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.
Over the last 36 hours there has been a constant stream of stories about DISH Network’s negotiations with various players to launch its proposed wireless network, in what appears to be a last ditch attempt to deflect the FCC from its declared intention to impose strict interference conditions on DISH’s spectrum in order to make the H block auctionable.
First we saw reports of DISH’s “exploratory stage” talks with Google, which unsurprisingly led to massive speculation about Google’s desire to get into the wireless business, largely omitting any mention of Google’s previous (financially disastrous) investment in Clearwire, which was motivated solely by a desire to create more competition and cheaper wireless service and had nothing whatsoever to do with enabling Google to become a wireless operator.
Now we’ve seen reports about DISH’s unsuccessful bid over the summer for MetroPCS, as revealed in MetroPCS’s preliminary proxy statement filed last night. We also saw DISH highlighting that 3GPP standardization work has been completed, with the implication that DISH could move forward very quickly if the FCC approved the network without new interference conditions.
However, it seems clear that the FCC is having none of it, with officials briefing that they are close to a decision, which is expected to confirm that the H block will be auctioned for high power use and therefore the lower part of DISH’s uplink band will face significant powwer restrictions. In other words, the FCC is placing a higher priority on ensuring Sprint has sufficient LTE spectrum (i.e. can extend its 5x5MHz G block LTE network to a 10x10MHz network) and moving forward with an auction of the H block to raise $1B+ than they are on trusting DISH to become a new entrant in the wireless market.
In light of the Sprint-Softbank and TMobile-MetroPCS deals, the FCC has achieved its goal of having four viable players in the US wireless market, and so presumably does not see as much need to encourage a new entrant. Indeed I would expect the FCC would be relatively content to see the DISH spectrum go to AT&T, if it could then “encourage” AT&T to sell some of its PCS spectrum to Sprint (along the lines of Verizon’s AWS spectrum deal with TMobile). We might even see a similar “swap” in the PCS band between TMobile and Sprint (with Sprint getting more of the spectrum and paying some cash to TMobile) as an alternative to a potential rival Sprint bid for MetroPCS. After all, TMobile has far more spectrum per subscriber than any of the other three major players (if Clearwire’s holdings are excluded).
Does DISH have many other options left to build out a new network of its own, as opposed to selling the spectrum to AT&T and pursuing a merger with DirecTV? There still appears to be uncertainty about the status of a potential deal with Clearwire, though DISH’s 10-Q confirmed (as I suggested previously) that it has raised its stake in Clearwire’s debt by $400M during the third quarter to a total investment of $745M (note that Clearwire is not named in the 10-Q, but the amount invested is too large for the investment to be in LightSquared, given other declared holdings).
DISH has undoubtedly talked to almost everyone in the wireless industry, but apparently these talks are currently only at the exploratory stage, which is quite surprising given how much time has elapsed. Of course what the MetroPCS proxy statement reveals is that everyone else has been talking as well, and as set out below, the proxy provides some very interesting nuggets about what’s happened over the last 18 months, once you decode the references to Companies A through H.
Company A: DBSD. MetroPCS determined that DBSD’s spectrum was more attractive than TerreStar’s spectrum and MetroPCS made a binding offer for the spectrum in March 2011, but lost out to DISH.
Company B: TerreStar. MetroPCS ultimately decided not to pursue TerreStar, leaving Harbinger out in the cold in June 2011, but then negotiated unsuccessfully with DISH during the summer of 2011 over a potential sale of spectrum, joint venture or contribution of the spectrum in exchange for equity in MetroPCS.
Company C: DISH subsequential expressed interest in buying MetroPCS, starting in March 2012 when it became clear DISH would not receive its hoped-for ATC waiver, and ultimately made a bid of $11 per share in August 2012, which was rejected by MetroPCS because it was less than the value offered by TMobile. DISH then indicated that it was unwilling to pay a higher price.
Company D: Clearwire. MetroPCS offered to buy spectrum from Clearwire in late 2011 (and earlier had even considered buying the whole company), but was unable to agree on terms. These discussions were revived in June 2012 when Clearwire again suggested a sale of spectrum and a “substantial investor” (Sprint or perhaps DISH???) proposed splitting the company between themselves and MetroPCS. Those “occasional” discussions continued up until the TMobile deal was announced.
