12.11.13

All the king’s horses and all the king’s men…

Posted in DISH, LightSquared, Operators, Regulatory, Spectrum at 10:07 am by timfarrar

Its rather ironic to see the headline in the WSJ today, proclaiming that “A Gold Rush Hits Wireless Spectrum” on the same day as LightSquared’s bankruptcy auction takes place. While I’ll address the gold rush silliness in another post (although I note that amazingly enough MAST apparently still wants to fight with Ergen over the H-block), behind the scenes of the LightSquared bankruptcy there’s been a lot of activity over the last three weeks, as LightSquared and Harbinger tried to pull together a consortium to keep the company out of DISH’s hands (and submit a more credible reorganization plan).

Just before Thanksgiving, the “interest” of Fortress and Centerbridge was leaked to the WSJ, in an attempt to persuade other firms to become involved and to pressure the FCC to move forward. The auction itself was even delayed until today, to give more time for an FCC ruling (or at least some sign that the FCC would rule on LightSquared’s request), because many potential investors thought it was simply too risky to participate without any signal from the FCC that the proposed spectrum “swap” had a chance of being approved.

However, the FCC appears unmoved, despite some last ditch in-person lobbying by former FCC Chairman Reed Hundt on Thursday Dec 5. That’s the second former FCC Chairman that LightSquared has sent to the FCC to lobby for them in recent months! This filing highlights that Centerbridge has been working hand in hand with LightSquared in order to try and outbid Ergen. The rationale behind Centerbridge’s interest is unclear, as I’m told they were not a previous investor in LightSquared, but appears to relate to a belief in the opportunities of the spectrum “gold rush”.

That’s different from Fortress, who own a substantial amount of LP Preferred Shares, which would be largely wiped out by DISH’s bid and so are likely motivated primarily to protect their existing investment. Fortress’s LP Preferred investment would receive only a modest recovery as a result of DISH’s bid, despite Ergen’s earlier agreement last April to purchase Fortress’s preferred shares at 95 cents on the dollar, as this purchase was blocked because SPSO is certainly an “affiliate” of DISH (the term used in the shareholder restrictions), even if its not a “subsidiary” (as used in the term loan restrictions). However, with the LP Preferred being next in line for a recovery, even pushing DISH’s bid up by $100M-$200M would provide a major benefit to Fortress.

UPDATED (12/11): It seemed that because everything had been so quiet in recent days, LightSquared might have been unable to gain enough backing for their bid, presumably because the FCC appeared to have been unmoved by Hundt’s entreaties. However, its now being reported by the WSJ that LightSquared postponed the auction to try and thrash out a deal with Centerbridge, which has resulted in a $3.3B tentative deal. I would expect that to include all of the company (and for Centerbridge to assume the Inmarsat Cooperation Agreement largely in its current form), so that Centerbridge would pay off the Inc holders and continue to pursue the spectrum “swap” with the FCC and the litigation against the GPS industry. Notably Harbinger could now potentially also stand to benefit substantially if Ergen’s $1B debt claim was ultimately disallowed as a result of the litigation, because there will be no debtholders ahead of them with higher priority bankruptcy claims.

If the $3.3B Centerbridge bid becomes firm, I wouldn’t expect DISH to bid even more, although it would remain the backup bidder through Feb 15 if the Centerbridge offer falls apart. DISH would have other options for uplink, including the 1695-1710MHz band which will be auctioned in 2014. However, if DISH did instead ultimately emerge as the winner, there would still need to be significant negotiations over the DISH Asset Purchase Agreement, which apparently has some areas of disagreement (not least over DISH’s request for certain releases (including for Ergen’s purchases) and for its purchase to include all causes of action of the LightSquared estates against the GPS industry, FCC, Inmarsat and Harbinger, etc.). If it came to that, I’d expect that issue in particular to require the intervention of the judge, and of course her ruling would therefore also determine whether LightSquared’s lawsuit against Ergen would continue as currently scheduled. In that event, a very interesting question would be whether DISH actually has an out in the event that no resolution is reached over the asset purchase agreement or whether the judge can force DISH to follow through with its bid, even if the final terms of the asset purchase agreement were not acceptable to DISH.

