11.26.14

Masa’s choice…

Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, Sprint at 7:35 am by timfarrar

If I’m right and DISH is determined to win a significant AWS-3 spectrum position at the end of the auction, then it seems highly likely that one or both of AT&T and Verizon will leave the auction with a significant shortfall in AWS spectrum in major cities including New York, Los Angeles and potentially several other markets.

Then it seems Ergen’s calculation is that he will have significant leverage to force AT&T and Verizon to deal with him and lease spectrum on his terms (including supporting interoperability for his AWS-4 spectrum holdings). However, one way for AT&T and Verizon to freeze Ergen out and avoid having to make a deal would be for them to instead purchase 2.5GHz spectrum from Sprint. Its plausible that Sprint could raise as much as $10B relatively easily from selling say 30MHz to each of AT&T and Verizon, leaving Ergen holding an asset with no clear route to monetization and a buildout deadline which will start to become a pressing concern within a year or two (especially if DISH has not yet standardized the AWS-4 band).

So does Masa Son want to boost DISH’s position at the expense of AT&T and Verizon, or would he like to get revenge for DISH’s actions in the Sprint & Clearwire bidding wars last year? If DISH is stuck with billions of dollars of spectrum it can’t lease, then DISH will be disadvantaged in mounting a competing T-Mobile bid, when Sprint renews its attempts after the 2016 Presidential election, because DISH will struggle to raise as much cash and DT will be reluctant to accept shares whose value is based primarily on spectrum assets with limited utility (remember that T-Mobile isn’t in a position to create an ecosystem for AWS-4, unlike AT&T and Verizon).

In fact, Sprint could point to DISH’s reserves of spectrum as providing the basis of a new competitor in the wireless market, and could even gain the tacit endorsement of AT&T and Verizon for a purchase of T-Mobile. In addition, by selling some spectrum now, Sprint raises money to participate in the 600MHz incentive auction (where DISH may not have the resources to compete) and gets out from under the spectrum screen limitation. So it might well make sense for Masa to make a choice which boosts AT&T and Verizon, rather than cooperating with DISH.

Incidentally, another side-effect of the AWS-3 auction prices is that Phil Falcone is now scrambling to get back into the LightSquared reorganization plan, as his argument that LightSquared’s spectrum should be valued at more than the debt gains support from these price benchmarks. For example, the unpaired uplink 10MHz B1 block (1700-1710MHz), currently valued at almost $1.3B, will be used to argue that LightSquared’s two 10MHz uplink blocks alone are worth double this sum. So the obvious counterstrike from Ergen is likely to be to try and blow up the reorganization plan and force LightSquared into liquidation.

I understand conversion to Chapter 7 would invalidate the Inmarsat Cooperation Agreement, and thereby make it much harder for anyone to take on the risk of buying LightSquared’s assets. Of course, that is unlikely to worry Ergen (he would be expected to take a hard line with Inmarsat in any case), and would provide an opportunity to potentially buy LightSquared’s satellite assets for considerably less than the value of the LP debt and boost Ergen’s attempts to corner the spectrum market. As one person close to the case told me, such an outcome would literally make Judge Chapman cry.

UPDATE (11/26): Another interesting question is the status of the 650M MHzPOPs of EBS spectrum (38MHz) that NextWave holdco controls in New York City. I would expect hectic bidding to secure access to that spectrum, if DISH turns out to be the winner of much of the AWS-3 spectrum in New York. Of course, Ergen has likely already thought of that, and I’d speculate that he might even have locked up an agreement to buy that spectrum block in advance of the AWS-3 auction, making it harder for Verizon and AT&T to address their potential spectrum shortfall in the New York market.

11.23.14

No limits Denver hold-em…

Posted in DISH, Financials, Operators, Regulatory, Spectrum at 8:42 am by timfarrar

That seems to be a pretty good summary of what Charlie Ergen has told SNR and NorthStar, the Designated Entities (DEs) which appear to be doing a lot of the bidding in the AWS-3 auction. We’re still seeing multiple bids on the New York and Los Angeles J block licenses (which are now priced at over $3.6B for just these two licenses), and so its possible that DISH’s DEs may now hold in excess of $10B of Provisionally Winning Bids (PWBs) between them.

Its interesting to note that because Ergen is a designated bidder for American AWS Wireless I LLC (the DISH subsidiary), he wouldn’t be allowed to communicate with either SNR or NorthStar during the auction. So they must be bidding in line with instructions he gave them previously, and he can’t change course in the middle of the auction, if bidding has gone well beyond what even he expected. Ergen could have set a limit on the $/MHzPOP that he is prepared to pay for a single license and/or an overall dollar cap on bidding, but it looks like neither of those factors have been affecting the bidding to date. That suggests to me that Ergen is more likely to have imposed an overall dollar cap, which could perhaps be as much as $8B to $10B each, before the 25% discount on the PWBs that each DEs is expected to receive.

A plausible bidding strategy for each DE, which requires no communication after the auction starts (and seems to roughly accord with what happened after DISH likely switched to the unpaired spectrum in Round 17), could then be something like:

Bid in every round until you see high activity in the unpaired spectrum (a sign that DISH has switched away from the AWS-3 blocks), then defend what you have, no matter what the price of each license. When you reach the overall dollar cap, drop the G block licenses first, then the H and I blocks, but keep the J blocks.”

So now the question is whether, with a weekend to think about it, AT&T and Verizon decide to leave Ergen holding the J-block licenses in major cities. Is there a point at which DISH becomes so financially stressed by the burden of spending perhaps $15B on spectrum, that it is in a weaker position after the auction than it was before (e.g. with insufficient resources to bid for T-Mobile or build out its spectrum)?