Company E: Leap. Leap offered to sell “excess” spectrum to MetroPCS in the first half of 2011, but as early as June 2011 had decided to sell the spectrum to another wireless company (Verizon). This implies both that Verizon sat on the Leap deal until it had completed its negotiations with SpectrumCo in December 2011, and that the transfer of the Chicago 700MHz A block spectrum to Leap was presumably only included so the deal could be portrayed to the FCC as a “swap”. (Of course Leap’s presumed follow-up deal of a sale to US Cellular has now been derailed by US Cellular’s exit from the Chicago market and sale of its spectrum to Sprint). In May 2012, Leap asked MetroPCS to consider a combination of the two companies, but MetroPCS decided such discussions would not be productive. Then in July 2012, Deutsche Telekom also raised the prospect of combining Leap with TMobile and MetroPCS, as part of a single transaction, but MetroPCS declined, presumably because of the added complications it would entail.
Company F: AT&T. As was widely reported at the time, MetroPCS was in discusssions with AT&T in 2011 about potential asset sales as a condition of the TMobile acquisition. However, this did not come to fruition because the acquisition was blocked by the DoJ and FCC. Later, in August 2012, MetroPCS discussed approaching AT&T, but the consensus opinion was that AT&T would not be interested in buying MetroPCS.
Company G: Sprint approached MetroPCS about a potential acquisition in September 2011, and this led to the abortive bid in February 2012, which was vetoed by the Sprint board. Even after this time discussions continued with Sprint, and Sprint indicated in August and September 2012 that it was still interested in an acquisition of MetroPCS.
Company H: Verizon. MetroPCS held discussions with Verizon in the spring of 2012 about potentially buying some of the AWS and 700MHz spectrum that Verizon would need to divest to get approval of the SpectrumCo transaction. However, Verizon was not particularly interested in selling the AWS spectrum to MetroPCS (and entered into a deal with TMobile instead).
What all this appears to show is that DISH has looked at a number of transactions which involve further investment in the sector, but the main reason these have not come to fruition is that DISH is trying to pay as little as possible for any acquired assets. Alternatively, if DISH was to be a seller, then it was looking for too rich a price (at least for MetroPCS). In this context, it is likely that only Clearwire would be prepared to do a deal to sell assets to DISH on such terms, as I’ve speculated previously. It also seems pretty clear that the potential network sharing deal mentioned in the WSJ article about the discussions with Google would most likely be with Clearwire rather than Sprint, because the benchmark terms set by Sprint’s deal with LightSquared would be unattractive to DISH. As a result, it seems we are back to where we started – could DISH still pull off a deal with Clearwire (and does it want to in the current circumstances?), or will DISH end up selling its spectrum to AT&T and pursuing a merger with DirecTV instead?
FCC Chairman Genachowski took a trip to Wharton today, to tell a bunch of students about “the incredible world of mobile communications”. However, he also gave away an enormous amount of information about the FCC’s spectrum agenda, which so far has gone almost completely unreported. As first sight one might be distracted by such nonsense as “U.S. mobile data traffic grew almost 300% last year, and mobile traffic is projected to grow an additional 16-fold by 2016″ and the boast that he alone knew “that something was up”, “did the math” (wrongly) and “sounded the alarms…about the looming spectrum crunch”. Incredibly Chairman Genachowski even makes the ludicrous claim that:
“There were many skeptics [in 2009] about whether we faced a spectrum crunch. Today virtually every expert confirms it.”
Of course this comes just at the time when journalists are starting to ask “What happened to the spectrum crunch?”
Once you’ve stopped laughing at all of this, the meat of the speech is in fact very useful, as the Chairman indicates just how he hopes the “audacious” target in the National Broadband Plan of freeing up 300MHz of spectrum by 2015 will be “exceeded” by a combination of auctions, removal of regulatory barriers, clearing the TV bands and spectrum sharing. First of all, 75MHz of AWS spectrum will be auctioned, including, in 2013, the 10MHz of H-block spectrum desired by Sprint. This confirms that DISH has lost the battle to avoid a 5MHz shift in its uplinks, but in compensation DISH will at least be authorized to use the full 40MHz of spectrum (2005-2025MHz up and 2180-2200MHz down) for a terrestrial network “later this year”.
Secondly, an additional 50MHz of AWS-3 spectrum (desired by T-Mobile) will be auctioned, based on spectrum sharing with the DoD in the 1755-1780MHz uplink band. Finally, AT&T will get its rebanding of the WCS spectrum approved. The Chairman even indicates that the FCC is “working with stakeholders to enable use of the portions of the mobile satellite spectrum in the L- and Big LEO bands [i.e. LightSquared and Globalstar] for terrestrial service” although notably this spectrum is not included in the 2015 total, indicating that these efforts may not be concluded quickly.
