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.
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.
Last week, at its partner conference, Iridium announced the launch of its new GO! product, which will provide the ability to relay calls and data to and from a smartphone via WiFi, at a reported retail cost of $700-$800. Iridium is looking to boost its revenues from handheld data (i.e. email, texting, etc.) which to date have been fairly modest in the satellite phone market, and will offer lower cost bundles of data minutes, including unlimited packages for intensive users. Indeed, one of the likely use cases is on yachts and fishing boats, which don’t need a full blown high speed data solution. This is slightly different to Thuraya’s SatSleeve, which is more likely to stimulate incremental voice usage, because the SatSleeve is physically attached to an iPhone or Samsung S3/S4 phone and so is easier to use for voice communications.
Globalstar also threw its hat in the ring, pre-empting Iridium’s announcement with the Sat-Fi, which is “expected to receive final FCC certification…during the second quarter of 2014, with shipments starting shortly thereafter.” Globalstar has had a “puck-like” device on its roadmap for several years, but has always wrestled with whether it is worthwhile to invest in product development for a product based on its existing Qualcomm air interface, with a potentially limited lifespan, or if it is better to wait for the new Hughes chipsets in 2015, which will offer improved data capabilities and will be supported throughout the lifetime of the second generation constellation.
Its therefore interesting to note that (according to my sources) the Sat-Fi will be based on the Qualcomm GSP-1720 voice and data module rather than the Hughes chipset. This suggests that Globalstar either perceives a large near term opportunity, which would justify making the investment now, or was particularly focused on spoiling Iridium’s announcement. Iridium clearly thinks it was the latter, and doesn’t believe that the Sat-Fi is actually “real”.
Globalstar has kept details of the Sat-Fi pretty quiet (although it filed a patent application on some aspects of the concept two years ago), and none of the MSS distributors I’ve spoken to seems to know much about the size, price or market positioning of the Sat-Fi device. However, despite Globalstar’s greater focus on the consumer market, it does not appear likely that Sat-Fi would sell in significantly higher volumes than Globalstar’s existing satellite phones, assuming a comparable price point. Indeed estimates that there might be 150K hotspots in use by 2022 would represent only 10%-20% of the expected satellite phone market in that timeframe.
I’m sure this will be make for a fascinating discussion during the MSS CEO panel at Satellite 2014 and perhaps even a return to some of the contentious debates of prior years. Ironically, the barbs being thrown around over the GO! and Sat-Fi don’t fully reflect the competitive landscape in the MSS industry, with Iridium and Globalstar focusing to a significant degree on different distribution strategies, target customers, and (to some extent) geographies.
In that context, both could be successful in different parts of the market, which would make this much like prior arguments over Inmarsat’s ISatPhone Pro and its supposed advantages over Iridium (reflected in the Gabby Wonderland video produced by Inmarsat’s marketing agency in 2010). In that case Inmarsat’s initial belief was that the ISatPhone Pro would hurt Iridium’s satellite phone business significantly, but in reality Iridium continued to dominate the higher end of the MSS handheld market (and sold more satellite phones than Inmarsat at much higher equipment margins), while Inmarsat expanded the low end of market instead.
In my view the announcement of a partnership between Orbcomm and Inmarsat on Monday evening may represent a sea change for the MSS industry, as Orbcomm showed how its planned “multi-network operator strategy” could eventually lead to it getting out of the business of operating its own satellite fleet, allowing Orbcomm to be what it wants to be: a solutions provider rather than a satellite operator.
In the short term the deal means that Orbcomm will invest in developing a new low cost Inmarsat ISatDataPro (IDP) module, costing around $100 (i.e. aiming to be less expensive than Iridium’s SBD module) which OEMs and VARs can choose to drop into their terminals as a direct alternative to Orbcomm’s own OG2 module, using a common management interface provisioned by Orbcomm.