Does it matter if AT&T and Verizon are unable to deploy as much AWS-3 spectrum in major cities as they wanted? How much leverage can they exert at the FCC if DISH fails to build out these licenses? And should AT&T or Verizon force up the price of the unpaired spectrum to a level which puts the Ergen-led LightSquared reorganization plan in jeopardy? We’ll see in the next few days whether AT&T or Verizon are able to play Ergen at his own game.

UPDATE (11/23): Thinking further about the end-game, it looks to me like the mysterious spin-off of DISH’s spectrum, mentioned briefly by Ergen in the Q3 results call, is the likely way forward if one of the DEs is successful in acquiring a large block of spectrum. DISH could inject its existing spectrum assets into this entity and raise debt against the combined spectrum portfolio. Then (given the FCC rules against selling DE spectrum for at least 5 years), DISH would have a standalone entity it could spin-off to shareholders, and could lease or all of its spectrum holdings to the major operators, just like Grain Management.

UPDATE (12/1): Round 38 saw another apparent “tell” from DISH with the bidding on the New York I block: 2 new bids were submitted for a price of $1.316B, when the identical H block could have been secured for only $1.235B. Its implausible that either Verizon or AT&T would have bid for the I block at this price unless they already held the H block and wanted to double up. But equally well, its impossible for both of them to already be holding the H block, and only the holder of the H block would want to bid a higher price than necessary for the I block. So the only logical scenario under which 2 bids could have been submitted for the I block is if DISH holds the H block and both its DEs were bidding to add the I block, potentially sending a “signal” to AT&T and Verizon that DISH is determined to capture both blocks (and preserving eligibility for both DEs for when the FCC moves to the second stage of the auction). Note also that a similar single bid in Round 40 for the New York H block (after several rounds with no bids) was followed by a double bid in Round 41 (albeit at a lower price than the I block).

If we go back a few rounds then we can see many instances of these paired bids in New York, Los Angeles and a few other major cities. Until now I had assumed this simply to be a sign that DISH was competing with both AT&T and Verizon. However, now I think that quite possibly only one of AT&T and Verizon is competing very actively for the paired spectrum blocks. Most likely that would be Verizon (who can put AWS-3 to use more quickly as supplementary downlink for its AWS-1 holdings), with AT&T perhaps switching to the unpaired uplink B1 block, where DISH appears to be facing unexpectedly intense competition.

Notably, we can also see that there were two bids for the New York J block in Round 36 (after 1 bid in Round 35 and 2 bids in Round 34), followed by a single bid in Round 37 and no other bids thereafter. That sequence may indicate that Verizon finally forced DISH to relinquish the J block in Round 37. However, the fact that DISH’s DEs both appear to have enough eligibility to still be bidding for such a large license (when only one could be the winning bidder in any round) at that stage also suggests that DISH must hold a very significant share of the major city licenses. So the question now is just how far Verizon will need (and is prepared) to go in order to capture the remaining licenses it wants to secure.

11.18.14

The game Charlie plays…

Posted in DISH, Financials, Operators, Regulatory, Spectrum at 9:53 am by timfarrar

After the AWS-3 auction reached its reserve price of $10.066B for the 50MHz of AWS-3 spectrum (1755-1780MHz uplink/2155-2180MHz downlink) in Round 12, the most notably feature of the auction so far has been in the high level of bidding activity for the largest cities, such as New York and Los Angeles. As shown in the table below, in the first 12 rounds, there were up to 8 bids per round for the three main (BEA) licenses in these cities, implying that multiple players other than the major operators (AT&T, Verizon and T-Mobile) were bidding.

By now it would have been expected that the three operators would sort themselves out and bid on a self-selected subset of licenses (e.g. AT&T for 20MHz in H+I, Verizon for 20MHz in J and T-Mobile moving to the smaller CMA G-block license as it did successfully in the AWS-1 auction in 2006). However, it appears that this has all been disrupted by DISH’s desire to drive up the price. DISH has presumably concluded, logically, that the major operators will have to buy the New York and LA licenses (plus a few other places such as Chicago, Washington, Boston, San Francisco and Dallas) whatever the cost, so has been bidding simultaneously across all of the main licenses in these cities.

Uniquely amongst the participants, DISH is also part of three separate bidding consortia: American AWS-3 Wireless I LLC, Northstar Wireless, LLC and SNR Wireless LicenseCo, LLC. Given Ergen’s interest in pushing up the price that the operators have to pay, it would not be in the least surprising if all three have been bidding simultaneously against one another for all of these licenses. The resulting higher level of bidding activity would potentially sway the decisions of AT&T, Verizon and T-Mobile, making them think they face more competition from each other than is actually the case, and thereby persuading them to bid more than they originally expected. After all, if AT&T thinks Verizon wants all 50MHz and Verizon thinks the same about AT&T, they are both likely to bid more aggressively, since both will think they had underestimated how valuable the spectrum is.

What happens next? DISH could potentially have instructed each bidding consortium to cease bidding at the same level, minimizing the risk that it would be stuck with licenses it didn’t actually want. That wouldn’t require any coordination, merely setting a near identical budget/price limit for each of the three consortia. Then I’d expect a sharp drop in bidding activity, probably later today or tomorrow, when DISH reaches its desired price point (to provide a high comparable for its other spectrum holdings) and probably switches to buy the 1695-1710MHz unpaired uplink block, where to date the price has lagged significantly due to a lack of competitive bidding. Recall that this unpaired uplink block is one of the best comparables for LightSquared’s valuation (where Harbinger is arguing that the 20MHz of uplink should be worth up to $5B), and so its clearly in DISH’s interests for the end price to be little more than the $580M reserve price (for 15MHz of spectrum).

Of course, DISH is in a win-win position: if Verizon, AT&T and T-Mobile bid up the price of AWS-3 then Ergen can claim his AWS-4 spectrum is worth even more, but if they call his bluff and leave DISH owning the key licenses in major cities (that will be needed as part of any AWS-3 rollout), then Ergen can demand interoperability for his current AWS-4 spectrum as a condition of selling the spectrum to those operators.