The most obscure reference is in the unstated 15MHz balance of AWS spectrum planned for auction before 2015. Given the short timeframe, this can only be the 1695-1710MHz spectrum being reclaimed from NOAA. Presumably this block will be made available as uplink spectrum (because it is adjacent to AWS-1 uplinks at 1710-1755MHz) and as such it will be attractive for AT&T to pair with the WCS spectrum (which will probably all be converted to downlinks). However, this leaves LightSquared in a bind over the spectrum “swap” it proposed last Friday, because LightSquared does not want more uplink spectrum (let alone having to buy it in an auction), and after giving up the 1695-1710MHz block, NOAA will need to use the 1675-80MHz band even more intensively for weather balloons.
Looking at the bigger picture, the situation may be made more difficult not just for LightSquared, but for DISH and Clearwire as well, because the FCC’s actions appear designed to give all of the major wireless operators the spectrum they are hoping for in the near term. Specifically, the FCC intends to free up the H block for Sprint, the AWS-3 block for T-Mobile and 1695-1710+WCS for AT&T, while Verizon has already had its SpectrumCo purchase approved. Especially in the wake of yesterday’s T-Mobile/MetroPCS merger, this makes me wonder just how many attractive alternatives Charlie Ergen still has to a deal with Clearwire for buildout of his 2GHz spectrum?
Surprisingly little attention is being given to Charlie Ergen’s upcoming PCIA keynote speech on October 3, where he is set to “discuss DISH’s wireless plans” and will be followed by a Q&A session with FCC Chairman Genachowski. This may be due to the fact that many analysts believe DISH are unlikely to build out a wireless network and will instead seek to sell their spectrum to AT&T. Support for this view comes from the narrowing field of potential partners for DISH, with DirecTV indicating last week that “it’s hard for us to see why we would want to go and compete in [the wireless] space”. DISH have also been pushing back at the FCC on the proposed shift of their uplinks by 5MHz into the 2005-25MHz band, claiming that a 5MHz buffer is needed between their spectrum and BAS operations above 2025MHz, and that a shift would cause serious delays for their network buildout plans. However, our BAS industry contacts indicate that any interference issues would be largely manageable, and so many believe DISH may struggle to win this battle on interference arguments alone.
However, I think that in fact the chances of any spectrum sale to AT&T in the near future are rather low, unless DISH can put forward a wireless business plan that scares AT&T into making a knockout bid for the company. Indeed it is in AT&T’s interests to sit on the sidelines if they expect DISH to struggle with network buildout and customer acquisition, because then the potential price for taking the assets off DISH’s hands would most likely go down, and AT&T does not need (and could not use) the 2GHz spectrum band for several years.
As a result, whether or not a deal with AT&T remains a possibility, DISH now need to come up with a concrete plan for their network buildout as well as partnerships that AT&T would consider a real threat. Some of these pieces now appear to be coming together, and the first details may even emerge as soon as next week’s speech. With regard to a network buildout plan, it is interesting to note that DISH have apparently been building a significant stake in Clearwire’s first lien debt, which totaled almost $400M at the end of June and may now be considerably higher. Clearwire have also been highlighting the potential for “asset sales” to raise the money required to complete their planned LTE buildout.
A deal which could meet the needs of both DISH and Clearwire would be for Clearwire to sell its existing WiMAX network and retail customer base to DISH for something like $1B to $2B in cash (and Clearwire debt?) and then enter into a network sharing agreement for Clearwire and DISH’s separate LTE buildouts. This would allow DISH to acquire a network covering 130M+ people (and perhaps more when moved to the 2GHz band) at a very substantial discount to the $4B that Clearwire have invested in their network to date, and enable DISH to offer fixed wireless broadband to their existing satellite TV subscriber base. Indeed, by adding an outdoor 2.5GHz terminal alongside their satellite TV antennas, DISH could extend the range of the 2.5GHz WiMAX network to cover considerably more people compared to existing indoor modems. DISH would also presumably develop a dual mode 2.5GHz WiMAX/2GHz LTE (and perhaps 2.5GHz LTE) handset to provide an evolution path for Clearwire’s handheld customer base. Meanwhile, Clearwire could substantially reduce their network costs and gain additional income from leasing 2.5GHz spectrum to DISH for the next several years.
The second part of the puzzle is who DISH’s partner(s) for their wireless operation might be. Obviously AT&T and Verizon could not be partners, and after their AWS spectrum deal with Verizon, T-Mobile are almost certainly out of contention. Sprint have been looking for a hosting customer similar to LightSquared to help defray the cost of Network Vision, but if DISH enter into a network deal with Clearwire then that would likely rule out a partnership with Sprint (though Sprint’s wholesale WiMAX customers would continue using the Clearwire/DISH network for the time being). With DirecTV also now on the sidelines, it looks like DISH’s partner would have to come out of left field, and the only obvious option there would be Carlos Slim (and presumably America Movil). Its worth noting that Slim already appears to be interested in MSS spectrum, given he is probably the only remaining credible possibility for the mystery LightSquared investor that many thought was Ergen earlier this year, and he has an existing relationship with Ergen in Mexico, so a deal here would not be that much of a surprise.
