After the NTIA filed a fairly devastating letter with the FCC on July 1 (which went completely unnoticed in the press), it seems that Phil Falcone decided to use the July 4th holiday to assert his own independence from LightSquared, and attempt to blow up both the company and its relationship with the US government.
The NTIA letter attaches a September 2013 letter from the Department of Transportation, which states that “the Department questions whether the Commission has the necessary and sufficient information before it to approve the handset proposal at issue in the Public Notice. Again, to the Department’s knowledge, there has not been any robust interagency effort to examine or test LightSquared’s proposal, to probe the underlying assumptions, or to consider feasible alternatives.” The NTIA states that “the agencies are not in complete agreement that the Uplink Assessment has adequately addressed these issues to support a recommendation to NTIA and the FCC” and “NTIA agrees with DOT that the FCC should seek to ensure that LightSquared’s handset proposal is adequately supported by data and a full understanding of the potential impacts on GPS receivers.”
This letter comes in conjunction with the June 20 FCC workshop, which appeared designed to demonstrate that the FCC was seriously investigating whether interference concerns could be resolved, but was structured in a manner that was very supportive of GPS. It also immediately follows LightSquared’s proposal of a new plan for emergence from bankruptcy, which is supposed to be filed with the court on Monday July 14. The NTIA letter means that there is no clear roadmap even to approval of the 20MHz of uplink spectrum that LightSquared assumes is certain to be available, significantly undermining the foundations of the new plan.
More importantly, Falcone’s actions over the last week basically destroy any prospects of further progress with the FCC. While his RICO lawsuit against Ergen and DISH can be largely ignored, the decision to sue the US government and FCC on Friday, is expected to freeze further contacts with the FCC while the lawsuit is in progress.
The likely way forward is now for LightSquared to sue Harbinger in order to prevent the lawsuit going forward, since such lawsuits would normally be regarded as assets of the bankruptcy estate, belonging to LightSquared rather than its shareholders. Harbinger alleges that all negotiations with the FCC prior to the March 2010 takeover were directly with Harbinger’s lawyer (Henry Goldberg), not “LightSquared” (at that time SkyTerra) but it is far from clear that would overcome the presumption that the claims belong to LightSquared.
In any case, the names of the underlying companies changed after the Harbinger acquisition: what is now LightSquared Inc. was at that time Harbinger Global Wireless (HGW), which was the company (represented by Goldberg) that was formally given permission to buy SkyTerra. So even if there was an agreement with HGW (which is doubtful), its claims should now belong to LightSquared Inc. and the bankruptcy estate.
There are several other curious statements in the lawsuit, most notably that the publication of the National Broadband Plan in 2010 was delayed to coincide with the Harbinger acquisition of SkyTerra. Secondly, the amount of Harbinger’s losses was set at $1.9B, but that is far in excess of the amount of investment that Harbinger made in LightSquared after March 2010. Finally, the concept that there was an agreement with Harbinger under which the ATC modifications were granted in exchange for the commitments made as part of the takeover is not part of the formal record: the ATC mods order (which Harbinger claims the FCC has not upheld) is completely separate from the approval of the takeover (which included the Harbinger commitments).
Overall, this marks a significant change in the bankruptcy case: Falcone is on the outside rather than the inside, and now it seems quite likely that the entire new plan will collapse in acrimony. Moreover, the company is on the verge of running out of cash, creating a further crisis in the very near future.
UPDATE (7/15): Yesterday LightSquared’s Special Committee finally recognized the reality of the situation by reaching an agreement with Charlie Ergen to convert his existing debt into a dominant share of the new first lien debt, and obtain an additional $300M first lien loan, replacing JP Morgan in the new capital structure. It was stated that there will be $1.6B of new first lien, with $1.3B from Ergen, and I would assume the remaining $300M will come from Fortress rolling over its first lien debt. Its unclear if Cerberus will also invest in the new second lien tranche, and it certainly seems highly implausible that Harbinger will accept its proposed treatment under the new plan, since this would bar Harbinger from asserting claims against the FCC or Ergen, and therefore the probability of any recovery for Falcone is significantly diminished. It therefore seems highly likely that, as I predicted, the next stage of the bankruptcy case will be litigation between LightSquared and Harbinger, while Ergen just has to sit back and enjoy Phil Falcone’s discomfort.
Judge Chapman concluded her ruling in the LightSquared Adversary Proceeding (which was published two weeks ago) by quoting Charlie Ergen’s famous statement that “[y]ou can live in a bubble if you want to…and probably never get any disease. But you go play in the mud and the dirt and you probably aren’t going to get disease either because you get immune to it. So you pick your poison and I think we choose to go play in the mud.”