The choice of module will be up to the OEM, and will depend on their data needs (IDP has higher capacity and less latency, because there will sometimes be several minute gaps in coverage between the 17 OG2 satellites), the geographies they will serve (Inmarsat will provide access to Russia and China) and the price they are willing to pay (IDP service will be more expensive than the current Orbcomm $5-$6 OEM ARPUs). Note that this is somewhat different than Orbcomm’s arrangement with Globalstar, under which Orbcomm’s Solutions business offers a Globalstar tag to retail customers (and existing Comtech VARs), but Globalstar will not be a direct alternative for Orbcomm’s OEM customers (who buy from Orbcomm’s Devices and Products business).
In the longer term it seems to me that (although this is not part of the current agreement with Inmarsat) Orbcomm will very likely not build a third generation of LEO VHF satellites, as the nature of their network (where the LEO satellites search actively for channels that are free of interference as they orbit the Earth) would be very difficult to consolidate onto an Inmarsat GEO platform. Because Orbcomm will have access to Inmarsat capacity on an I6 constellation which will last into the 2030s, eventually (in a decade or more) Orbcomm could instead migrate its customer base onto Inmarsat’s L-band services, so that it will not have to spend hundreds of millions of dollars on another round of fleet replenishment. In fact, if Orbcomm has any substantial launch problems with OG2 (remember that the satellites from its last two launches have been lost) it might not even make sense to reinvest the insurance proceeds in replacement satellites and conceivably such a migration could take place more quickly.
The significance of this announcement is that it appears to represent the first step towards a reduction in the amount of capex being invested in the rather slow growing MSS market. The next question will be whether, when Inmarsat orders its I6 L-band satellites (likely in late 2014 or early 2015), it opts for a copy (or even a simpler version) of the I4 constellation, and thus whether, as I suggested last year, we really have now reached the “end of history” in the MSS L-band industry. After all, with the sale of the Stratos energy business to RigNet (and a likely disposal of Segovia), Inmarsat is now backing away from its strategy of going direct, and is continuing to focus on maritime price rises to boost revenues, in accordance with the other part of my “end of history” thesis.
I won’t belabor the errors of physics in the movie, instead just noting that even though you might think that in space things can keep going in a straight line indefinitely, they are still subject to gravity and you can’t get to a higher orbit without some form of propulsion.
We’ve now seen confirmation from Iridium of what I pointed out last week, that Q3 was very bad for the MSS industry. Iridium missed its expectations for equipment revenues (i.e. handset sales) and subscriber growth (i.e. M2M net adds), although at least the government contract renewal is more favorable than expected – the unlimited nature of the contract removes the incentive for the DoD to scrub its user base to remove unused handsets, which has been a headwind for Iridium in the last couple of years.
Its far from clear that anyone else is doing better: it looks like Iridium’s competitors also saw pretty poor handset sales in Q3 and the SPOT 3 has been very slow to arrive in stores as well. Moreover, the government business is dire – Intelsat’s profit warning (which included its off-net business reselling MSS) is a bad sign for Inmarsat, as are the large scale layoffs in Astrium’s government business last week.
Inmarsat has now followed up its promise not to raise FleetBB prices in 2014 with an enormous 48% rise in maritime E&E prices from January, in an attempt to sustain maritime revenue growth next year. While the stated intention is to persuade the remaining pay as you go customers to move off the E&E network and choose FleetBB instead, the vast majority of higher spending B and Fleet customers have already migrated and many of the remaining users are mini-M voice-only users or really want the PAYG service because they are only occasional users, so FleetBB is not necessarily the ideal option.
Inmarsat is clearly calculating that these customers won’t want to risk moving to Iridium after the OpenPort problems earlier this year and has stepped up its efforts to portray Iridium’s network as “failing”. Despite all this, no-one believes that Inmarsat could possibly achieve its 8%-12% revenue growth target for 2014 and I expect this to be “softened” in the near future as well. Inmarsat is also likely to emphasize its opportunities for internal cost savings next year and move to dispose of some retail business units like Segovia.
