07.01.13

Its the ecosystem, stupid…

Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 3:12 pm by timfarrar

Today Charlie Ergen’s next battle has officially begun, with the filing of LightSquared’s motion to extend exclusivity and potentially reject Ergen’s purchases (through Sound Point Special Opportunities Fund or SPSO) of LightSquared’s debt. Its important to note that Ergen personally (not DISH) owns SPSO, and Ergen (through an entity named L-Band Acquisition Corp or LBAC) made the $2B offer to acquire LightSquared back in May.

LightSquared wants to extend exclusivity to give it more time to secure approvals from the FCC, because Jefferies is currently trying to get commitments for a $3B exit financing loan (which should be confirmed one way or the other this week). That loan, which carries an 8% interest rate plus substantial warrants for LightSquared equity, would pay off all of LightSquared debts and give Harbinger another year or more to find a buyer for LightSquared’s spectrum, while allowing the company to meet all of its obligations (including a resumption of lease payments to Inmarsat in April 2014).

However, LightSquared would not be permitted to draw down the loan unless and until the FCC has granted LightSquared rights to use the 1675-80MHz spectrum band. LightSquared has assured potential investors that it expects approval from the FCC this fall, shortly after Tom Wheeler takes over the chairmanship of the FCC, and that there will be no auction of the 1675-80MHz band (instead LightSquared will pay $80M for weather balloon relocation plus a further $170M “fee” in 2017). LightSquared also believes that it will be free to use its L-band uplinks without any GPS problems, as soon as the ruling is issued, and has told potential investors that the lower L-band downlinks will be available for use in 2015.

That sounds a lot like fantasyland (for example the FCC’s proposed FY2014 budget indicates that the 1675-80MHz spectrum will not be available until 2017 after weather balloons have been relocated), and some investors are apparently considering making a commitment in the expectation that no approvals will be received, because then they will get their commitment fees (in cash), but never have to put their money at risk.

A plausible best case for LightSquared is that the FCC defines a way forward later this year (i.e. more GPS testing and work to define interference standards), but it seems inconceivable that the FCC could simply hand over the 1675-80MHz spectrum band without at the very least defining service rules and an allocation framework through an NPRM and then conducting a 9-12 month comment cycle before any ruling is issued. More likely is that Wheeler has other things on his plate (like the incentive auctions), and a giveaway to LightSquared (along with alienating the DoD through more GPS testing) is not worth the political battle.

LightSquared is suggesting that a $3B loan would be well covered by the spectrum value, because it considers its spectrum to be worth the same as AWS-1 spectrum ($0.69/MHzPOP based on the Verizon-SpectrumCo transaction) and that there will be strong demand for its spectrum from AT&T and Sprint, who LightSquared believes would want to pair L-band uplink spectrum with WCS or BRS/EBS downlink spectrum respectively. While AT&T has the power to create a new ecosystem and has permission from the FCC to use WCS in an all downlink configuration, its hard to see why AT&T wouldn’t instead just buy the 1695-1710MHz uplink band which will be auctioned (very likely as unpaired spectrum) next year, with little competition from other carriers (except possibly DISH).

Sprint on the other hand has certainly learned its lesson from paying Apple $15.5B to ensure its own non-standard LTE spectrum was included in iPhones, and it would be crazy to try and make another unique band pairing when it will be far more straightforward to simply make use of the globally allocated BRS/EBS band in SoftBank’s small cell vision. Remember that Ergen wanted to buy Clearwire spectrum to take advantage of the emerging handset ecosystem in this band (as a mobile small cell play), and was going to use the AWS-4 spectrum for fixed wireless broadband (backhauling the mobile small cell traffic), so it wasn’t necessary to force the creation of a handset ecosystem in AWS-4. There’s no way that LightSquared’s spectrum will get an ecosystem outside North America (because international regulators won’t rush to address GPS issues and the 1670-80MHz band will still be allocated for meteorological systems elsewhere in the world), and without AT&T or Verizon, no-one will create an ecosystem in the US either.

So why is Ergen interested in buying LightSquared? If he’s now stuck without a wireless partner (and I don’t expect him to bid for T-Mobile now he won’t control any Clearwire spectrum), then he won’t be able to sell the AWS-4 spectrum to AT&T or Verizon (the two carriers who can force the creation of a new ecosystem at little cost to themselves) until after the next Presidential election, so it would be possible to take this time to reband AWS-4 spectrum to downlink and use LightSquared as uplink. More importantly, LightSquared’s spectrum is part of Ergen’s leverage in a battle with DirecTV (due to the upcoming Mexican coordination), which in my view is a far more plausible near term merger target for DISH, especially if the promise of a fixed wireless broadband network is sufficient enticement for the FCC to approve a DISH-DirecTV merger.

Of course, prospective lenders to LightSquared are therefore also betting that they will ultimately be backstopped by DISH’s interest in the spectrum band. Indeed some even think that Ergen will be prepared to bid $3B+ for the spectrum (despite the fact that this is far higher than DISH offered for Clearwire’s spectrum). Lenders might instead want to consider that by next year, a DISH-DirecTV merger will either have happened or not, and LightSquared’s spectrum will then offer little in the way of leverage to DISH.

In addition, the forthcoming FCC auctions of 75MHz of spectrum (H block, 1695-1710MHz uplink and AWS-3 likely paired with 1755-80MHz) may reset some expectations with regard to spectrum pricing, especially in unpaired uplink bands. Given that the new $3B loan will all have been spent within 12-18 months of emergence, it therefore seems there would be little reason for anyone interested in this spectrum not to wait until LightSquared once again runs out of money, and the price of the debt falls.

The one piece of good news, for Falcone, if not for the new lenders, is that as part of any exit financing deal, it seems that Harbinger will be released from any liability for misleading investors during the sale of LightSquared debt in 2010 and 2011 (when lenders were assured that GPS interference was no problem). So even if Phil ultimately does lose all of his investment in LightSquared, at least he will then only have to account to Harbinger’s investors and not to LightSquared’s investors as well.

1 Comment »

  1. TMF Associates MSS blog » This is how it feels to lose $1B… said,

    July 8, 2013 at 10:15 am

    [...] Castle lease, and it will be interesting to see how the court views Harbinger’s arguments. As I noted on Monday, it seems like fantasyland to believe that the FCC will simply give LightSquared the 1675-80MHz [...]

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