She went on to remark that “Here, playing in the mud involved end-running the LightSquared Credit Agreement and then purposefully holding in limbo hundreds of millions of dollars of debt trades and undermining the ability of the Debtors, the constituents, and even the Court to conduct the case” and therefore ruled that “the SPSO Claim shall be equitably subordinated” in an amount based on “the amount of harm that has occurred to these estates as a result of SPSO’s conduct.”
Now the court-appointed mediator, Judge Drain, has filed a memorandum with the court stating that “SPSO/Charles Ergen have not participated in the mediation in good faith and have wasted the parties and the mediator’s time and resources. I understand the seriousness of this assertion; it is unique in my experience as a mediator in a field where the parties are known to assert their positions aggressively and sharp elbows in negotiations, although not welcome, are tolerated.”
It is pretty clear what Ergen is getting up to in the mud: by delaying a resolution of the case he buys himself time to seek a deal for DISH with Sprint and/or T-Mobile, while retaining a bid (either personally or by EchoStar) as a backup option, and in the meanwhile he accumulates interest on the non-subordinated portion of his debt.
While clearly irritating to the judges involved, Ergen’s actions are therefore perhaps not entirely surprising, so what is more interesting about Judge Drain’s memo is what it tells us about the terms of LightSquared’s new Chapter 11 plan. Of course the memo does not specify the terms of the agreement that all parties with the exception of SPSO/Ergen have reached, but it is pretty clear what those are, by reading between the lines.
Firstly, Judge Drain indicates that the new Chapter 11 plan “should be confirmable without the support of the one party, SPSO, which has not agreed.” That means that SPSO is no longer being treated less favorably than the other secured debtholders with respect to the non-subordinated part of its debt, and its agreement to the new plan is not required. That can only mean that SPSO’s non-subordinated debt is being paid in full, in cash, with accrued interest.
That also fits with Judge Drain’s statement that he had invited SPSO to make “a certain proposal by 5:00 p.m. on June 24, 2014 [which] was not made” since the requested proposal was clearly for SPSO to indicate the amount of subordination which would be acceptable. As I noted back in May, Judge Chapman’s ruling should allow at least $320M (face value) of SPSO’s holdings, and possibly as much as $540M to be subject to subordination, though the amount of harm might arguably be somewhat less. The non-subordinated debt would then accrue a total of at least 30% interest from the time of the bankruptcy filing over and above its face value.
If the subordination was only of the later purchases, then SPSO might be entitled to receive at least $660M including interest, and I would guess that the offer on the table from LightSquared’s new backers would then need to pay Ergen a sum relatively close to the $700M he originally paid for the debt.
UPDATE (7/2): The new plan, revealed in a July 1 court hearing, proposes to pay Ergen $470M in cash plus an unsecured note worth “at least $492M.” This implies that about $360M of Ergen’s holdings (at face value) are not being subordinated, which would roughly correspond to a cutoff on purchases up to the end of 2012, while the later purchases are being converted into the unsecured note. This cash payment is sufficiently low that its hardly surprising Ergen intends to fight the new plan.
The corollary to the subordination of part of Ergen’s debt holdings is that there can’t be any money left for the equity holders, since even after being subordinated, Ergen’s holdings would still be senior to LightSquared’s equity. As I’ve noted previously, CapRe wanted to reduce Harbinger’s equity position “to nothing” and they have also agreed to the new plan. That conclusion also fits with Melody and SK Telecom not being represented at the mediation, despite both of them holding interests in LightSquared’s equity. In contrast, Harbinger’s presence in the mediation would still be necessary given its holdings of debt in LightSquared Inc. and the desire to gain releases for Falcone and itself from any potential litigation, such as that proposed by SPSO in April.
UPDATE (7/2): Harbinger will still hold around 12% of the reorganized LightSquared equity, but this appears to relate solely to the rollover of Harbinger’s debt holdings at LightSquared Inc, and compares to a proposed 36% stake under the previous plan.
Melody’s lack of involvement also tends to suggest that it will potentially no longer be providing financing for the new plan, although that is still to be confirmed. Conversely, Fortress had up to five people there for each mediation session, plus two of their lawyers from Stroock & Stroock & Lavan LLP, suggesting that Fortress will be making the primary decision on how much to offer Ergen and will therefore likely lead the financing of the new reorganization plan.