Its interesting to speculate about implications for the wider satellite industry as well. Last time around (in 1999-2003), problems in the MSS industry were a harbinger of a downturn in the FSS industry a couple of years later. That came in the wake of a peak in satellite orders in the 1999-2001 timeframe and after the launch of these satellites, which resulted in a sharp decline in prices, the FSS industry took a big hit. We’ve seen a similar peak in orders in recent years (2009-10), and while the major operators are much more likely to retain pricing discipline (in a far more consolidated industry than a decade ago), the advent of High Throughput Satellites, especially those owned by smaller players like Avanti (who might become the most desperate for contracts), could pressure prices in certain market segments and geographies.
Just as an example, in recent years, underlying transponder demand has grown at roughly 4% p.a., but revenues have been boosted by around 2% p.a. by price rises. Even if demand growth continues (not a foregone conclusion in some sectors like government where WGS is an alternative), a reversal of the pricing trend would certainly make a big difference to the FSS revenue outlook. As I said at the beginning of this post, gravity clearly exerts a force, even in space.
Incredible…it’s even worse than I thought
That’s been the reaction to my 57 page Globalstar profile, released on Friday (you can see the contents list here and get an order form here), because of the history of challenges that the MSS industry has faced in the past and more particularly the difficulties that the industry is seeing this year.
After discussions with a number of people in the industry over the last few weeks, it looks like Q3 has been pretty disastrous for MSS sales across the board, with none of the usual surge in demand expected in the summer months, as customers stock up to prepare for outdoor adventures or potential hurricanes. Part of that relates to slow government orders, as a result of the sequester (predating the current shutdown), but commercial demand has also been poor, and that’s much harder to explain.
In the handheld segment, one suggestion is that Hurricane Sandy proved that terrestrial cellphone networks are now considerably more reliable during disasters (and far more data capable than MSS phones), so companies are no longer giving as high a priority to MSS equipment in their disaster planning. In the M2M segment, a fairly convincing explanation is that service providers who formerly specialized in MSS are now focusing more and more on selling cellular-based solutions to customers who find they don’t need MSS as a backup.
As a result, I’m now convinced that subscriber growth (and equipment sales) will fall short of expectations this year, particularly in the handheld and M2M segments, for almost all of the major MSS players, with knock-on effects for subscriber revenues in Q4 and more particularly next year. The defense business also looks poor (as shown by Intelsat’s recent profit warning): the word on the street is that Inmarsat may dispose of its Segovia government FSS business, as revenues in Inmarsat’s US Government business unit fell by 11% year-on-year in the first half of 2013 and appear to have eroded further in recent months, particularly in Segovia’s VSAT business. The sale price would be a fraction of what Inmarsat paid for Segovia, but in exchange Inmarsat would hope to secure a GX airtime contract, similar to its RigNet deal in the energy sector.
In the case of Globalstar, the implications of the MSS downturn are that while Globalstar should be able to meet the new bank case revenue forecasts, it won’t be easy to beat them. However, unlike some other players, Globalstar is fortunate in having the potential upside from monetizing its spectrum, if it can complete a deal with Amazon or another company. The report looks at spectrum valuation for both LTE and TLPS and concludes that there could be substantial value for Globalstar, although realizing this will require both rapid approval from the FCC and for a deal to be struck fairly quickly, before new spectrum bands such as 3550-3650MHz develop an alternative ecosystem at what will likely be much lower prices. If you are interested in getting a copy, please contact me for more details.
Why didn’t Phil think of this first?
With MSS revenues in a bit of a funk this year, its not surprising that MSS operators are pursuing opportunities to attract consumers and expand the voice market outside the traditional verticals. We saw this first of all with Thuraya’s SatSleeve, announced at the Satellite 2013 conference in March. The SatSleeve connects via Bluetooth (and in the latest version WiFi) to an iPhone allowing the customer to use their iPhone contacts and touch screen interface. However, a key limitation is the need for compatibility of the sleeve with a particular phone form factor, and Thuraya has just launched a new version of the SatSleeve compatible with the slightly larger iPhone 5 handset rather than the original iPhone 4.