Despite all of LightSquared’s and Harbinger’s efforts, it would hardly be surprising if the FCC proves unwilling to act on LightSquared’s requests, because DISH has made it clear that it is not interested in the spectrum “swap” (see LightSquared’s recent motion for an extension of the use of cash collateral which states “As the Court is well aware, LBAC is not interested in LightSquared’s downlink channels or resolution on the series of applications LightSquared has filed with the FCC…LBAC is only interested in LightSquared’s uplink channels”).

Given that, why would the FCC give spectrum away for free to LightSquared (or even forgo an auction) when DISH would drop this request if it won the bidding, especially at a time when the FCC is under considerable pressure to raise as much money as possible from spectrum sales? Even selling the 1675-80MHz band of spectrum to LightSquared for the $300M assumed in the White House budget would inevitably lead to accusations of favoritism (because the price would be equivalent to only $0.20 per MHzPOP), so why wouldn’t the FCC simply auction this spectrum along with other bands, once the appropriate rules have been put in place?

On the other hand, Centerbridge must have come away from Friday’s meeting feeling somewhat comforted by the discussion with the FCC, so perhaps the compromise could be to auction the 1675-80MHz band along with AWS-3 and 1695-1710MHz next summer? Certainly the FCC is now in a much trickier political position if the Centerbridge bid goes through, compared to the prospects of DISH getting them out of the LightSquared mess.

Despite Phil’s efforts to hire the best lobbyists (and lawyers) that money can buy, even if the Centerbridge bid succeeds, it therefore seems like it will still be a struggle to put LightSquared together again. We’ll be publishing our latest report on LightSquared, DISH and the related spectrum issues later this week, including an analysis of why LightSquared suddenly lost one third of its total revenues earlier this year (hint: the DoD really doesn’t like them…). Contact me for more details if you are interested.

10.14.13

Charlie’s house of spectrum cards…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum, Sprint at 10:51 am by timfarrar

As others have noted, in order to get a 700MHz interoperability deal, which will largely benefit Verizon and AT&T (as AT&T are now the only plausible national user of the A block spectrum and are likely to acquire both Verizon and Leap’s spectrum holdings in this band), DISH has secured a pretty good deal in Washington from interim FCC Chairman Clyburn: in exchange for DISH agreeing to low power use of the 700MHz E block (and bidding $0.50 per MHzPOP in the H block auction), DISH appears set to obtain an option to reband its AWS-4 uplinks to downlinks and an extension of the AWS-4 buildout milestones.

UPDATE (11/13): T-Mobile is raising $2B for spectrum purchases and is now rumored to be contemplating a bid for Verizon’s 700MHz A block spectrum. This would only give T-Mobile a 5x5MHz LTE network, which would not add much capacity in urban areas, but if T-Mobile is seeking to improve its rural coverage then it would have to buy other A block licenses as well.

This gives DISH a significant advantage both in the upcoming LightSquared bankruptcy auction, where no-one really expects any alternative bidder to emerge for the L-band spectrum, because the FCC has all but guaranteed it will not propose the so-called spectrum “swap” that LightSquared has asked for: it’s understood that Ergen will simply drop the request when he buys LightSquared’s satellite assets, so there is no point in the FCC annoying those in Congress who would want to see the 1675-80MHz spectrum band auctioned instead.

More importantly, if DISH is given an option but not an obligation to reband the AWS-4 uplinks (DISH has asked for 30 months to decide, but I would expect the FCC to only allow 12-18 months at most), then it also has a huge advantage in the H-block auction, because if Sprint were to win the spectrum then DISH could hold up standardization of the band (and delay any ability for Sprint to use the H block to relieve capacity constraints in its PCS G block LTE network). After years of experience in being held hostage by Ergen, its therefore hardly surprising that the smart move for Sprint will be to let DISH have the H block at the reserve price. That will force DISH to drive the standardization efforts, and potentially even allow Sprint to put roadblocks in DISH’s way instead of vice versa.