The presence of two people from Cerberus at each session is also very interesting, and suggests that they may be the new source of financing, presumably replacing Melody (who in any case were closely tied to Harbinger, with Omar Jaffrey having led multiple LightSquared financings while at UBS). This appears to be confirmed by a Wall St Journal article.
It will now be interesting to see how both Fortress and Cerberus feel about the outcome of the FCC workshop on “GPS Protection and Receiver Performance” last week, where Tom Wheeler went to the trouble of noting emphatically that the meeting was “not about FCC-mandated receiver standards” and LightSquared received support from the White House (whose representative, Tom Power, was involved in discussions with LightSquared back in summer 2011) but apparently few other participants.
Remember that Cerberus’s involvement was proposed by Fortress but was unacceptable to Harbinger back in January, when “Mr. Falcone exercised those veto rights in the weeks after the January 23 meeting when he objected to Fortress’ suggestion that Tom Donahue of Cerberus join LightSquared’s board.” (see ¶32 of SPSO’s proposed Findings of Fact). This appears to be further confirmation that Harbinger’s role in the new proposed capital structure for LightSquared is being cut back, as I indicated earlier this month and that’s why Phil Falcone has been threatening to sue the FCC.
Notably Falcone’s resignation from LightSquared’s board was communicated only in a June 18 letter to the FCC, which there would be no reason to send other than to ramp-up the pressure for the FCC to negotiate prior to Harbinger filing suit. In that context, one might view Wheeler’s (apparently last minute) decision to open the FCC workshop and make remarks supportive of GPS as a rejoinder to Harbinger’s threats.
UPDATE (7/2): Harbinger is still involved in the new plan (with a reduced 12% equity stake) which suggests that Harbinger may also continue to control the GPS litigation if the plan is approved, and this may be sufficient to mitigate the possibility of litigation against the FCC in the near term. However, given that the GPS industry seemed happy with the outcome of the recent FCC workshop, describing it as “a great event”, it seems they do not expect the FCC to be particularly accommodating to LightSquared in the immediate future.
Although the location of this new search area has not yet been released, the independent team that has been analyzing the publicly available data felt it was appropriate to provide a statement, given below, with our best estimate of the highest probability (but not the only possible) location for a potential search. In this way, we hope to provide information which can clearly be seen to be completely independent of any locations that might be published by the search team in the near future.
The statement is as follows:
Shortly after the disappearance of MH370 on March 8th, an informal group of people with diverse technical backgrounds came together on-line to discuss the event and analyze the specific technical information that had been released, with the individuals sharing reference material and their experience with aircraft and satellite systems. While there remain a number of uncertainties and some disagreements as to the interpretation of aspects of the data, our best estimates of a location of the aircraft at 00:11UT (the last ping ring) cluster in the Indian Ocean near 36.02S, 88.57E. This location is consistent with an average ground speed of approximately 470 kts and the wind conditions at the time. The exact location is dependent on specific assumptions as to the flight path before 18:38UT. The range of locations, based on reasonable variations in the earlier flight path result in the cluster of results shown. We recommend that the search for MH370 be focused in this area.
We welcome any additional information that can be released to us by the accident investigation team that would allow us to refine our models and our predictions. We offer to work directly with the investigation team, to share our work, to collaborate on further work, or to contribute in any way that can aid the investigation. Additional information relating to our analysis will be posted on http://duncansteel.com and http://blog.tmfassociates.com. A report of the assumptions and approaches used to calculate the estimated location is being prepared and will be published to these web sites in the near future.
The following individuals have agreed to be publicly identified with this statement, to represent the larger collective that has contributed to this work, and to make themselves available to assist with the investigation in any constructive way. Other members prefer to remain anonymous, but their contributions are gratefully acknowledged. We prefer that contact be made through the organizations who have published this statement.
Brian Anderson, BE: Havelock North, New Zealand;
Sid Bennett, MEE: Chicago, Illinois, USA;
Curon Davies, MA: Swansea, UK;
Michael Exner, MEE: Colorado, USA;
Tim Farrar, PhD: Menlo Park, California, USA;
Richard Godfrey, BSc: Frankfurt, Germany;
Bill Holland, BSEE: Cary, North Carolina, USA;
Geoff Hyman, MSc: London, UK;
Victor Iannello, ScD: Roanoke, Virginia, USA;
Duncan Steel, PhD: Wellington, New Zealand.