One way to overcome this handset compatibility issue is to use an external puck-like device, similar to a SPOT Connect or DeLorme inReach product, but offering voice and data capability in addition to simple messaging. This concept has been around for many years, and indeed was part of Craig McCaw’s new business plan when he bought ICO out of bankruptcy back in 2000: ICO told the FCC in its original ATC application in March 2001 that
“The use of already-permitted wireless technology such as Bluetooth or IEEE 802.11 could allow a whole range of consumer devices – standard terrestrial phones, PDAs, or laptop computers – to communicate with a satellite transceiver that houses the antennas, amplifiers, and other electronics unique and specific to the satellite link”.
Subscribers to my MSS research service heard 6 weeks ago about Iridium’s new handheld product, scheduled for launch at the end of the year, which is apparently exactly this puck-like device. It will be positioned to compete at the low end of the handheld market with a broadly comparable price to Thuraya’s SatSleeve (which was originally announced at $499 but is now selling for $599 to $799) and the Inmarsat and Globalstar handheld phones. I’m now told that Inmarsat is working on a similar device for release towards the end of next year, and meanwhile Globalstar has announced that it is “aiming to bring a $100 satellite device to market in 18 months time…to enter into a totally different market”.
I understand that Globalstar’s new device is likely to be the long-awaited two-way SPOT product, and may not be voice-capable like Iridium and Inmarsat’s new devices. It remains unclear whether the form factor will be a smartphone-connected puck (like SPOT Connect) or a standalone device: certainly the standalone device has sold much better for Globalstar to date, but equally well this might make it harder to expand beyond the current market of techie-focused backpackers and outdoorsy people (the vast majority of SPOT users are like me: 40-something relatively high income males with an interest in technology). Given the 18 month timetable stated by Globalstar, its also unclear whether this would be based on the new Hughes chipset or the current SPOT uplink plus a similar downlink channel, as the second generation ground segment upgrades are supposed to take about two more years to complete.
As Globalstar moves to raise its profile with investors, it seems the next stage will be a new round of fundraising (Globalstar noted in its 2013Q2 10-Q that “In June 2013, the Company entered into an agreement with Ericsson which deferred to September 1, 2013 or the close of a financing approximately $2.4 million in milestone payments scheduled under the contract”), presumably helping to reduce some of Thermo’s $85M backstop commitment (of which $40M had been provided by the end of July and $4.4M had been offset by receipts from termination of the 2009 share lending agreement). Indeed, it would be plausible for fundraising to go beyond this ~$35M level given the rise in Globalstar’s share price in the expectation of a positive outcome from the FCC, though it appears unlikely Globalstar will order more satellites anytime soon, given that the legal disputes with Thales are apparently still ongoing (Thales has “alleged that Thermo had failed to pay Thales $12,500,000 by December 31, 2012 as required by the Settlement Agreement“).
It seems Globalstar is highly confident that its NPRM will be issued by the time Chairman Clyburn leaves office, so it would be reasonable to suspect that this new financing is intended to take place in the next month or so, helping to cover payments of $20M+ due to Hughes between August 2013 and January 2014). Last week’s grand bargain over the 700MHz A&E blocks, DISH’s AWS-4 downlink waiver request and the H block auction, certainly indicates that I was too pessimistic in believing that Clyburn didn’t want to address spectrum issues and would leave these for Wheeler, and it would therefore now not be in the least bit surprising to see the Globalstar NPRM released at or around the time of the September FCC Open Meeting (when Clyburn will have what might be the last chance to trumpet her accomplishments as Chairman). Clyburn also appears less likely than Wheeler to pursue the “harm claim threshold” approach favored by the FCC’s TAC, which is good news for Globalstar in terms of how long it would take to issue an FCC order, although given that the FCC highlighted the speed with which it had moved to complete the DISH ruling last December (within 9 months of issuing the NPRM), it is still hard to imagine a final ruling on TLPS before early summer 2014.