If this is actually what is happening, then I’d expect criticism of how the FCC has enabled DISH to game the system (by participating in multiple consortia), just like there was criticism of their decision to auction off the H-block earlier this year in what some likened to a “retail sale” to DISH. However, the result will be the opposite to the H-block, which only just reached the reserve price, because in this case the auction revenue will be significantly higher than expected. Nevertheless, I’d expect mobile operators to be even less enamored of DISH than they were already, because Ergen will have just cost them billions of dollars they didn’t want to spend, just like he cost Masa Son billions of dollars by forcing him to raise the price that Softbank paid for Sprint and Clearwire last year.

UPDATE (11/20): It seems that I may have been right, because the FCC announced on Tuesday afternoon that the reserve price of $10.066B was met for the paired spectrum blocks at the end of Round 13:

At the conclusion of Round 13, the provisionally winning bid amounts, net of any applicable bidding credit discounts, for the paired 1755-1780/2155-2180 MHz licenses (the licenses in Blocks G, H, I, and J) exceeded $10,0660,326,600, thus meeting the aggregate reserve price for these licenses in Auction 97.

However, at the end of Round 12, the total of Provisionally Winning Bids (PWBs) in these bands was already $10.375B. The PWB is calculated before bidding credits (of 25% for a small business) are applied. Thus holders of bidding credits must have held sufficient licenses for the total of net bids to still be below the reserve price (i.e. had bids with the 25% discount valued at more than $311M). That means these small bidders held licenses valued at more than $1250M at the end of Round 12.

Two of the three DISH entities (SNR and Northstar) both sought 25% bidding credits (despite apparently having credit agreements with DISH to fund their bids) so it appears likely that they were bidding aggressively throughout this period. Then we apparently saw DISH move its own bids over to the unpaired spectrum in Round 17, leading to a reduction in the number of bids for the large metro licenses. Given their use of bidding credits, it would not be at all surprising if SNR and Northstar emerge still holding billions of dollars of spectrum, funded by DISH, and it would be logical to take this approach (if DISH buys the unpaired spectrum at close to the reserve price, then it would have gained no benefit from using bidding credits, since the reserve price has to be met by the net bids). Of course the availability of bidding credits will probably also be a cause for further criticism of DISH’s apparent moves to game the system by pushing up the prices paid in the auction.

07.13.14

Independence Day…

Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 2:20 am by timfarrar

After the NTIA filed a fairly devastating letter with the FCC on July 1 (which went completely unnoticed in the press), it seems that Phil Falcone decided to use the July 4th holiday to assert his own independence from LightSquared, and attempt to blow up both the company and its relationship with the US government.

The NTIA letter attaches a September 2013 letter from the Department of Transportation, which states that “the Department questions whether the Commission has the necessary and sufficient information before it to approve the handset proposal at issue in the Public Notice. Again, to the Department’s knowledge, there has not been any robust interagency effort to examine or test LightSquared’s proposal, to probe the underlying assumptions, or to consider feasible alternatives.” The NTIA states that “the agencies are not in complete agreement that the Uplink Assessment has adequately addressed these issues to support a recommendation to NTIA and the FCC” and “NTIA agrees with DOT that the FCC should seek to ensure that LightSquared’s handset proposal is adequately supported by data and a full understanding of the potential impacts on GPS receivers.”

This letter comes in conjunction with the June 20 FCC workshop, which appeared designed to demonstrate that the FCC was seriously investigating whether interference concerns could be resolved, but was structured in a manner that was very supportive of GPS. It also immediately follows LightSquared’s proposal of a new plan for emergence from bankruptcy, which is supposed to be filed with the court on Monday July 14. The NTIA letter means that there is no clear roadmap even to approval of the 20MHz of uplink spectrum that LightSquared assumes is certain to be available, significantly undermining the foundations of the new plan.

More importantly, Falcone’s actions over the last week basically destroy any prospects of further progress with the FCC. While his RICO lawsuit against Ergen and DISH can be largely ignored, the decision to sue the US government and FCC on Friday, is expected to freeze further contacts with the FCC while the lawsuit is in progress.

The likely way forward is now for LightSquared to sue Harbinger in order to prevent the lawsuit going forward, since such lawsuits would normally be regarded as assets of the bankruptcy estate, belonging to LightSquared rather than its shareholders. Harbinger alleges that all negotiations with the FCC prior to the March 2010 takeover were directly with Harbinger’s lawyer (Henry Goldberg), not “LightSquared” (at that time SkyTerra) but it is far from clear that would overcome the presumption that the claims belong to LightSquared.

In any case, the names of the underlying companies changed after the Harbinger acquisition: what is now LightSquared Inc. was at that time Harbinger Global Wireless (HGW), which was the company (represented by Goldberg) that was formally given permission to buy SkyTerra. So even if there was an agreement with HGW (which is doubtful), its claims should now belong to LightSquared Inc. and the bankruptcy estate.

There are several other curious statements in the lawsuit, most notably that the publication of the National Broadband Plan in 2010 was delayed to coincide with the Harbinger acquisition of SkyTerra. Secondly, the amount of Harbinger’s losses was set at $1.9B, but that is far in excess of the amount of investment that Harbinger made in LightSquared after March 2010. Finally, the concept that there was an agreement with Harbinger under which the ATC modifications were granted in exchange for the commitments made as part of the takeover is not part of the formal record: the ATC mods order (which Harbinger claims the FCC has not upheld) is completely separate from the approval of the takeover (which included the Harbinger commitments).

Overall, this marks a significant change in the bankruptcy case: Falcone is on the outside rather than the inside, and now it seems quite likely that the entire new plan will collapse in acrimony. Moreover, the company is on the verge of running out of cash, creating a further crisis in the very near future.