The biggest unknown is how much of this unfolding story will emerge next week at PCIA. With the FCC not expected to approve DISH’s request for terrestrial use of the AWS-4 spectrum until later in October, it may be risky to reveal too much right now. If an announcement does come next week, then it will also come as a major shock to most wireless industry observers, because almost no attention is being given to the possibility of a tie-up between DISH and Clearwire. However, this may be the last chance for DISH to pressure the FCC not to shift their uplink spectrum, and a major announcement of network plans could tip the scales in their favor. As a result, I suspect that Ergen’s speech could well contain an announcement of a network deal, a partnership or perhaps even both.
It looks like the next month or so may be filled with interesting developments in the US spectrum market. Last week, it was reported that the FCC is preparing to launch of review of its “spectrum screen” at the September Commission meeting. Of course if the FCC suggests a preference for distinguishing between low frequency (sub 1GHz) and higher frequency spectrum, in response to concerns that AT&T and Verizon have been accumulating too much of the most valuable spectrum, then that might not only put a damper on the prospects for broadcast TV incentive auctions (recall that AT&T and Verizon contributed over 85% of the 700MHz auction proceeds back in 2008), but could be taken as a clear signal that the FCC would approve of AT&T buying DISH for its higher frequency spectrum.
In that context, it seems increasingly likely that the release of a LightSquared ruling (almost certainly confirming the FCC’s February proposal to withdraw LightSquared’s ATC license) will also come this month, along with approval of DISH’s terrestrial network in the 2GHz MSS band. This week DISH has been continuing its campaign to avoid its uplink allocation being shifted up by 5MHz to 2005-2025MHz, which is an option being considered very seriously by the Commission, as it would satisfy Sprint’s desire to access the H-block (which Sprint probably considered to be a done deal last November when it settled with DBSD and TerreStar), and mitigate both windfall and timeline concerns. However, it is notable that the Public Interest organizations who have been most vocal in raising the windfall issue actually oppose a relocation of the uplink due to the delay it would could in the standardization process.
Intriguingly, if we do see a ruling (at least partly) in DISH’s favor in the next month or two, it may make it even more difficult for Clearwire to pull off any potential spectrum sale. Then we may be faced with exactly the same situation in December as at the end of last year, namely does Clearwire pay the large interest payment due in December, or use the threat of a bankruptcy filing as leverage to raise more money from Sprint and others to fund it through next year.
LightSquared is also wheeling out the big guns in its lobbying campaign right now, with former FCC Chairman Kevin Martin lobbying the Commission on LightSquared’s behalf last week, and the company is once again ramping up attempts to get its side of the story across. This may raise a few eyebrows, given that Martin was key to approving ATC back in 2005 and then requiring Inmarsat to cooperate with LightSquared via their Dec 2007 agreement. However, it seems unlikely to change many minds at the Commission, especially in advance of the November election. Apparently the best that LightSquared could hope for is for the initial decision to be taken by the full Commission, rather than by the International Bureau on delegated authority, which would give LightSquared an earlier opportunity to challenge the decision in court (because an IB decision must first be appealed to the full Commission before any legal action is initiated).
After LightSquared’s attempts to insert consideration of its own situation into the DISH proceeding, it would seem natural for both rulings to emerge at about the same time. The FCC will also need to indicate in the DISH ruling how it plans to take forward any similar flexibility proceedings in other MSS bands, notably the Big LEO band, where Globalstar has emphasized that “Greater flexibility for mobile broadband in Big LEO spectrum [is] necessary to enhance financial viability of Globalstar and its mission-critical MSS offerings” (emphasis mine). With Globalstar looking to raise substantial financing (perhaps as much as US$250M to $300M if Globalstar aims to fund both the remaining satellites and the ground segment buildout) by the end of the year in order to move forward with the final phase of its second generation constellation buildout, it is plausible to conclude that a positive signal from the FCC in this regard within the next month or two may be a pre-requisite for completion of that financing (which would presumably involve a combination of additional Export Credit Agency funding and further investment from Thermo).
Finally, and separately, TerreStar Corporation appears to have basically resolved its bankruptcy, and the existing preferred shareholders will convert their holdings to equity and keep control of the company. It is interesting to note that the valuation put on the 8MHz of national 1.4GHz spectrum in the event of a liquidation was only $80M to $100M (or $0.03-$0.04/MHzPOP) for an M2M smart grid type network (which is gratifyingly close to my estimate of $60M to $100M two years ago at the beginning of this process). It is hoped that FCC waivers can be secured, which would make the spectrum more valuable and usable for LTE, but that is a long term process, and there is no guarantee that it will be attractive to manufacturers to include this small, isolated band in future LTE chipsets. As a result, although there is a proforma offer for sale of the spectrum, it is inconceivable that any bid would be higher than the $400M+ that the existing preferred holders could credit bid in any auction. Of course its also another example of how just assuming spectrum is always a valuable asset, without consideration of the limitations applicable to that spectrum, is a quick way to lose a lot of money.