So the key issues for Globalstar are likely to be how successfully it can build up its MSS business (note that the revenue projections given for the bank case in the new COFACE agreement generate just enough cash to cover debt, interest and capex payments through 2022 but little else) and more importantly whether Globalstar can find a partner to exploit its spectrum assets. We know about Amazon, but will there be other interest either from the cellular industry or (perhaps more plausibly) from non-traditional players? What are the best comparisons for spectrum valuation for TLPS and/or LTE authorization? I’ll be publishing my updated profile of Globalstar shortly and all of these issues will be discussed along with my revenue projections for the MSS business.
DISH’s submission to the FCC earlier this week, offering concessions on 700MHz E block power limits (thereby securing support from AT&T), and the prospects of a bid of up to $0.50/MHzPOP ($1.5B) for the PCS H block, in exchange for the option to use the 2000-2020MHz AWS-4 uplink band for downlink operation, confirms that DISH’s plan is to use LightSquared’s L-band spectrum for uplink operations. That would presumably be paired with the 2180-2200MHZ AWS-4 downlink, which would give DISH the opportunity to offer the 2000-2020MHz band as supplementary downlink for PCS operators. It also confirms that DISH’s two targets for a potential partnership are now AT&T and Sprint, since they will be the two main LTE operators in the PCS band, and strongly suggests that DISH no longer has any interest in buying T-Mobile (though a deal with DirecTV remains plausible in 2014).
Its important to remember that now it hasn’t got access to the Clearwire spectrum, DISH is essentially offering a partnership under which it would host AT&T or Sprint’s mobile spectrum (most likely in the WCS and BRS/EBS bands respectively) on its planned fixed broadband wireless network (which would use the AWS-4 downlink and L-band uplink for backhaul). In other words, DISH becomes a tower company, offering small cell hosting for as little as $100-$200 per cell per month, because DISH’s wireless broadband subscribers will be providing the site (on their rooftop satellite TV antenna) and the power for free.
If DISH secures auxiliary PCS downlink spectrum then it will also have an even more attractive set of additional spectrum to lease to AT&T or Sprint for their macrocell rollouts. That’s in addition to the 700MHz E block spectrum which AT&T desperately wants (and will feel even more pressure to secure, now it will be able to move forward with the rollout of the Qualcomm D/E block spectrum). Stating that DISH will bid for the H block also puts additional pressure on Sprint to come to a deal, which would substantially reduce the cost of SoftBank’s planned small cell rollout in the 2.5GHz BRS/EBS band in suburban and rural areas.
UPDATE (9/13): With the FCC confirming plans for a Jan 2014 H-block auction this afternoon, with DISH’s proposed reserve price of $0.50/MHzPOP, it seems near certain that DISH’s deal is on a fairly smooth path to being approved by mid December (30 days before the auction starts), so DISH should have clarity in time for the LightSquared auction. It is possible that this could lead to other subordinated debt/preferred holders attempting to push up the price DISH will have to pay, but it is also important to note that DISH will have other potential choices (such as the 1695-1710MHz block) for uplink spectrum and will have the option but not the obligation to switch the AWS-4 uplink band to downlinks. Thus the timetable this time around is likely to be highly favorable for DISH: it will know about the FCC before the LightSquared auction wraps up, which comes before the H block auction, which comes before the 1695-1710MHz auction.
However, one key consideration for DISH is whether it will be forced to pay lease fees to Inmarsat for the LightSquared spectrum, starting next April, which would be around $90M-$100M p.a. if LightSquared’s application for 20MHz of terrestrial uplink authorization is ultimately approved. (Note that DISH is certain to drop LightSquared’s request for a purported “swap” of downlink spectrum in the 1675-80MHz band, as it only wants the L-band uplink in the near term, and this is an obvious concession to offer to the FCC).
I believe that DISH is unwilling to pay Inmarsat anything material in cash while it is waiting for a terrestrial deal, and therefore needs to gain leverage over Inmarsat in the run up to the April 2014 deadline for payments to resume. To do that I understand that EchoStar’s Hughes subsidiary is working on a dual mode L/S-band satellite phone, and Ergen is considering a roaming agreement/partnership with Thuraya, enabling Thuraya to gain access to the North American market via the TerreStar and/or LightSquared satellites. Alternatively, in order to entice Inmarsat into a deal, DISH is prepared to enter into a European S-band joint venture, using the TerreStar-2 satellite to secure Inmarsat’s S-band license (of course if Inmarsat refuses then DISH could instead partner with Solaris Mobile, the Eutelsat/SES joint venture).