UPDATE (7/15): Yesterday LightSquared’s Special Committee finally recognized the reality of the situation by reaching an agreement with Charlie Ergen to convert his existing debt into a dominant share of the new first lien debt, and obtain an additional $300M first lien loan, replacing JP Morgan in the new capital structure. It was stated that there will be $1.6B of new first lien, with $1.3B from Ergen, and I would assume the remaining $300M will come from Fortress rolling over its first lien debt. Its unclear if Cerberus will also invest in the new second lien tranche, and it certainly seems highly implausible that Harbinger will accept its proposed treatment under the new plan, since this would bar Harbinger from asserting claims against the FCC or Ergen, and therefore the probability of any recovery for Falcone is significantly diminished. It therefore seems highly likely that, as I predicted, the next stage of the bankruptcy case will be litigation between LightSquared and Harbinger, while Ergen just has to sit back and enjoy Phil Falcone’s discomfort.

06.27.14

Playing in the mud…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 9:40 pm by timfarrar

Judge Chapman concluded her ruling in the LightSquared Adversary Proceeding (which was published two weeks ago) by quoting Charlie Ergen’s famous statement that “[y]ou can live in a bubble if you want to…and probably never get any disease. But you go play in the mud and the dirt and you probably aren’t going to get disease either because you get immune to it. So you pick your poison and I think we choose to go play in the mud.”

She went on to remark that “Here, playing in the mud involved end-running the LightSquared Credit Agreement and then purposefully holding in limbo hundreds of millions of dollars of debt trades and undermining the ability of the Debtors, the constituents, and even the Court to conduct the case” and therefore ruled that “the SPSO Claim shall be equitably subordinated” in an amount based on “the amount of harm that has occurred to these estates as a result of SPSO’s conduct.”

Now the court-appointed mediator, Judge Drain, has filed a memorandum with the court stating that “SPSO/Charles Ergen have not participated in the mediation in good faith and have wasted the parties and the mediator’s time and resources. I understand the seriousness of this assertion; it is unique in my experience as a mediator in a field where the parties are known to assert their positions aggressively and sharp elbows in negotiations, although not welcome, are tolerated.”

It is pretty clear what Ergen is getting up to in the mud: by delaying a resolution of the case he buys himself time to seek a deal for DISH with Sprint and/or T-Mobile, while retaining a bid (either personally or by EchoStar) as a backup option, and in the meanwhile he accumulates interest on the non-subordinated portion of his debt.

While clearly irritating to the judges involved, Ergen’s actions are therefore perhaps not entirely surprising, so what is more interesting about Judge Drain’s memo is what it tells us about the terms of LightSquared’s new Chapter 11 plan. Of course the memo does not specify the terms of the agreement that all parties with the exception of SPSO/Ergen have reached, but it is pretty clear what those are, by reading between the lines.

Firstly, Judge Drain indicates that the new Chapter 11 plan “should be confirmable without the support of the one party, SPSO, which has not agreed.” That means that SPSO is no longer being treated less favorably than the other secured debtholders with respect to the non-subordinated part of its debt, and its agreement to the new plan is not required. That can only mean that SPSO’s non-subordinated debt is being paid in full, in cash, with accrued interest.

That also fits with Judge Drain’s statement that he had invited SPSO to make “a certain proposal by 5:00 p.m. on June 24, 2014 [which] was not made” since the requested proposal was clearly for SPSO to indicate the amount of subordination which would be acceptable. As I noted back in May, Judge Chapman’s ruling should allow at least $320M (face value) of SPSO’s holdings, and possibly as much as $540M to be subject to subordination, though the amount of harm might arguably be somewhat less. The non-subordinated debt would then accrue a total of at least 30% interest from the time of the bankruptcy filing over and above its face value.

If the subordination was only of the later purchases, then SPSO might be entitled to receive at least $660M including interest, and I would guess that the offer on the table from LightSquared’s new backers would then need to pay Ergen a sum relatively close to the $700M he originally paid for the debt.

UPDATE (7/2): The new plan, revealed in a July 1 court hearing, proposes to pay Ergen $470M in cash plus an unsecured note worth “at least $492M.” This implies that about $360M of Ergen’s holdings (at face value) are not being subordinated, which would roughly correspond to a cutoff on purchases up to the end of 2012, while the later purchases are being converted into the unsecured note. This cash payment is sufficiently low that its hardly surprising Ergen intends to fight the new plan.

The corollary to the subordination of part of Ergen’s debt holdings is that there can’t be any money left for the equity holders, since even after being subordinated, Ergen’s holdings would still be senior to LightSquared’s equity. As I’ve noted previously, CapRe wanted to reduce Harbinger’s equity position “to nothing” and they have also agreed to the new plan. That conclusion also fits with Melody and SK Telecom not being represented at the mediation, despite both of them holding interests in LightSquared’s equity. In contrast, Harbinger’s presence in the mediation would still be necessary given its holdings of debt in LightSquared Inc. and the desire to gain releases for Falcone and itself from any potential litigation, such as that proposed by SPSO in April.

UPDATE (7/2): Harbinger will still hold around 12% of the reorganized LightSquared equity, but this appears to relate solely to the rollover of Harbinger’s debt holdings at LightSquared Inc, and compares to a proposed 36% stake under the previous plan.

Melody’s lack of involvement also tends to suggest that it will potentially no longer be providing financing for the new plan, although that is still to be confirmed. Conversely, Fortress had up to five people there for each mediation session, plus two of their lawyers from Stroock & Stroock & Lavan LLP, suggesting that Fortress will be making the primary decision on how much to offer Ergen and will therefore likely lead the financing of the new reorganization plan.

The presence of two people from Cerberus at each session is also very interesting, and suggests that they may be the new source of financing, presumably replacing Melody (who in any case were closely tied to Harbinger, with Omar Jaffrey having led multiple LightSquared financings while at UBS). This appears to be confirmed by a Wall St Journal article.