UPDATE (11/13): Both T-Mobile and Sprint have now ruled out bidding for the H-block spectrum. So it seems that both have made the smart move by leaving Ergen to contemplate what to do with ~80MHz of spectrum and no partners.

Moreover, it will establish a low benchmark price for the rest of DISH’s spectrum holdings, well below the $1.00 per MHzPOP that many analysts have been touting recently, and Ergen will then have doubled his bets on spectrum to roughly $8B, when taking into account both the LightSquared and H-block spectrum, without any clear route to monetization. With AT&T focused on European expansion and Verizon encumbered by the debt from buying out Vodafone’s stake, Sprint could then hope to hold the whiphand in any partnership negotiations with DISH.

Indeed next year’s auctions of 70MHz of additional spectrum (AWS-3, 1695-1710MHz and J block) may further impact perceptions of spectrum value: a $0.50 per MHzPOP valuation will again be ample to cover the costs of clearance plus the $7B needed to fund FirstNet. That is the FCC’s key objective in the upcoming spectrum auctions, so it can limit AT&T and Verizon’s participation in the 2015 broadcast TV incentive auction and ensure that Sprint and T-Mobile gain sufficient low frequency spectrum to preserve a four player market after the next presidential election. Once no net revenues need to be raised from the incentive auction, then it won’t matter if AT&T and Verizon refuse to participate, as that would simply keep the price low for Sprint and T-Mobile (or ensure that not as much broadcast spectrum is cleared).

However, rather than negotiating with Sprint on their terms, I expect that Ergen will instead pursue a merger with DirecTV, as an alternative to any wireless partnership, and I still expect a commitment to build out a fixed wireless broadband network with rural coverage to be key to getting regulatory approval for such a deal. Nevertheless, if DirecTV doesn’t put as much value on DISH’s spectrum holdings as Ergen does, it may be difficult to reach agreement on the respective value of the two companies. As a result, while Ergen builds his tower of spectrum cards ever higher, it will be interesting to see whether investors stay confident that he can ultimately create substantial value from these holdings.

09.23.13

Phil filleted…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 9:34 am by timfarrar

Tomorrow’s hearing in the LightSquared bankruptcy case was supposed to be the showdown at which the judge would decide between LightSquared’s own proposed bidding procedures (which attempt to reject Ergen’s $2.2B bid for the company) and the alternative bidding procedures which have now been proposed jointly by the LP and Inc secured creditors (and would accept Ergen’s stalking horse bid). However, LightSquared has appointed an independent committee of its directors (including a new member, Donna Alderman, who fought with DISH over the resolution to the DBSD case) and this committee (whose independence is disputed by the LP creditors) has requested that the hearing be delayed until September 30.

Of course, no-one is taking seriously the alternative plan proposed by Harbinger, which would simply keep the existing debt in place (converting it to PIK interest) and allow Harbinger to stay in charge, but LightSquared’s plan would allow it to deem a non-cash bid, contingent on FCC approval, superior to DISH’s cash bid, which could potentially further delay a resolution of the case. In contrast, under the secured creditors plan, any competing bid must be non-conditional on FCC approval, making it hard to see how any strategic buyer could emerge – although since potential bidders have already had two months to make an offer, and none have done so, it is likely that no-one else other than Ergen is actually interested.

LightSquared spent last week groveling to the FCC, suggesting that “The current stalking horse bid might be the only one submitted, if the FCC does not make its decisions quickly, because the company’s assets cannot be fully valued until the Commission acts on the pending modification applications.” However, the FCC’s recent grand bargain with DISH and AT&T over the 700MHz A and E blocks, AWS-4 downlinks, and the PCS H block auction makes it pretty clear that the FCC would prefer DISH as a buyer of the LightSquared assets, so that just the L-band uplinks would be used, rather than Harbinger getting a spectrum “swap” (which in reality would represent another windfall and lead to more criticism in Congress).

