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.

4 Comments »

  1. TMF Associates MSS blog » FCC budget shreds LightSquared’s spectrum swap proposal… said,

    April 12, 2013 at 10:36 am

    [...] presumably explains why Latham & Watkins considered withdrawing LightSquared’s application for access to this spe…, and why the FCC has basically ignored LightSquared’s March 5 application for experimental [...]

  2. TMF Associates MSS blog » “Another sucker” bites the dust… said,

    May 9, 2013 at 6:24 pm

    [...] why was Sound Point, which is widely believed to be backed by Charlie Ergen, buying up LightSquared’s debt and preferred shares last month? After 3 days of meetings with dozens of investors in New York this week, I’ve [...]

  3. TMF Associates MSS blog » I am serious, and don’t call me Shirley… said,

    May 20, 2013 at 9:30 pm

    [...] that would wipe out their equity, even if value is left for preferred holders (where Sound Point owns an 80% stake and would thus control the fulcrum security in any reorganization) after paying off the $1.7B plus [...]

  4. TMF Associates MSS blog » All the king’s horses and all the king’s men… said,

    December 11, 2013 at 10:07 am

    [...] Preferred investment would receive only a modest recovery as a result of DISH’s bid, despite Ergen’s earlier agreement last April to purchase Fortress’s preferred shares at 95 cents on the dollar, as this purchase was [...]

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