It will now be interesting to see how both Fortress and Cerberus feel about the outcome of the FCC workshop on “GPS Protection and Receiver Performance” last week, where Tom Wheeler went to the trouble of noting emphatically that the meeting was “not about FCC-mandated receiver standards” and LightSquared received support from the White House (whose representative, Tom Power, was involved in discussions with LightSquared back in summer 2011) but apparently few other participants.

Remember that Cerberus’s involvement was proposed by Fortress but was unacceptable to Harbinger back in January, when “Mr. Falcone exercised those veto rights in the weeks after the January 23 meeting when he objected to Fortress’ suggestion that Tom Donahue of Cerberus join LightSquared’s board.” (see ¶32 of SPSO’s proposed Findings of Fact). This appears to be further confirmation that Harbinger’s role in the new proposed capital structure for LightSquared is being cut back, as I indicated earlier this month and that’s why Phil Falcone has been threatening to sue the FCC.

Notably Falcone’s resignation from LightSquared’s board was communicated only in a June 18 letter to the FCC, which there would be no reason to send other than to ramp-up the pressure for the FCC to negotiate prior to Harbinger filing suit. In that context, one might view Wheeler’s (apparently last minute) decision to open the FCC workshop and make remarks supportive of GPS as a rejoinder to Harbinger’s threats.

UPDATE (7/2): Harbinger is still involved in the new plan (with a reduced 12% equity stake) which suggests that Harbinger may also continue to control the GPS litigation if the plan is approved, and this may be sufficient to mitigate the possibility of litigation against the FCC in the near term. However, given that the GPS industry seemed happy with the outcome of the recent FCC workshop, describing it as “a great event”, it seems they do not expect the FCC to be particularly accommodating to LightSquared in the immediate future.

05.18.14

Buying dishes not DISH?

Posted in AT&T, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 8:01 pm by timfarrar

So now AT&T has finally announced that it has agreed to acquire DirecTV for $95 per share, and has indicated that “AT&T will use the merger synergies to expand its plans to build and enhance high-speed broadband service to 15M customer locations, mostly in rural areas where AT&T does not provide high-speed broadband service today, utilizing a combination of technologies including fiber to the premises and fixed wireless local loop capabilities.”

That sounds a lot like AT&T intends to steal DISH’s concept of a fixed wireless broadband connection to rooftop antennas collocated on a satellite TV dish. Indeed, its hard to think of any other way for AT&T to advance an out-of-region TV+broadband strategy, in places where it isn’t the incumbent telco. Of course, the obvious rejoinder is “so why didn’t AT&T buy DISH instead and get hold of its spectrum”.

However, its important to remember that AT&T has already turned down the opportunity to buy DISH twice in the last few years, in 2007/8 and 2012, both times apparently because it refused to pay Charlie Ergen’s asking price. And it seems the same is still true: my understanding is that Ergen has advertised his price to AT&T (and presumably Verizon as well) and indicated it was take it or leave it. Once again AT&T chose to leave it and this time moved on to negotiate with DirecTV instead (just like AT&T jumped to NextWave back in spring 2012).

DISH’s price is pretty clear: in DISH’s Q1 conference call Ergen indicated that his spectrum should be valued at twice the amount that the AWS-3 spectrum is sold for in the upcoming auction, and that he expected the AWS-3 price to be higher than the $5B-$10B range cited by analysts. That implies a price of $20B+, in line with the value ascribed to spectrum in DISH’s current stock price, although perhaps not quite as high as the $26B cited by some reports.

I’ve been skeptical of such high valuations, and think that the value of DISH to an acquirer should include value for both its spectrum and its 14M rooftops, which are potential sites for future small cell network deployments. I would go as far as to say the $20B of value could be attributed half to the spectrum and half to the sites, since 1M small cells generating $100/month in small cell hosting fees would certainly be worth $10B.

If AT&T is thinking likewise, and expects future spectrum auction values to be rather lower than Ergen’s purported $1.33+/MHzPOP ($20B for 50MHz), then even if AT&T was prepared to pay $20B for DISH’s assets (excluding the satellite TV business itself) it would make more sense to buy DirecTV, which can provide the rooftop sites, and for AT&T to acquire the spectrum later. AT&T can look forward to a fairly clear run in the auctions, due to the amount of spectrum on offer over the next year, especially if Sprint and T-Mobile are consumed with trying to get regulatory approval for a merger during that period.

Indeed AT&T has indicated that it plans to buy spectrum in the incentive auction next year and will bid at least $9B for 20MHz of spectrum. That is only $1.50/MHzPOP, little more than Ergen is valuing his spectrum at, for spectrum that should offer rather better deployment economics for rural wireless broadband. It hardly seems to be a coincidence that the DirecTV deal was secured just a few days after the FCC came out with revised incentive auction rules that were acceptable to AT&T.

Ergen has justified placing a higher value on DISH’s spectrum because the AWS-4 band can all be converted to downlink, which should be much more valuable than uplink, as the majority of traffic is directed to the user. Even if that is true (and AT&T doesn’t seem to agree, because it appears to have foregone the option to convert the WCS A and B blocks to all downlink), it is partially offset by the lower efficiency (bps/Hz) of uplink traffic. More importantly, if DISH (or a buyer) actually deployed a fixed wireless broadband network using DISH’s spectrum, it would need to use uplink as well as downlink, so AWS-4 could not simply be all converted to downlink. Only if DISH’s spectrum were to be used in mobile networks, as supplementary downlink for the PCS and AWS bands, could it be used in an all-downlink configuration, and then AT&T or Verizon would have to buy the spectrum and put the effort into standardizing these new bands.