Given Phil’s troubles with the SEC, its hardly surprising that Chairman Mignon Clyburn would now choose DISH over Harbinger. That’s in contrast to my post last year asking if Phil was finally right about something with his comment 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” (which prompted this response).

Harbinger’s attempt last month to sue the GPS industry for $1.9B also appears to have backfired, with LightSquared creditors pointing out that Harbinger was violating the bankruptcy exclusivity order by asserting claims of the estate. Moreover, this action, coming immediately after the FCC put LightSquared’s request for uplink approval on public notice, appeared likely to delay rather than expedite any regulatory approval from the FCC. Not only has Phil therefore caused further angst in the bankruptcy case, but I’m told that he is also struggling to find a credible plaintiffs firm to take the lawsuit forward, while the GPS industry have hired Boies Schiller to fight their side of the case. So perhaps now is the time to ask if Phil can get anything right?

09.12.13

Give me a place to stand…

Posted in Clearwire, DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 3:39 am by timfarrar

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).

09.09.13

The best of times, the worst of times…

Posted in Aeronautical, DISH, Financials, Globalstar, Inmarsat, Iridium, LightSquared, Operators, Orbcomm, Regulatory, Spectrum at 3:12 am by timfarrar

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?

07.22.13

No longer “highly confident”…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 6:11 pm by timfarrar

Back on May 31, LightSquared asserted in its motion to retain Jefferies as placement agent for its exit financing that “both LightSquared and Jefferies are highly confident [that the retention] will lead to fully committed financing in an amount likely in excess of the face amount of the Prepetition LP Obligations, the Prepetition Inc. Obligations, and the DIP Obligations at relatively low costs to the LightSquared estates”. Two weeks ago, I noted that LightSquared had been forced to scale down its planned $3B debt raise to $2B, and would seek to force Ergen/Sound Point to accept PIK second lien debt instead of being repaid from the exit facility.

However, on Friday night LightSquared acknowledged that exclusivity had been lost and that competing plans for reorganization would be filed, followed by an auction of the company. Moreover, I’m told that today LightSquared and Jefferies dropped the planned exit financing facility completely (not just putting it “on hold” as was reported last week).

Falcone apparently told potential investors that he was unwilling to go forward because the facility was “too expensive” (with warrants for 15% of LightSquared’s equity being granted upfront to potential lenders). However, I understand that the change of direction appears to have resulted from LightSquared being hauled over the coals by the bankruptcy court last week for ignoring Ergen’s $2B cash offer, and the judge was unwilling to accept LightSquared’s contingent reorganization plan, which would have only been funded after FCC approval was received. As the Secured Lenders noted in their submission on July 9:

“Since these Chapter 11 Cases were filed over a year ago, the Debtors have told the Court repeatedly that the only way to realize value is to pursue a resolution of their regulatory problems with the Federal Communications Commission (“FCC”), and that all they needed was sufficient “runway” to achieve their objective. When the Cases were filed in May 2012, the Debtors believed they needed about six months to get there. In January 2013, during the exclusivity hearing, the Debtors’ management testified that they still needed about six months to clear the regulatory hurdles to value maximization. Today, they claim that their elusive objective remains six months or more away…In reality, the Debtors have no idea whether or when they will ever get regulatory approval.”

Now LightSquared has set out a lengthy timetable for an auction in December 2013 (which is already subject to an objection from the Secured Lenders), because (in fantasyland) Harbinger is apparently highly confident that the FCC will approve LightSquared’s request in November, enabling them to raise money for a counterbid on the back of that approval, before the auction actually takes place. However, even if LightSquared’s proposed timetable is approved (and it appears that the judge is actually losing patience with the company’s repeated delays), it seems rather more likely that Falcone is instead going to be 0 for 3 in his battles with Ergen (with LightSquared following the path trodden by DBSD and TerreStar).

I suppose at least for the time being, Phil can still tell everyone he’s “highly confident” that he will ultimately win his battle with the SEC, but again perhaps he now shouldn’t be as highly confident as in May when he “blindsided SEC officials” by publicly declaring that he’d escaped with a “slap on one wrist“.