So going back to my title above, the next few months should reveal a lot more about who’s going to show that they’re an “All Star” and who will prove to have “the shape of an L on [their] forehead”. However, one thing seems pretty clear: when the FCC announces its decisions, not everyone is going to be a winner.
Earlier today AT&T announced details of its new proposal with SiriusXM to resolve disagreements over how to deploy mobile broadband in the WCS band. AT&T is the largest holder of WCS spectrum, with about 4B MHzPOPs of spectrum, and NextWave is the second biggest holder. However, there is a difference in usability within the WCS spectrum between the C&D blocks (unpaired 5MHz blocks) that are immediately adjacent to the 2320-2345MHz satellite radio (DARS) band (and so have a much higher risk of causing interference with satellite radio receivers) and the A&B blocks (each a paired 2x5MHz channel) which are further away from the DARS band.
AT&T and Sirius’s proposal would sharpen this difference by prohibiting mobile use of the C&D blocks, while further liberalizing use of the A&B blocks. As a result, AT&T would then have between 10MHz and 20MHz of usable A&B block spectrum over roughly half the country. The result of this proposal would likely make NextWave’s life more difficult (because nearly half of its WCS holdings are in the C&D blocks), thereby potentially giving AT&T a chance to pick up additional A&B block WCS spectrum.
However, what is particularly intriguing about the details of AT&T’s submission is the proposal that it should be allowed more flexibility to deploy FDD technologies such as LTE, with downlinks in both halves of the WCS A and B blocks. In other words, AT&T would gain yet more downlink spectrum, in addition to the Qualcomm 700MHz spectrum that it acquired last year “to allow support of asymmetrical data bandwidth allocation”. Of course, the obvious unanswered question is where would the uplink spectrum to be paired (under the proposed FDD configuration) with both the Qualcomm and WCS A&B block spectrum come from?
What AT&T needs is a clean block of paired spectrum for an LTE Advanced deployment so that the Qualcomm and WCS spectrum can be used as carrier-aggregated downlinks. When it proposed the Qualcomm transaction, the scenario that AT&T advanced was to use the AWS band to serve this purpose, but of course that is now off the table with the collapse of the T-Mobile takeover. As I’ve noted before, the Qualcomm transaction alone therefore provides a pretty compelling reason for AT&T to be interested in buying DISH.
However, another fascinating possibility is that perhaps Moelis’s assertion last week that LightSquared’s spectrum would still be worth a considerable amount of money if used on an unpaired basis (i.e. as uplink only spectrum) might be grounded in something more than wishful thinking. Indeed Moelis cites the potential for at least some of LightSquared’s spectrum (the 1670-75MHz block leased from Crown Castle) to be paired with other spectrum blocks through carrier aggregation “similar to AT&T’s planned usage of Qualcomm’s 700MHz spectrum” and I’m told that this possibility has been explored with AT&T in recent months.
Of course, GPS interference concerns in LightSquared’s satellite band would still need to be resolved, and LightSquared would still need to pay for leasing spectrum from Inmarsat (according to Moelis’s figures the lease payment if the full L-band band is usable has now been increased to $145M p.a. from April 2014 under the revised agreement struck with Inmarsat in April). Even then, uplink spectrum is generally worth much less than downlink spectrum, both because there is a need for additional downlink spectrum due to traffic asymmetries and, as LightSquared found out to its cost, interference concerns can be more problematic in downlink spectrum.
As a result this severely undercuts Moelis’s argument that LightSquared should be able to attribute the same valuation to its spectrum whether it is used for uplinks or downlinks (not to mention the use of comparisons based on recent sales within the well established and widely deployed AWS-1 band). However, this possibility does at least raise the question of whether AT&T’s acquisition plans (which are intended to give it enough spectrum for the next five years) include options other than buying both DISH and Verizon’s 700MHz B block spectrum.
What a bizarre day in the world of LightSquared, where it appears nothing is ever as it seems! First of all, a comment yesterday on my last blog post gave some hints as to a completely different way to think about why Charlie Ergen might be interested in acquiring LightSquared’s spectrum, despite the current roadblock imposed by GPS interference concerns. Specifically, why couldn’t LightSquared’s L-band MSS spectrum be repurposed as uplink-only spectrum and then paired with the DISH 2GHz spectrum, which could all be converted to downlinks (a proposal already made in the FCC’s 2GHz NOI)? Then Ergen would have access to a total of up to 80MHz of spectrum which could be authorized for terrestrial use (four 10MHz uplink blocks in the L-band and two 20MHz downlink blocks in the 2GHz band).