So it would be entirely logical for AT&T to conclude that for fixed wireless broadband and small cell hosting, its simply not worth paying Ergen’s asking price. Instead, by buying DirecTV, AT&T gets the sites it needs thrown in for free with DirecTV’s satellite TV business, and the FCC has now created the right conditions for AT&T to buy the spectrum it needs in the upcoming auctions.

This of course leaves DISH in a difficult position, because Verizon has indicated that it doesn’t believe that deploying wireless connections to rooftop satellite TV antennas makes sense (both DirecTV and Verizon were skeptical after their previous joint trial), so it wouldn’t attribute much value to DISH’s rooftop sites. In any case, after buying Vodafone’s stake in Verizon Wireless, Verizon’s balance sheet would be unlikely to accommodate a near-term purchase of DISH.

So perhaps Ergen’s last option for a near-term deal is a partnership with Sprint, to facilitate a fixed wireless deployment and allow Masa Son to fulfill his promise of competing in fixed broadband if Sprint is allowed to purchase T-Mobile. Even for mobile users, Sprint certainly needs tens if not hundreds of thousands of new cellsites if it is going to deploy its 2.5GHz spectrum beyond urban cores, and DISH’s rooftops would be the best way to get that at reasonable cost.

If not, and Sprint bids for T-Mobile anyway, then DISH will have to go all out to block that deal. Of course, the most likely way to resolve the difference in expectations about the size of the break fee (Sprint has offered $1B, but DT wants nearer $3B) would be to offer T-Mobile some of Sprint’s 2.5GHz spectrum instead of more cash. However, that would provide DISH with an even bigger incentive to block Sprint’s bid, as giving DISH the opportunity to acquire some 2.5GHz spectrum is precisely what Ergen wanted Softbank to concede when they battled over Clearwire last year. If DISH does succeed in blocking a Sprint bid for T-Mobile, and T-Mobile is left with 20-40MHz of 2.5GHz spectrum, then there would be every reason for DISH to look at buying T-Mobile next year, as the only remaining way to make use of DISH’s spectrum assets.

05.10.14

Google Loon: Into Thin Air…

Posted in DISH, Globalstar, Operators, Regulatory, Spectrum at 10:43 am by timfarrar

Google’s Project Loon has been in the news again this week, with confirmation that Google will now look to partner with cellular operators to use their licensed spectrum rather than acquiring its own spectrum. Indeed yesterday the FCC issued an STA to permit continued testing in Nevada, using T-Mobile’s AWS-1 F-block LTE spectrum.

I’m particularly intrigued that Astro Teller of Google indicated that in late 2012/early 2013 the company spent “six months negotiating with ‘large companies’ to buy [a relatively thin piece of] harmonized spectrum,” but the plan was vetoed by Larry Page. Its pretty clear that the only “relatively thin” piece of “harmonized” (i.e. multi-country) spectrum out there is MSS spectrum and it was reported in November 2012 that Google had held discussions with DISH about their spectrum. Presumably similar discussions were held with other MSS operators like Globalstar as well (although at least as of late 2012 Google might not have considered Globalstar to be a “large” company on the scale of DISH or even Inmarsat).

However, the idea of partnering with individual wireless operators in different countries is completely incompatible with the concept of using balloons which can travel around the world in 22 days, because of course different spectrum would need to be used in each country. The obvious conclusion to draw is that Google will soon be moving on from balloons to its new Titan drones, which can stay in a defined area and be configured with a specific payload that would use the spectrum available there, just as Facebook predicted. Interestingly drones would operate at the same altitude of “up to 65000ft” and therefore might conceivably even be covered by Google’s current FCC STA. So how soon will we see this change happen?

03.14.14

Busman’s holiday…

Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, Thuraya at 9:35 am by timfarrar

Back in 2009, only a year before it embarked on the original $1.2B and now $1.6B Global Xpress Ka-band project (this new figure implicitly includes the launch of the fourth I5 satellite), Inmarsat’s CEO was happy to tell investors that “We are going into a period of capex holiday”. So perhaps it was inevitable that earlier this month at Inmarsat’s Q4 results presentation, some analysts were worried about the “risk that CapEx in 2015 won’t come down by the $300M figure you’ve mentioned”.

It does seem they were right to be concerned, because its now being reported (and I’ve confirmed) that Inmarsat and Arabsat are negotiating the inclusion of an S-band payload on Hellas Sat 3, similar to the Solaris piggyback payload on Eutelsat W2A.

I’m told that Inmarsat is now actively applying for national licenses to preserve its rights to 2x15MHz of S-band spectrum in Europe, after turning down an offer from Charlie Ergen to buy the license from them (in fact Ergen met with Rupert Pearce, Inmarsat’s CEO, in Washington DC this week). Inmarsat was previously exploring the development of an Air-To-Ground (ATG) network using this spectrum in Europe, but that has been abandoned, because it proved impossible to resolve the regulatory issues in the short timeframe available before the license deadlines (for a satellite launch) expire.

The new S-band business plan is instead directed at “smaller, cheaper terminals” for traditional MSS services (an opportunity that Inmarsat’s CEO highlighted on the MSS CEO panel that I moderated at Satellite 2014) rather than terrestrial exploitation of the spectrum. Another potential reason for Inmarsat’s move is that Thuraya will be trying to secure backing for a replacement L-band satellite over the next year, and by teaming up with Arabsat, Inmarsat could look to undermine Thuraya’s pitch that having an MSS satellite from the Middle East is a matter of regional pride.

In fact, Inmarsat was very firm at the conference that MSS spectrum should not be reallocated for terrestrial use, and even described the LightSquared Cooperation Agreement as something they were “forced” into (implicitly by the FCC), with Inmarsat’s preoccupation being to protect their MSS users from interference. This was quite a striking signal that Inmarsat may not be very supportive of compromise with LightSquared, which is a condition of the current bankruptcy exit plan.