07.06.13

This is how it feels to lose $1B…

Posted in DISH, Financials, LightSquared, Operators, Spectrum at 4:11 pm by timfarrar

On Wednesday afternoon, it emerged that Jefferies’ attempts to raise a $3B exit financing facility for LightSquared had failed, with news that the debt was being split into two tranches, a first lien of $2B, with an increased interest rate (3% extra of Pay In Kind interest) and additional warrants (10% of diluted equity instead of 5%, with all of the warrants immediately vested, instead of the warrant grants increasing over time). In other words, third parties didn’t believe that LightSquared’s spectrum was worth more than $2B, even with the required FCC approvals. The terms of the $1B second lien were not specified, except that it would be all PIK interest and the syndication of this facility would be “handled” by Harbinger.

On Friday, the New York Post revealed that LightSquared plans to ask the bankruptcy court to force Charlie Ergen’s Sound Point Special Opportunities (SPSO) fund to accept this second lien debt, because, according to Harbinger’s court filing on Wednesday, Sound Point “fraudulently entered LightSquared’s capital structure…to prevent the Debtors from successfully reorganizing and acquire the Debtors’ assets on the cheap”. Instead Harbinger, wants the court to extend the July 15 exclusivity deadline, allowing LightSquared to pursue its own reorganization plan.

Its not a little ironic that Harbinger describes Ergen’s $2B offer for LightSquared’s satellite assets and spectrum as a “low ball bid” when Jefferies has only been able to raise $2B of debt secured against all of LightSquared’s assets, including its Crown Castle lease, and it will be interesting to see how the court views Harbinger’s arguments. As I noted on Monday, it seems like fantasyland to believe that the FCC will simply give LightSquared the 1675-80MHz spectrum band in the next few months and so it might not even be possible to get hold of the $2B loan and pay off the other (non-Ergen) debt in the foreseeable future. Presumably that is why (according to the NY Post article), LightSquared plans to borrow another $200M of DIP financing to extend its cash runway into next year.

However, LightSquared will of course be supported by everyone else in the capital structure apart from the secured debtholders, because Ergen’s proposed $2B bid would do little more than pay off the secured debt, and so LightSquared’s plan is their only chance of a recovery. As a result, we saw MAST and US Bank claiming in their court submission on Monday that FCC approval is “near certain”, a ludicrous distortion of the reality of the situation, based only on Genachowski’s expressed opinion, in response to my question, that the L-band will ultimately “be freed for terrestrial use”, which supposedly “foreshadowed approval of the application”.

Its therefore going to be very interesting to see how things develop at Tuesday’s status conference. Although the subordination plan may not be discussed in detail at that hearing (I’m told it will likely be published on July 15), it would certainly be a dramatic move if the court decided to subordinate Sound Point’s $1B holding to $2B of new debt, raising the possibility that Ergen’s $1B will never be repaid if LightSquared is unable to realize more than $2B when it tries to sell its spectrum. Then perhaps Phil can commiserate with Charlie that this is how it feels to lose $1B by investing in LightSquared…

07.01.13

Its the ecosystem, stupid…

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

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

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

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

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

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

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

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

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

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

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

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

06.13.13

Spoiling for a fight…

Posted in Clearwire, DISH, Financials, LightSquared, Operators, Spectrum, Sprint at 3:49 pm by timfarrar


Please Masa, don’t throw me into the litigation briar patch!

This week saw an apparent reversal for DISH on Monday, when SoftBank agreed to increase its bid for Sprint slightly and Sprint rejected DISH’s bid as unlikely to lead to a “superior offer”, followed by a victory on Wednesday when Clearwire’s special committee recommended that shareholders accept DISH’s $4.40 per share tender over Sprint’s $3.40 per share bid to buy out minorities.