So it now looks like we are set for a tense few months of dealmaking in the MSS industry, and investors will have to wait and see whether Inmarsat is prepared to compromise over the LightSquared Cooperation Agreement. Of course, if Inmarsat refuses, and the Cooperation Agreement lapses, then Inmarsat could prevent any terrestrial use of the L-band spectrum by DISH. However, that might not go down too well with the FCC, if it is relying on DISH to bring the additional spectrum into use soon (and provide rural broadband competition to boot), so it is far from clear who has the most leverage here.
In addition, I’m told that Inmarsat signed the contract with Boeing on Tuesday for the fourth GX (backup) satellite, so it now will incur an extra $150M+ of capex in the next few years (assuming that this satellite remains a ground spare, which is not a foregone conclusion in the medium term).
UPDATE (9/13): Inmarsat also told potential customers this week not to expect global GX coverage until Q1 or Q2 of 2015.
That could be an awkward message for Inmarsat’s investors, who have bid up the company’s shares substantially in recent months, if Inmarsat not only has to spend more money on satellites, but is also facing the prospect of no more cash from the L-band spectrum, the possibility of investment to exploit the European S-band license (if it does partner with DISH) and perhaps even additional competition for its core MSS services (if Inmarsat rejects DISH’s offer).
That seems an appropriate title, as I head off to London and Paris this week, to hear MSS and other satellite operators talk about their future opportunities. I found it interesting to note that Euroconsult released their updated MSS market assessment a couple of weeks ago, cutting their projection of future wholesale revenue growth from 7% p.a. (in the previous version of their analysis) to 5% p.a. over the next 10 years, getting back much closer to my forecasts from a couple of years ago.
However, by my estimate, MSS wholesale service revenues only grew at 2% in 2011 and 3% in 2012 (not 5% as Euroconsult estimates, perhaps due to double counting of Orbcomm’s revenue growth from resale of Inmarsat and now Globalstar services) and the majority of this growth in 2012 came from Inmarsat’s price rises. While it originally looked like 2013 was shaping up to see a bit better growth, Iridium has reduced its guidance, Globalstar’s second quarter results were nothing to write home about and Inmarsat is again seeing a significant part of its modest revenue growth being driven by maritime price rises. So its now far from clear that we will get even to Euroconsult’s lowered 5% growth projection in the near term.
While spectrum is a wildcard that could provide incremental revenues for Globalstar (through a potential deal with Amazon) and Inmarsat (through a resumption of lease payments from LightSquared), progress here may not be as fast as expected. Globalstar’s hoped for NPRM is not on the tentative agenda for the FCC’s September Open Meeting, presumably meaning that although the NPRM has now been placed on circulation this issue may be left for incoming Chairman Wheeler to finalize. The recent application by Oceus Networks for an experimental license to test TLPS for DoD users also suggests that a partnership with Amazon is far from set in stone as the way Globalstar will be able to realize value from its spectrum assets.
In contrast, it looks increasingly like DISH will succeed in its bid to buy LightSquared’s satellite assets later this year, and DISH has agreed to assume the Inmarsat Cooperation Agreement as part of its stalking horse bid. But buying LightSquared is a sign that DISH is unlikely to move forward quickly with its entry into the wireless market, because it would take until late 2014 or beyond before the FCC could approve any change to downlink use for the 2000-2020MHz AWS-4 uplink band. At the moment it seems that interim FCC Chairman Clyburn doesn’t want to take a decision even on LightSquared’s uplink band (let alone address the purported “swap” of downlink spectrum, which Ergen doesn’t want or need – leaving MAST Capital Management stuck holding a largely worthless lease of the 1670-75MHz spectrum band), because the FCC will not receive reply comments until September 23 (shortly before Clyburn relinquishes the chairmanship). So even if DISH buys the satellite assets, and drops the request to get hold of the 1675-80MHz band, reaching any resolution of the current regulatory issues in the L-band will undoubtedly be a lengthy process.