As I pointed out in my reply to that comment, there are certainly some GPS interference concerns expressed by the NTIA over handsets operating in the portion of the L-band uplink closest to GPS (1627.5-1637.5MHz) and presumably these concerns would be considerably greater for uplink use of the 1545-1555MHz block because it is even closer to GPS. It would also be very hard to develop handset filters which could comply with the onerous ATC out of band emissions limits above 1559MHz (something that is easier to address for downlink use on a tower, where physical size and power requirements are less of a constraint), presenting further issues for uplink use of the 1545-1555MHz block. However, even if these two bands were dropped from the initial deployment plan and only three of the four bands were used eventually, DISH could still benefit hugely from having access to 40MHz of downlink spectrum instead of 20MHz. Indeed DISH might even be able to sell off or lease some of this spectrum to another operator and still build a network.
This guesswork seemed to be supported by LightSquared’s April 25 letter to the FCC, asking for the L-band to be addressed within the 2GHz NOI, so that “cross-band” solutions could be considered. The counter-argument is that any such change would obviously delay the process of authorizing and then building out DISH’s network considerably (most likely by 1-2 years), and therefore might not be acceptable to either DISH or to the FCC Chairman (assuming he is focused on maximizing the speed with which the 2GHz spectrum is brought into terrestrial use).
However, later in the day, news emerged that Harbinger and the debtholders have agreed on a change to the First Lien Debt Agreement, adding DISH specifically to the list of Disqualified Parties who are not allowed to purchase the debt (this section previously just referred generically to strategic purchasers). That would suggest Harbinger are not interested in some form of accommodation with DISH along the lines of the above “cross-band” spectrum pairing.
Even more bizarrely, I have had people insisting to me that it is definitely not DISH who is the purchaser, and Ergen is not formally denying an interest simply because he wants the LightSquared debtholders to be even more confused about his intentions, while he moves ahead with his plans in the 2GHz band. It was indicated to me that various people have already been spreading misinformation, for example when the WSJ was told that Falcone had agreed to step down (which I’m told he hadn’t), and when the New York Post was told that Falcone had not been presented with an economic proposal by the debtholders (which I’m told he had). According to this version of events, the New York Post story that “Ergen bought the debt” is similarly misleading and may even have been encouraged by Falcone and his advisors in order to persuade investors that there is strategic value in the spectrum. Of course that version of the story might just be wrong as well.
At this point what we do know is that Sound Point has a deep pocketed backer who is trying to acquire a significant amount of the LightSquared debt. If it’s not Ergen, then it is very hard to understand who would have a strategic interest in the spectrum at anything close to the price they are paying. We don’t know the intentions of the buyer, but it seems that they are probably not friendly towards Harbinger and would presumably therefore seek to force LightSquared into bankruptcy on Monday when the waiver expires. Whether they will gain support from other debtholders in doing that remains unclear, but it does seem that Falcone’s threat of a voluntary bankruptcy may not be give him as much power to dictate the outcome of this week’s negotiations as first thought. Most people certainly seem to think that another extension of the negotiations beyond next Monday is fairly unlikely and a resolution one way or another will be reached by then.
As a result we seem set for another few days of briefing and counter-briefing, in a situation where almost no-one knows who is telling the truth and who is bluffing. With $1.6B of debt and billions more in equity at stake, it really is going to be a game of high stakes poker this weekend.
Since news emerged yesterday that Carl Icahn had sold his $250M of LightSquared’s first lien debt at around 60 cents on the dollar there has been feverish speculation about whether someone else is backing Sound Point Capital, the small investment firm that bought the debt. Today that led to the price of LightSquared’s debt being bid up to almost 70 cents on the dollar, as investors wonder if a strategic player is interested in the company.
Attention has focused on Charlie Ergen, because of his record of doing the same with DBSD and TerreStar last year, with the Reuters article which broke news of the sale indicating that Ergen was previously an investment banking client of Sound Point’s principal. Notably, in both cases Ergen acquired debt of the companies before bankruptcy and then bought the assets out of bankruptcy, with the debt investors ultimately getting paid back at par. Ergen was even asked on today’s DISH results call if he was “interested” in LightSquared’s spectrum, but deflected the question by responding that DISH has all the spectrum they “need”.
