As we head towards the holiday season, LightSquared’s attempts to find an alternative to being bought by Charlie Ergen are becoming ever more desperate, as the December 24 deadline to put forward an alternative plan approaches and the company takes a “time machine back to the summer…to formulate from scratch their own refinancing plan
…like the failed effort with Jefferies.”
Reuters is reporting the terms of a $2B-$2.5B three year term loan to back a Fortress-sponsored exit plan as including 12% interest, all paid-in-kind, with an additional unspecified amount of equity injected into the company (presumably mostly achieved through rolling over existing investments). Unless a substantial amount of warrants are also included in this deal, the terms appear worse than those offered by Jefferies (and rejected by investors) back in July, which comprised mostly cash pay interest plus an ongoing ticking fee and substantial warrants.
We find it hard to imagine that the judge will be happy with a proposal which involves waiting another 6-9 months for an FCC decision, with no certainty at the end of the process, and which would presumably result in DISH terminating its non-contingent cash offer. Remember that there are numerous other uncertainties in the near future as well, including the resolution of LightSquared’s Mexican coordination negotiations, the Cooperation Agreement with Inmarsat, LightSquared’s difficult relationship with the DoD (which led to the termination of a contract accounting for one third of LightSquared’s total satellite revenue earlier this year) and most importantly the unprecedented amount of spectrum that will be auctioned by the FCC in 2014 and 2015. All of these issues are discussed in detail in our new 49 page LightSquared profile, released yesterday – please get in touch if you are interested in purchasing a copy.
The AWS-1 auction in 2006 provides one good example of how large amounts of new spectrum coming to the market can have a major effect on the perceived value of spectrum. Take for example ICO’s July 2005 Offering Memorandum, which suggested its spectrum was worth $1.64/MHzPOP, whereas after 2006, ICO had to use an AWS-1 benchmark instead (in that case the most optimistic number that could be justified was $0.73/MHzPOP for the 20MHz F-block spectrum).
One of the underrated issues that is still to play out in the bankruptcy (and a key sticking point in negotiation of DISH’s proposed Asset Purchase Agreement) was that DISH’s bid included acquiring all of the litigation rights of the LightSquared estate. The most obvious effect that would have is on LightSquared’s lawsuit against Ergen for buying up its debt. However, it would also have significant consequences for the suit against the GPS industry and potential litigation against the FCC: whereas LightSquared soon may have nothing to lose by employing scorched Earth tactics, we suspect DISH would look for a compromise that would be acceptable to all parties. Finally, DISH could even sue Harbinger on behalf of LightSquared investors who lost money as a result of the “guarantees” that there was no GPS interference problem whatsoever.
We should soon know if this will be Phil’s last gasp, so just like the Delorean above, he will find himself “OUTATIME” or if we will have many months more of uncertainty about the FCC process. Either way, it looks like it is no longer FCC Chairman Wheeler who will have an unhappy Christmas, but instead it will be Judge Chapman, who is charged with resolving the LightSquared bankruptcy case and now has to determine just how much of LightSquared’s “alarming and reckless” efforts to fend off DISH she will tolerate.
Tomorrow FCC Chairman Wheeler plans to tell Congress that “we are not the Federal Courtesy Commission” with respect to the upcoming rulemaking on in-flight cellphone calls. However, that message could apply equally to the unwelcome prospect of Centerbridge’s bid for LightSquared, where the unexpected backlash over phones on planes may end up looking like a walk in the park compared to the renewed battle over approvals for LightSquared. After all, whichever way the FCC now rules will be “picking winners and losers” between DISH and Centerbridge and will undoubtedly end up making some people (including many politicians) very unhappy.
Earlier today I wondered what Centerbridge heard from the FCC during Reed Hundt’s lobbying meeting last week that gave them enough comfort to put together their $3.3B bid. However, it now appears that in fact Centerbridge’s bid is contingent on FCC approval of LightSquared’s so-called spectrum “swap” coming through very soon, presumably before the deal closes. Thus if the FCC doesn’t rule quickly in favor of LightSquared, the Centerbridge deal could fall through, and DISH would then be back in the driver’s seat with its original $2.2B bid.
Indeed, if the process is extended past February 15, then DISH’s offer could be withdrawn and LightSquared would be back at square one, so I suspect the bankruptcy court will require a firm commitment to be made by Centerbridge well before then. As a result, the FCC’s previous plan, to simply ignore LightSquared’s request and hope that it goes away after DISH buys the company, has now essentially become untenable.
So if Chairman Wheeler and his staff didn’t already have enough in their in tray (including ruling on DISH’s request for more flexibility in its use of the AWS-4 spectrum by the end of next week, in order to keep the H-block auction on track), he now has the prospect of spending the holiday period pondering whether to alienate the DoD, GPS industry and politicians opposed to a perceived spectrum “giveaway” to a reorganized LightSquared which will still count persona non grata (i.e. Falcone and Harbinger) amongst its major investors.
Given that Centerbridge’s plan is apparently simply to sell the LightSquared spectrum to AT&T or Verizon before the end of 2015 (when the new tranche of funding will run out), helping to make LightSquared viable is hardly going to do much to promote the FCC’s objective of more competition in the mobile market either (though who knows what will happen in reality, because Centerbridge will be trying to sell the spectrum in the midst of the most sustained period of major FCC spectrum auctions in history).
However, if approval is refused, then the alternative may be that the FCC has to face the prospect of LightSquared actually commencing its long threatened legal action against the Commission for blocking LightSquared’s ATC license. That’s because I assume that the LightSquared estate will now try to keep control of its causes of action rather than handing them to DISH if the Centerbridge deal falls apart, since the damages supposedly suffered by LightSquared investors as a result of adverse FCC action will now be much more explicitly quantifiable. Either way this decision is going to be tricky, and somehow I doubt Chairman Wheeler’s mood will be improved by the knowledge that several of his predecessors are already working for Phil Falcone.