Despite this apparently split decision, many seem to believe that the outcome will have to be all-or-nothing, with either DISH or Softbank winning both Sprint and Clearwire. In other words, either Sprint increases its bid for Clearwire to fend off DISH, or DISH brings in an equity partner to further improve its bid for Sprint. However, Sprint has put some serious roadblocks in DISH’s way, increasing the break-up fee due to SoftBank if its bid is rejected and more importantly, requiring any counterbid by DISH to be “fully financed pursuant to binding commitments from recognized financial institutions“. Sprint has also stated that it will “enforce its governance rights in Clearwire” and previously described DISH’s offer for Clearwire as “illegal”.

In my view, rather than pointing towards a new DISH bid for Sprint with committed financing (costing hundreds of millions of dollars) which would potentially still be rejected by the Sprint board, that suggests to me that DISH might instead make a much higher (non-financed) bid for Sprint and then initiate legal action over Sprint’s refusal to consider it. Similarly, DISH has been trying to delay FCC approval for the SoftBank bid, because Softbank has been emphasizing the urgency of moving forward quickly to improve Sprint’s network and the deal becomes less attractive to SoftBank the longer it is delayed. Going forward DISH would presumably also bid against Sprint for the H-block spectrum, closing off yet another avenue for Sprint to improve its network.

A similar strategy may be at work in the Clearwire bidding, and even if Sprint was to mount an increased bid (which seems less likely now that SoftBank has increased the offer to Sprint shareholders and reduced the cash available to Sprint for investment), I’m convinced that Ergen would simply increase DISH’s tender offer once again. As a result, DISH is very likely to gain a substantial stake in Clearwire, and then Ergen will be able to block Sprint from taking full advantage of Clearwire’s spectrum, and probably tie the company up in another legal battle over Sprint’s “governance rights”.

Remember that as Craig Moffett noted “Dish is unique in that it uses litigation as a profit center” and Charlie Ergen said last year “I may be the only CEO who likes to go to depositions…You can live in a bubble, and you’re probably not going to get a disease. But you can play in the mud and the dirt, and you’re probably not going to get a disease either, because you get immune to it. You pick your poison, and I think we choose to go play in the mud.”

So now the question for Masayoshi Son is, does he want to tie up Sprint and Clearwire in litigation for years, or will he instead reach an accommodation with Ergen, and sell DISH the 40MHz of Clearwire spectrum that Ergen wants, in exchange for getting full control of Sprint and the remainder of Clearwire? Such a deal might enable Ergen to become a wireless competitor (as it would likely be followed by DISH purchasing T-Mobile), but the alternative may be that SoftBank’s $21.6B investment in Sprint wastes away, as Sprint fails to improve its network and does not become any more competitive with AT&T and Verizon.

While all eyes are on the Softbank/Sprint/Clearwire battle, there have also been some interesting developments in the long running LightSquared saga. In mid May Sound Point Special Opportunities (SPSO) fund hired Rachel Strickland of Wilkie, Farr & Gallagher, who previously represented DISH and EchoStar in the TerreStar bankruptcy case, just before news emerged that DISH had made a $2B takeover offer for LightSquared. Reports on the June 6 case hearing suggested that SPSO is controlled by Ergen (presumably in a personal capacity rather than by DISH or EchoStar, which are disqualified investors) but gave few additional details. However, today SPSO has joined the Ad Hoc Secured Group, represented by White & Case. This filing reveals that SPSO holds only $504.7M of the LP Term Loan and none of the LP Preferred Shares (which may well be the fulcrum security in the bankruptcy case, given LightSquared’s intention to raise a $2B loan from Jefferies to pay off the secured debt and continue operations and that Ergen’s $2B bid for LightSquared was carefully pitched to pay off the LP Secured Debt but not the Preferred Shares).