Icahn was not regarded as a spectrum expert, and it was with some justification that Harbinger argued 10 days ago that “they doubt Icahn would get better results from DC”. In contrast, Ergen has an intimate knowledge of the regulatory issues and currently appears to be far more in the FCC’s good books than Falcone (exemplified by Ergen’s ability to secure a meeting with the FCC Chairman on January 4, when Falcone was relegated to only meeting with officials on the same day). Indeed LightSquared’s investors would very likely welcome the involvement of Ergen with open arms, and would certainly trust Ergen far more than Falcone to negotiate a way out of their current dilemma, despite Falcone’s claims in his comments to an earlier blog post of mine that:
Everyone knows Ergen is not going to build out a network. No one trusts him, including the FCC. They are not going to put their eggs in that basket because they know he will make them look foolish. It is inevitable. This guy, as smart as he is, will never build the network. He is using it as bait so one of the big guys step up and attempt to pay him for a dwindling subscriber base. Dish and Ergen are on the downward slope of a steep hill and he knows that, hence his aggressive acquisition tactics over the last 12 months…. stay tuned….
Of course we don’t yet know who, if anyone, is behind the purchase of Icahn’s holdings. Even if it is Ergen, then he could have a range of motivations, ranging from a defensive move to ensure LightSquared doesn’t disrupt the current FCC proceeding to authorize terrestrial use of the DBSD/TerreStar 2GHz spectrum, to a desire to help the FCC out of a hole, all the way to seeing a long term opportunity to make the L-band spectrum useful for terrestrial service. Indeed several of these factors could be in play simultaneously.
UPDATE: The New York Post is now reporting that Ergen was the buyer and he picked up another $100M of debt last week in addition to Icahn’s $250M holding.
However, one important consideration to bear in mind when drawing parallels with DBSD and TerreStar is that in those cases the spectrum was owned free and clear (whereas LightSquared has an expensive lease contract with Inmarsat, albeit one that is currently on hold) and (in the absence of a spectrum swap) the GPS interference problems in the L-band mean it will be many years before even a portion of the band (likely at most 20MHz) is usable. Both those factors will significantly depress the value of LightSquared’s spectrum relative to DBSD and TerreStar (where Ergen paid $1.4B-$1.5B for 20MHz of spectrum from each company) and make it much harder to justify paying anything close to the $1.6B par value of LightSquared’s debt simply to acquire LightSquared’s spectrum assets.
This week’s Bloomberg article about LightSquared had an interesting assertion from Nathan Pettit, an assistant professor at New York University’s Stern School of Business that “Falcone’s doubling down on LightSquared fits a pattern”:
“People of status and power have an illusory sense they can control more than they do,” said Pettit. “That leads to unrealistic optimism, increased risk-taking and decreased inhibitions.”
That brought back memories of the classic case study on Iridium’s 1999 bankruptcy, by Sydney Finkelstein, which was included in his book “Why Smart Executives Fail” (uniquely, Motorola actually features twice in the book, both for Iridium and for missing the transition to digital cellphones). I wonder if Mr. Falcone has ever read this book and case study, because the parallels with the LightSquared debacle are quite striking. In particular, the three forces that according to Finkelstein combined to create Iridium’s business failure were:
1. Escalating commitment among Motorola executives who pushed the project forward in spite of known and potentially fatal technology and market problems
2. For personal and professional reasons Iridium’s CEO was unwilling to cut losses and abandon the project
3. Iridium’s board was structured in a way that prevented it from performing its role of corporate governance
In the case of LightSquared/SkyTerra/Harbinger, it is pretty easy to identify exactly the same problems:
1. Escalating commitment by Falcone, who kept devoting an increasing proportion of Harbinger’s assets to SkyTerra/LightSquared (and other spectrum projects such as TerreStar), despite Falcone’s apparent awareness of the GPS interference problems and the lack of interest from wireless operators in buying this (or any other MSS) spectrum. Similar to Motorola, Falcone’s history was that similar bets (e.g. in subprime mortgages and iron ore) had paid off in the past and so just as with Motorola he has maintained his “arrogance” that “the investment thesis was dead-on“.
2. Unwillingness to cut losses, because Harbinger’s investment was in equity, which would all be wiped out if Falcone did not continue with the project, but the chance of a recovery could be preserved by raising additional senior debt from third parties (just as with Iridium, where the bondholders also got stuck with a 99% loss because in the end the assets were essentially worthless).
3. Lack of corporate governance, because Falcone was able to make whatever bets he wanted with Harbinger’s money, despite the fact that as another Bloomberg interviewee pointed out “There should have been constraints on risk and concentration of the investments”. In addition, SkyTerra’s board was focused solely on trying to raise money and then sell the company to someone else (Falcone) rather on whether they actually had a viable business at the end of the day, because they could never hope to fund a terrestrial network buildout themselves.