Charlie Ergen hinted on DISH’s Q2 call that he doesn’t anticipate simply continuing the Cooperation Agreement in its current form, so it would not be at all surprising to see a fight between DISH and Inmarsat over renegotiation of the Cooperation Agreement in the early part of 2014. One possible compromise could be in the form of a partnership between DISH and Inmarsat to use the TerreStar-2 satellite to preserve Inmarsat’s S-band license in Europe, in exchange for further postponement of any cash payments under the Cooperation Agreement.
Despite (or perhaps because of) the challenges that the MSS market faces, M&A continues apace. Recent agreements include Inmarsat’s sale of its energy sector assets to RigNet and Rockwell Collins’ acquisition of ARINC. I understand a number of additional notable transactions are in the works. Rumors persist that SITA has put OnAir up for sale (only six months after buying Airbus’s stake in the business) and Honeywell appears to be the most likely buyer, while Orbcomm continues its acquisition of satellite M2M service providers and may now be in negotiations to buy Comtech Mobile Datacom.
UPDATE: According to an OnAir spokesperson “SITA has no intention to sell OnAir to Honeywell or to anyone else and remains OnAir’s sole shareholder.”
It will be particularly interesting to see the valuation put on OnAir, given the recent disastrous public offerings of Gogo and Global Eagle/Row44, because if OnAir attracts a much lower valuation than Gogo and Row44 it could be a sign that SITA is pretty pessimistic about the future of the inflight connectivity market. That would be a surprise to many, because after all inflight connectivity is seen as one of the major areas for growth in the MSS market going forward, but at present making an operating profit, let alone a return on investment, is a pretty distant prospect for most if not all of the service providers. So if now is the time for SITA to get out, will this turn out be the age of wisdom for the sellers and the age of foolishness for the buyers, or the reverse?
Today Charlie Ergen’s next battle has officially begun, with the filing of LightSquared’s motion to extend exclusivity and potentially reject Ergen’s purchases (through Sound Point Special Opportunities Fund or SPSO) of LightSquared’s debt. Its important to note that Ergen personally (not DISH) owns SPSO, and Ergen (through an entity named L-Band Acquisition Corp or LBAC) made the $2B offer to acquire LightSquared back in May.
LightSquared wants to extend exclusivity to give it more time to secure approvals from the FCC, because Jefferies is currently trying to get commitments for a $3B exit financing loan (which should be confirmed one way or the other this week). That loan, which carries an 8% interest rate plus substantial warrants for LightSquared equity, would pay off all of LightSquared debts and give Harbinger another year or more to find a buyer for LightSquared’s spectrum, while allowing the company to meet all of its obligations (including a resumption of lease payments to Inmarsat in April 2014).
However, LightSquared would not be permitted to draw down the loan unless and until the FCC has granted LightSquared rights to use the 1675-80MHz spectrum band. LightSquared has assured potential investors that it expects approval from the FCC this fall, shortly after Tom Wheeler takes over the chairmanship of the FCC, and that there will be no auction of the 1675-80MHz band (instead LightSquared will pay $80M for weather balloon relocation plus a further $170M “fee” in 2017). LightSquared also believes that it will be free to use its L-band uplinks without any GPS problems, as soon as the ruling is issued, and has told potential investors that the lower L-band downlinks will be available for use in 2015.
That sounds a lot like fantasyland (for example the FCC’s proposed FY2014 budget indicates that the 1675-80MHz spectrum will not be available until 2017 after weather balloons have been relocated), and some investors are apparently considering making a commitment in the expectation that no approvals will be received, because then they will get their commitment fees (in cash), but never have to put their money at risk.