Its rather ironic to see the headline in the WSJ today, proclaiming that “A Gold Rush Hits Wireless Spectrum” on the same day as LightSquared’s bankruptcy auction takes place. While I’ll address the gold rush silliness in another post (although I note that amazingly enough MAST apparently still wants to fight with Ergen over the H-block), behind the scenes of the LightSquared bankruptcy there’s been a lot of activity over the last three weeks, as LightSquared and Harbinger tried to pull together a consortium to keep the company out of DISH’s hands (and submit a more credible reorganization plan).
Just before Thanksgiving, the “interest” of Fortress and Centerbridge was leaked to the WSJ, in an attempt to persuade other firms to become involved and to pressure the FCC to move forward. The auction itself was even delayed until today, to give more time for an FCC ruling (or at least some sign that the FCC would rule on LightSquared’s request), because many potential investors thought it was simply too risky to participate without any signal from the FCC that the proposed spectrum “swap” had a chance of being approved.
However, the FCC appears unmoved, despite some last ditch in-person lobbying by former FCC Chairman Reed Hundt on Thursday Dec 5. That’s the second former FCC Chairman that LightSquared has sent to the FCC to lobby for them in recent months! This filing highlights that Centerbridge has been working hand in hand with LightSquared in order to try and outbid Ergen. The rationale behind Centerbridge’s interest is unclear, as I’m told they were not a previous investor in LightSquared, but appears to relate to a belief in the opportunities of the spectrum “gold rush”.
That’s different from Fortress, who own a substantial amount of LP Preferred Shares, which would be largely wiped out by DISH’s bid and so are likely motivated primarily to protect their existing investment. Fortress’s LP 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 blocked because SPSO is certainly an “affiliate” of DISH (the term used in the shareholder restrictions), even if its not a “subsidiary” (as used in the term loan restrictions). However, with the LP Preferred being next in line for a recovery, even pushing DISH’s bid up by $100M-$200M would provide a major benefit to Fortress.
UPDATED (12/11): It seemed that because everything had been so quiet in recent days, LightSquared might have been unable to gain enough backing for their bid, presumably because the FCC appeared to have been unmoved by Hundt’s entreaties. However, its now being reported by the WSJ that LightSquared postponed the auction to try and thrash out a deal with Centerbridge, which has resulted in a $3.3B tentative deal. I would expect that to include all of the company (and for Centerbridge to assume the Inmarsat Cooperation Agreement largely in its current form), so that Centerbridge would pay off the Inc holders and continue to pursue the spectrum “swap” with the FCC and the litigation against the GPS industry. Notably Harbinger could now potentially also stand to benefit substantially if Ergen’s $1B debt claim was ultimately disallowed as a result of the litigation, because there will be no debtholders ahead of them with higher priority bankruptcy claims.
If the $3.3B Centerbridge bid becomes firm, I wouldn’t expect DISH to bid even more, although it would remain the backup bidder through Feb 15 if the Centerbridge offer falls apart. DISH would have other options for uplink, including the 1695-1710MHz band which will be auctioned in 2014. However, if DISH did instead ultimately emerge as the winner, there would still need to be significant negotiations over the DISH Asset Purchase Agreement, which apparently has some areas of disagreement (not least over DISH’s request for certain releases (including for Ergen’s purchases) and for its purchase to include all causes of action of the LightSquared estates against the GPS industry, FCC, Inmarsat and Harbinger, etc.). If it came to that, I’d expect that issue in particular to require the intervention of the judge, and of course her ruling would therefore also determine whether LightSquared’s lawsuit against Ergen would continue as currently scheduled. In that event, a very interesting question would be whether DISH actually has an out in the event that no resolution is reached over the asset purchase agreement or whether the judge can force DISH to follow through with its bid, even if the final terms of the asset purchase agreement were not acceptable to DISH.
Despite all of LightSquared’s and Harbinger’s efforts, it would hardly be surprising if the FCC proves unwilling to act on LightSquared’s requests, because DISH has made it clear that it is not interested in the spectrum “swap” (see LightSquared’s recent motion for an extension of the use of cash collateral which states “As the Court is well aware, LBAC is not interested in LightSquared’s downlink channels or resolution on the series of applications LightSquared has filed with the FCC…LBAC is only interested in LightSquared’s uplink channels”).
Given that, why would the FCC give spectrum away for free to LightSquared (or even forgo an auction) when DISH would drop this request if it won the bidding, especially at a time when the FCC is under considerable pressure to raise as much money as possible from spectrum sales? Even selling the 1675-80MHz band of spectrum to LightSquared for the $300M assumed in the White House budget would inevitably lead to accusations of favoritism (because the price would be equivalent to only $0.20 per MHzPOP), so why wouldn’t the FCC simply auction this spectrum along with other bands, once the appropriate rules have been put in place?
On the other hand, Centerbridge must have come away from Friday’s meeting feeling somewhat comforted by the discussion with the FCC, so perhaps the compromise could be to auction the 1675-80MHz band along with AWS-3 and 1695-1710MHz next summer? Certainly the FCC is now in a much trickier political position if the Centerbridge bid goes through, compared to the prospects of DISH getting them out of the LightSquared mess.
Despite Phil’s efforts to hire the best lobbyists (and lawyers) that money can buy, even if the Centerbridge bid succeeds, it therefore seems like it will still be a struggle to put LightSquared together again. We’ll be publishing our latest report on LightSquared, DISH and the related spectrum issues later this week, including an analysis of why LightSquared suddenly lost one third of its total revenues earlier this year (hint: the DoD really doesn’t like them…). Contact me for more details if you are interested.