As I’ve pointed out before, it took nearly nine months after the Iridium bankruptcy filing in August 1999, before the investors actually realized that the assets were worthless (and considered de-orbiting the satellites), during which time even as smart an investor as Craig McCaw considered a multi-billion dollar commitment to rescue Iridium. Indeed in the end McCaw and others actually committed $1B+ to rescue the similar ICO project, much of which now looks to have been wasted after ICO’s jury verdict against Boeing was reversed last week. As we look to what will happen next, I’m therefore left wondering if history will once again repeat itself, with Icahn in the role of McCaw, and a decade long court case in the offing.
After today’s FCC Open Meeting there is a lot of speculation about the content of the 2GHz NPRM and NOI which is expected to emerge very shortly. The FCC indicated that it would reallocate the entire 40MHz of spectrum (2000-2020MHz uplink/2180-2200MHz downlink) to terrestrial services, redesignating it as the AWS-4 band. Many have assumed that this means that DISH would secure unlimited terrestrial rights across the whole band, with no givebacks, but the FCC was careful to indicate in the press conference afterwards that “flexibility applies across the whole band” but not that DISH will get flexibility across the entire 40MHz.
UPDATE: The NPRM has now been released and it appears that there is no definitive requirement for DISH to give back any spectrum, and it would simply be allocated terrestrial licenses nationally in exchange for a buildout criteria of 30% of the population within 3 years (not dissimilar to the 100M POPs agreed to by LightSquared) and 70% of the population in each economic area within 7 years (a somewhat less onerous requirement than LightSquared). Though the possibility is raised that DISH will move up by 5MHz and possibly even give up another 5MHz of uplink spectrum, there is no mention of a larger amount of spectrum being returned to the FCC in exchange for these terrestrial rights, suggesting that Charlie Ergen has played a stunningly good hand of poker to achieve such a result. Of course, it would not be in the least bit surprising to see accusations of a windfall emerge, just as they did with LightSquared.
The FCC has also accompanied the NPRM with an NOI, which proposes a “variation of the AWS-4 band plan” intended to “extend the AWS-1 and PCS spectrum with 65MHz of usable bandwidth”. This alternate plan involves converting the MSS uplinks to downlink spectrum, so that the entire 1995-2025MHz band would be additional PCS downlink spectrum. In exchange the MSS licensee could be granted access to the 1695-1710MHz band which would be paired with 2180-2200MHz as an AWS extension band. This hardly seems to be something that DISH would be keen on, given that it would involve defining another non-standard band class, and would not be compatible with the existing 2GHz satellite services, which DISH might at some point want to explore in Europe.
What is striking is that the FCC’s proposals are hard to reconcile with the requirement in the payroll tax bill back in February that the FCC should identify a “additional 15MHz of contiguous spectrum” to be auctioned, which is why I had assumed the NOI would propose that DISH gave up 10MHz of spectrum and moved its uplinks up by 5MHz into the 2020-25MHz J-block spectrum, as I indicated back in February.
In this context it is hard to see why the FCC bothered with the NOI, unless it is to use this to put more pressure on DISH to give up part of its uplink spectrum. I had guessed that the NOI would be the FCC’s preferred outcome and so NPRM would propose far more unfavorable terms for DISH. In other words, the NPRM would be “designed to fail” in order to drive all parties to a solution which would free up a greater amount of spectrum for auction.
Now we will have to see how commentators react to the NPRM. Could further pressure be brought to bear over the potential windfall, leading to a proposal that DISH gives up an extra 5MHz of uplink spectrum and create the 15MHz block of spectrum for the FCC? If not then the FCC will presumably have to look elsewhere for spectrum to meet the Congressional mandate, unless it perhaps claimed that it is not possible to auction the H-block due to interference concerns in the 1915-1920MHz band, and so the 1995-2010MHz block would meet this mandate. More importantly, the FCC appears to be betting that DISH will actually build out a network to introduce competition to the US wireless market, and so if the end result (after the November election) is a takeover bid from AT&T, it will be interesting to see what attitude the FCC takes to such a bid. If that occurs, and goes through without any further givebacks, then the FCC might very well be seen to have failed in its attempts to maximize the value of spectrum for the public interest. On the other hand, perhaps that could be the point at which an additional 5MHz of spectrum might be given up.
FURTHER UPDATE: As an aside, the NOI doesn’t appear to do much for LightSquared’s hopes of creating substantial incremental value for its Crown Castle lease in the 1670-75MHz block. LightSquared is apparently busy trying to extend its financial runway, but it may now be more difficult to avoid the looming financial crunch at the end of the second quarter of 2012, when LightSquared must repay a roughly $300M loan to its creditors.
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