquire the preferred stock through DISH, to give him a direct voice in proposing a bankruptcy reorganization plan after July 15.

However, it remains an intriguing question as to whether Carlos Slim has any involvement, given the challenging Mexican coordination issues facing LightSquared, which the company has reluctantly acknowledged by hiring a Mexican law firm this week to “provide legal services with respect to LightSquared’s activities and/or negotiations in Mexico and with Mexican authorities”. After all, it hardly seems likely that Ergen would want to take on the major challenge of making LightSquared’s spectrum usable, without some sort of arrangement in Mexico, if a large part of the spectrum could soon be lost to the MEXSAT system.

Incidentally, further confirmation of LightSquared’s difficult February 20 meeting with the FCC has also emerged in the $271K invoice and February billing records submitted by Latham & Watkins a couple of weeks ago: there was no preparation for this meeting until the day of the meeting itself (implying that the lawyers were summoned by the FCC, rather than arranging the meeting on their own initiative), and the meeting was billed as related to ATC licensing, not to 1675-80MHz sharing issues (which was how LightSquared’s ex parte filing characterized the discussion). More importantly an associate was then immediately tasked to “research and analyze FCC opinions and orders related to the dismissal and withdrawal of applications at the request of applicants”, implying that LightSquared was so concerned about the possibility of an imminent rejection by the FCC that it contemplated pulling its September 2012 application. The lawyers then switched immediately to focus on “draft[ing] legislation” and “talking points regarding license mod advocacy” for LightSquared’s government relations team to push at “[Capitol] Hill meetings”. They also appeared to drop the analysis they had been working on with an “economist”, in favor of exploring the hiring of a new “consultant”, presumably to reflect their new emphasis on trying to go around the FCC.

Given all these issues, another possibility is that a further investment in LightSquared is a relatively cheap signal to T-Mobile that Ergen still has alternative ways forward to make his spectrum assets more valuable, even if the possibility of a deal with Clearwire seems to be fading. After all, as I wrote a couple of weeks ago, T-Mobile could secure a deal with DISH as a way to make it clear to MetroPCS shareholders that staying independent is not a good alternative to the T-Mobile merger. It certainly seemed that a DISH-TMO deal of some sort could be close at that point, but T-Mobile’s event the following week focused instead on its new no-contract pricing plans and initial LTE network launch.

However, after the recommendations by two proxy advisory firms that MetroPCS shareholders should reject the merger, T-Mobile is now considering whether to change the terms of the deal, and one way to do that might be to bring DISH into the picture. Certainly T-Mobile’s partnership offer to DISH ought now to be more attractive than it was a couple of weeks ago, but if it is still unacceptable to Ergen, I could envisage DISH making a bid for MetroPCS before the April 12 merger vote, using the $2.3B it raised this week. In that context, any takeover of LightSquared certainly ought to be seen as a fallback option for DISH, which need not even be considered until the situation with T-Mobile and MetroPCS has been resolved one way or another.