So the question is who holds the LightSquared LP Preferred Shares, which I was told were sold to Ergen/Sound Point by Fortress and Providence in April when they sold their Term Loan debt. Notably, Solus (who have been on the opposite side from Ergen in previous MSS bankruptcies) has also sold its LP Preferred holdings in recent months. So its pretty clear that there is likely a single large undeclared holder controlling virtually all of the fulcrum security in this bankruptcy. Is it DISH (perhaps holding the preferred shares directly rather than through Sound Point) or someone else? And what happened to the indications I’d received that Sound Point owns more than half of the Term Loan? Is there another undisclosed Sound Point fund (perhaps backed by Carlos Slim?) in addition to SPSO that controls an additional $300M to $400M of the term loan? Its going to be very interesting to see how this works itself out and who now owns what, as we look forward to another epic legal battle over LightSquared’s proposed reorganization plan.

05.09.13

“Another sucker” bites the dust…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 6:24 pm by timfarrar

Many epitaphs are being written today, and perhaps even a few pitches for book deals, bringing back memories of my comments to Bethany McLean for her Vanity Fair article two years ago. However, some apparently think the LightSquared saga has a few more chapters to be written, after Chairman Genachowski’s comments yesterday that “he expects LightSquared Inc. to eventually win approval for using its airwaves”. Since I actually asked him the question that prompted this statement (at the Jefferies conference) about what lessons he took from the LightSquared debacle (a characterization he disputed), I thought it would be useful to set the comment in context.

It was prefaced by the statement that Genachowski believed all satellite and broadcast spectrum was underused and should be reallocated for flexible terrestrial mobile broadband use, to meet the “obvious” spectrum crisis, and because of this “crisis” the L-band spectrum was “too valuable to be left unused”. Of course, he didn’t state any timeframe for action, and acknowledged that it was not possible to use the L-band spectrum without new receiver standards or similar changes to protect GPS (which will take years).

Recent actions, such as tomorrow’s NPRM on Qualcomm’s plan to use Ku-band satellite spectrum for Air-To-Ground communications and the effort to allocate C-band spectrum for small cells certainly bear out Genachowski’s lack of regard for satellite services, and so its not surprising that Globalstar has been urging him in recent days to move forward with an NPRM on its TLPS plan “prior to the Chairman’s expected departure later this month”.

In contrast, observers I’ve spoken with expect his successor, Tom Wheeler, to have a keen appreciation of the challenges associated with reallocation of spectrum, by virtue of his chairmanship of the FCC’s Technological Advisory Committee (whose February 2013 white paper on harm claim thresholds notably didn’t even mention attempting to solve the LightSquared/GPS conflict). I’m also told that given the battle that will take place with the DoD over gaining access to the 1755-80MHz spectrum for an auction next year, it is highly unlikely to be worth extending this fight to cover LightSquared/GPS as well.

So why was Sound Point, which is widely believed to be backed by Charlie Ergen, buying up LightSquared’s debt and preferred shares last month? After 3 days of meetings with dozens of investors in New York this week, I’ve been refining my view of Ergen’s plan for Sprint, Clearwire, LightSquared etc and will shortly be issuing the next update to last week’s report on DISH’s wireless ambitions. On the LightSquared front, what has emerged is that Sound Point has now acquired the majority of LightSquared’s Term Loan debt, and there appears to be reasonably wide consensus that both Ergen and Carlos Slim are backing Sound Point. I’ve also concluded that the near term focus is likely to be on the leverage that gaining control of LightSquared would give Slim to get a Mexican broadcast license, as part of a settlement with the Mexican government to resolve the dispute over spectrum allocation for MEXSAT. That could provide a windfall for Slim (and DISH Mexico) that is worth far more than the $600M-$700M that Sound Point has paid for what is likely to be a controlling stake in a reorganized LightSquared.

In those circumstances, there would be little point in Sound Point offering to buy out the rest of the term loan holders, and instead a debt for equity conversion of the LP Term Loan seems much more plausible. That would leave the remaining Term Loan holders with illiquid equity in an entity with only a very long term possibility of owning valuable spectrum (assuming that any further payments to Inmarsat can be deferred indefinitely until terrestrial usage rights can be established in the L-band) and perhaps some optionality based on future litigation. That might come as a big shock to those who believe that the only outcome is that the Term Loan will get taken out at par plus accrued interest, because of how important LightSquared’s spectrum assets are to Ergen!

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