In particular, Inmarsat is sitting on about $260M of deferred revenues, which were paid by LightSquared 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 revenues don’t ramp-up as quickly as expected (and there is now a high likelihood that the third I5 satellite will not be launched this year, since its not even on the latest Russian schedule and the second satellite is currently listed as launching in September), then the easiest way for Inmarsat to meet the 8%-12% wholesale revenue CAGR from 2014-16 that it reiterated on the Q4 results (which requires an increase of $200M to $300M in absolute terms) would be to book most if not all of those deferred revenues in 2016.

Of course, that is actually supportive of Ergen’s original proposal to just use the LightSquared uplink spectrum, because filters would only be required if the downlink band is actually used for terrestrial services. On the other hand, because Inmarsat would want to book the deferred revenues in 2016, rather than 2014 or 2015 when the bankruptcy process is complete, it seems plausible that Inmarsat would agree to an additional two year deferral of most payments from April 2014 to early 2016, aligned with the assumptions in LightSquared’s latest plan that FCC approval would be received by the end of 2015 and that their new funding would last through the first quarter of 2016.

At that point, if LightSquared has made no progress with the downlink band and is forced to fall back on uplink only use of the MSS spectrum, Inmarsat could book the deferred revenues and potentially could even get some additional payments for leasing the uplink spectrum at a later date. Don’t forget that Ergen might still be on the scene as well, since the deadline for completion of what will now likely be two competing European S-band projects is also in the first half of 2016.

So now we move to the key hearings next week in the LightSquared bankruptcy case, which will address the adversary proceeding against Ergen and LightSquared’s plan for emergence. As I’ve noted previously, despite the evidence LightSquared has marshaled about Ergen’s strategic objectives for his investments, it would be a major step for the judge to allow LightSquared to put Ergen/SPSO in a class of his own, then designate his vote and give him a third lien note with no exit for 7 years (and potentially no value in the absence of FCC approval). However, no one seems clear about what the judge will do, and what any compromise ruling might entail.

02.27.14

DISH of the day…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum, Sprint at 2:29 pm by timfarrar

Today the H-block auction finally came to a close, after taking longer than many expected to reach the reserve price of $1.564B. Its clear that DISH won virtually all of the licenses, since it was able to select a sequence of bids to exactly match the reserve price.

However, DISH has also faced unexpectedly prolonged opposition from one other bidder who kept bidding on one or two small licenses (and switching around to find the relatively cheaper licenses) for several days in an attempt to secure a license that DISH might buy out later on. The competitor seems to have had only about 60,000 bidding units of eligibility yesterday and more than likely ended up winning one or two small licenses for a couple of million dollars total (a price of about $0.30 per MHzPOP). Stopping at the reserve price and being prepared to buy out the competitor later on (for say $10M-$20M) certainly made more sense for DISH than continuing to play Whac-a-Mole and bidding up licenses across the board to win all of the licenses at a much higher price.

So now the question is whether we will see DISH announce some sort of deal to put its spectrum to use in the near future. Ergen has ruled out bidding against Sprint for T-Mobile, but that doesn’t mean DISH wouldn’t oppose such a bid at the FCC and DoJ. Indeed, if Sprint decided to pay T-Mobile a break fee mainly in spectrum, which would almost certainly be in the 2.5GHz Clearwire band, DISH would have a big incentive to try and block Sprint’s bid before later engineering a lower priced deal with T-Mobile. On the other hand, DISH’s H-block win now gives Sprint more incentive to include DISH in any deal with T-Mobile (most likely joining with DISH to roll out a competitive fixed broadband wireless solution using DISH’s satellite TV antennas while perhaps leasing the H-block from DISH).

However, if DISH is left out in the cold by Sprint, Ergen could eventually turn his attention to a merger with DirecTV. Some thought that the asset swap between DISH and EchoStar that was announced last week was intended to “pave the way for a merger with DirecTV”. However, I think that misunderstands what the next move is going to be and that this deal was intended to set EchoStar not DISH up for a near term transaction, by giving it more satellites plus a guaranteed (and incentivized) satellite broadband customer for the next 10 years, while removing some of the risk associated with consumer retail sales (which is less attractive to an FSS operator). That deal is highly likely to be with Telesat and/or Loral, which recently was reported to be up for sale and has been looked at by Ergen in the past. In contrast, any deal with DirecTV is more likely to be months away.

In addition to all of this action for DISH and Echostar, Ergen was also basically told by the judge in the LightSquared bankruptcy case on that he (i.e. SPSO) needs to come up with an alternative plan for LightSquared before the confirmation hearing on March 17, because she is “not going to say today ‘lights out on this company’” by rejecting the current plan from the company, even though SPSO has “strong” arguments that the plan is infeasible.

So now we appear poised to see one or more transactions from DISH, EchoStar and/or SPSO in the next few weeks. I would estimate that the probability of a LightSquared offer from SPSO is at least 90%, and the likelihood of a Telesat/Loral deal with EchoStar is perhaps 60%-70%, but the chance of a (much more significant) Sprint deal with DISH is no more than 30%. Nevertheless, that will still be plenty to keep Charlie busy for the time being.

02.19.14

Kissing off Charlie…

Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 3:47 pm by timfarrar

LightSquared’s Valentine’s Day message to Charlie Ergen was neither short nor sweet, with the filing of an 883 page long third amended bankruptcy plan on Friday night. The new plan no longer requires FCC approval of LightSquared’s license modification application before emergence, because as I pointed out last month, the FCC’s intervention had made LightSquared’s previous contingent plan untenable.

LightSquared has instead delayed the assumed timetable for FCC approval until December 31, 2015, and at this stage plans to raise enough money to carry the company through the first quarter of 2016. That will include a new $1.65B DIP facility, which will be sufficient to pay off all of the existing creditors of LightSquared (including accrued interest) with the exception of Ergen/SPSO. The new DIP facility would be expected to close at the end of March 2014, so the creditors wouldn’t even have to wait for the company to emerge from bankruptcy.