A plausible best case for LightSquared is that the FCC defines a way forward later this year (i.e. more GPS testing and work to define interference standards), but it seems inconceivable that the FCC could simply hand over the 1675-80MHz spectrum band without at the very least defining service rules and an allocation framework through an NPRM and then conducting a 9-12 month comment cycle before any ruling is issued. More likely is that Wheeler has other things on his plate (like the incentive auctions), and a giveaway to LightSquared (along with alienating the DoD through more GPS testing) is not worth the political battle.
LightSquared is suggesting that a $3B loan would be well covered by the spectrum value, because it considers its spectrum to be worth the same as AWS-1 spectrum ($0.69/MHzPOP based on the Verizon-SpectrumCo transaction) and that there will be strong demand for its spectrum from AT&T and Sprint, who LightSquared believes would want to pair L-band uplink spectrum with WCS or BRS/EBS downlink spectrum respectively. While AT&T has the power to create a new ecosystem and has permission from the FCC to use WCS in an all downlink configuration, its hard to see why AT&T wouldn’t instead just buy the 1695-1710MHz uplink band which will be auctioned (very likely as unpaired spectrum) next year, with little competition from other carriers (except possibly DISH).
Sprint on the other hand has certainly learned its lesson from paying Apple $15.5B to ensure its own non-standard LTE spectrum was included in iPhones, and it would be crazy to try and make another unique band pairing when it will be far more straightforward to simply make use of the globally allocated BRS/EBS band in SoftBank’s small cell vision. Remember that Ergen wanted to buy Clearwire spectrum to take advantage of the emerging handset ecosystem in this band (as a mobile small cell play), and was going to use the AWS-4 spectrum for fixed wireless broadband (backhauling the mobile small cell traffic), so it wasn’t necessary to force the creation of a handset ecosystem in AWS-4. There’s no way that LightSquared’s spectrum will get an ecosystem outside North America (because international regulators won’t rush to address GPS issues and the 1670-80MHz band will still be allocated for meteorological systems elsewhere in the world), and without AT&T or Verizon, no-one will create an ecosystem in the US either.
So why is Ergen interested in buying LightSquared? If he’s now stuck without a wireless partner (and I don’t expect him to bid for T-Mobile now he won’t control any Clearwire spectrum), then he won’t be able to sell the AWS-4 spectrum to AT&T or Verizon (the two carriers who can force the creation of a new ecosystem at little cost to themselves) until after the next Presidential election, so it would be possible to take this time to reband AWS-4 spectrum to downlink and use LightSquared as uplink. More importantly, LightSquared’s spectrum is part of Ergen’s leverage in a battle with DirecTV (due to the upcoming Mexican coordination), which in my view is a far more plausible near term merger target for DISH, especially if the promise of a fixed wireless broadband network is sufficient enticement for the FCC to approve a DISH-DirecTV merger.
Of course, prospective lenders to LightSquared are therefore also betting that they will ultimately be backstopped by DISH’s interest in the spectrum band. Indeed some even think that Ergen will be prepared to bid $3B+ for the spectrum (despite the fact that this is far higher than DISH offered for Clearwire’s spectrum). Lenders might instead want to consider that by next year, a DISH-DirecTV merger will either have happened or not, and LightSquared’s spectrum will then offer little in the way of leverage to DISH.
In addition, the forthcoming FCC auctions of 75MHz of spectrum (H block, 1695-1710MHz uplink and AWS-3 likely paired with 1755-80MHz) may reset some expectations with regard to spectrum pricing, especially in unpaired uplink bands. Given that the new $3B loan will all have been spent within 12-18 months of emergence, it therefore seems there would be little reason for anyone interested in this spectrum not to wait until LightSquared once again runs out of money, and the price of the debt falls.
The one piece of good news, for Falcone, if not for the new lenders, is that as part of any exit financing deal, it seems that Harbinger will be released from any liability for misleading investors during the sale of LightSquared debt in 2010 and 2011 (when lenders were assured that GPS interference was no problem). So even if Phil ultimately does lose all of his investment in LightSquared, at least he will then only have to account to Harbinger’s investors and not to LightSquared’s investors as well.
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