Because of the lack of FCC approvals, LightSquared can’t raise enough new money to pay off all of its debts, and so the plan involves subordinating Ergen/SPSO’s debt in the form of a third lien 7 year note, paying PIK interest at 12%. Ergen’s debt would rank behind a $1B first lien exit facility (which could be increased by another $500M after FCC approval of the license modification) and a second lien LP facility which would include $930M from the planned $1.65B DIP financing.

Of course, there is little incentive for Ergen to agree to this proposal, and even if the judge decides to approve the plan, including the new DIP financing, I would expect that LightSquared’s emergence from bankruptcy could be delayed while appeals take place (the current expectation is for the plan to become effective on or before October 31, 2014).

Importantly, LightSquared won’t have to make any payments to Inmarsat until it emerges from bankruptcy, and the plan contemplates that “the Inmarsat Agreement shall have been amended in a manner acceptable to the Lenders, which amendment shall include an extension of the period for election of spectrum and corresponding deferral of payments in respect thereof acceptable to the Lenders.”

However, LightSquared’s attempts to subordinate SPSO’s debt holdings are not based solely on the pending adversary proceeding, in which Ergen and Falcone testified in January. Instead LightSquared is seeking to designate SPSO’s vote, based on the DBSD precedent, which of course also involved DISH (disclosure: I testified as an expert in that case).

That Second Circuit ruling was based on deterring “attempts to ‘obtain a blocking position’ and thereby ‘control the bankruptcy process for [a] potentially strategic asset’ (as DISH’s own internal documents stated)” although it “[left] for another day the situation in which a preexisting creditor votes with strategic intentions” (which SPSO might be, because at least some of its purchases were made before LightSquared filed for bankruptcy). In addition, DBSD doesn’t address whether a debtor is able to divide one class of its debt into two so that there is only one creditor in a subclass, who can be treated differently from the rest of the class once that creditor’s vote is designated. Importantly, if the vote of the sole creditor in a class is designated, then (under DBSD) there then is no need to provide that creditor with “the indubitable equivalent” of its claims, as would otherwise be required under the “(more arduous) cram-down standards of §1129(b)”.

That’s why LightSquared is presenting allegations in the new bankruptcy plan which attempt to match the DBSD findings as closely as possible, stating that:

“LightSquared and the Supporting Parties believe that Ergen Entities’ inequitable scheme – which was outlined to the DISH board in a May 2, 2013 presentation – began when SPSO, which is controlled by Ergen, acquired LightSquared LP secured bank debt and preferred stock to influence these Chapter 11 Cases. The parties further believe that the evidence at trial contradicted the Ergen Entities’ contention that SPSO purchased LightSquared LP’s debt solely as an investment. Rather, the evidence demonstrated that SPSO’s acquisition was a scheme to control LightSquared’s bankruptcy process and to facilitate a spectrum acquisition option by DISH. Among other things, Ergen’s and Stephen Ketchum’s testimony demonstrated that (a) the Ergen Entities paid a third percent (30%) premium on what Ergen believed the debt was worth in order to obtain a blocking position, (b) obtaining a blocking position was an early objective, and (c) the Ergen Entities’ equated the blocking position with facilitating the acquisition of LightSquared’s spectrum assets.

LightSquared and the Supporting Parties further believe that, in the next phase of the Ergen Entities’ concerted scheme, shortly after SPSO had acquired a blocking position, Ergen caused LBAC to make a bid for substantially all of LightSquared LP’s assets, a bid that Ergen designed to be particularly attractive to LightSquared LP’s other secured lenders by consisting of an amount sufficient to pay LightSquared LP’s secured debt in full, and conditioning payment only on Hart-Scott-Rodino approval. The Ergen Entities, however, were already contemplating ways in which they could pay less than the agreed purchase price for the LightSquared LP assets if no other bids materialized. This tactic – reverting at a later date with an altogether different bid – was also outlined in the May 2, 2013 presentation.”

So now the question is whether Judge Chapman will go along with LightSquared’s plan, agree to treat SPSO’s debt as a separate class and designate SPSO’s vote. One argument that SPSO is likely to make is that it should not be in a separate class from other LP debtholders (in which case designation of its vote would become irrelevant, because the LP debtholders are being paid in full in cash). And of course, we will certainly hear a very different explanation of the developments described above.

I also wonder if Ergen will make an offer to purchase LightSquared through SPSO in an attempt to provide an alternative for the judge, perhaps at a price of roughly $2B as he tentatively offered last summer (although a lower offer of say $1.7B, or face value for the debt, might be plausible in view of the regulatory risk that the FCC introduced with its intervention last month). Remember that Ergen testified last month that he had considered bidding himself, by borrowing against his stake in EchoStar.

However, an offer by DISH seems unlikely, in view of DISH’s focus on other opportunities, and the fact that it would complicate Ergen’s defense against LightSquared’s allegations of an “inequitable scheme…to pay less than the agreed purchase price”. Indeed the defense would be stronger if DISH entered an alternative deal, providing the judge with a coherent rationale for the abandonment of its LightSquared bid.

In summary, it looks like it will be at least another month before there is any certainty about what happens to LightSquared. In the meantime, the H-block auction has been fairly quiet, with only a very slow rise in the total bids (to reach just below $1.5B at the end of Round 96 today). This afternoon, the pattern of new bids has changed somewhat, suggesting that DISH is mostly bidding against itself right now, and its remaining opponent(s) may have as little as a few hundred thousand bidding units of eligibility left. Once the auction is complete (which may finish on Friday or drag on until early next week) then I expect we’ll hear a lot more speculation about what else DISH has in mind and perhaps even a deal ahead of the confirmation hearing on LightSquared’s latest plan.

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