Since the Inmarsat ping data was released almost two weeks ago, I like many others have spent a good deal of time trying to discern what the data tells us. Particular thanks are due to Duncan Steel, Victor Iannello, Mike Exner, Don Thompson, Bill Holland and Brian Anderson, who’ve spent days and weeks performing numerous complex calculations and analysis of satellite and other data, much of which I’ve relied on in my analysis.
Although the data analysis remains a work in progress, and further information is needed to validate the BFO model in particular, I’ve now written up my initial conclusions, which indicate that the search area may need to be widened significantly beyond the areas identified in the most recent search effort. As the WSJ is reporting, this appears to be the approach now being taken by the investigative team.
Does the LightSquared bankruptcy case need a mediator or a psychiatrist? That’s what I’m wondering after learning that with the sole exception of Phil Falcone, all the creditors now agree on a revised plan for the company to emerge from bankruptcy. That plan apparently involves Harbinger being left with no stake in the reorganized company, as I predicted when Judge Chapman made her ruling last month. As a result, although the suggestion last week from the lawyer for LightSquared’s independent committee was that “A mediator could help us get over the finish line” it seems more likely that the current job for Judge Drain involves talking Phil out of “riding the bomb” and suing the FCC.
In any case, the lawyers involved appear convinced that ultimately Harbinger won’t be allowed to sue the FCC, because any potential claims against the FCC for suspending LightSquared’s ATC license would be property of the LightSquared bankruptcy estate, not of Harbinger. Thus, just like the bankruptcy court blocked Harbinger from proceeding with its litigation against the GPS industry (with LightSquared itself taking over this litigation), it seems that as part of the reorganization, the company would ask the court to prevent Harbinger from suing the government.
Judge Chapman certainly appears a little irritated about Phil’s actions, telling lawyers at an emergency hearing yesterday that she doesn’t like learning about developments in her cases “in the New York Post or the Wall Street Journal.” So it will be interesting to see how long she gives the mediation, especially given the rapid depletion of LightSquared’s existing funds, and whether she agrees that in fact Phil just needs to see a therapist instead.
Yesterday, Harbinger’s new lawyers at Cooper & Kirk, filed an ex parte with the FCC, documenting a meeting last Friday with FCC staff, plus two representatives of the DoJ (who would presumably defend the FCC in the event of a lawsuit), including Alicia Simmons who signed the devastating Jan 17 filing in LightSquared’s bankruptcy case. The FCC personnel included Associate General Counsel Jennifer Tatel and the letter also identified Hillary Burchuk as an FCC staffer, although she is in fact apparently a DoJ trial attorney. Interestingly, Cooper & Kirk has never filed an ex parte with the FCC in the past, and Harbinger has previously been represented at the FCC for many years by its regulatory law firm, Goldberg, Godles, Wiener and Wright.
It seems pretty clear that the purpose of the meeting was to threaten to sue the FCC, not least because Cooper & Kirk’s own website boasts that according to Legal Times, it is “The top choice for plaintiffs who want to sue the federal government.” This may be Falcone’s last effort to avoid being excluded from the resolution of LightSquared’s bankruptcy case, where (as I concluded) Judge Chapman’s decision to reject the LightSquared bankruptcy plan has made it far more difficult for Harbinger to maintain a stake in the reorganized company.
If Harbinger is excluded from the reorganization, then it would not benefit financially from the increase in spectrum value resulting from a future FCC approval (or indeed any proceeds from the litigation against the GPS industry). As a result, if that happens Harbinger is threatening to sue on its own account, because litigation would likely block any possibility of progress at the FCC, and Harbinger would not have any incentive to drop that litigation as part of a settlement which resulted in an FCC approval. Thus Falcone is basically offering the threat of mutually assured destruction to persuade the other LightSquared debtholders to give him a share of the reorganized company, exactly as his earlier emails suggested: “if I don’t like the result, maybe I’ll just sue the FCC and tie this up for 10 years.”
On Tuesday the LightSquared stakeholders were ordered to mediation, as expected, although reportedly some progress had been made on a “global restructuring” deal. That phrasing would suggest the aim is to keep the 1670-75MHz spectrum together with the L-band MSS spectrum, rather than auctioning the two pieces of spectrum separately, perhaps with the holders of the 1670-75MHz secured debt being paid off via a new injection of capital. If that deal comes to fruition it would suggest that the target would still be to gain access to the NOAA 1675-1680MHz spectrum, in which case it might also make sense to keep Ergen in the capital structure (in order to avoid the threat that DISH or EchoStar might bid against LightSquared in an auction). But its harder to see what bone might be thrown to Falcone to prevent Harbinger from filing suit against the FCC.
So now AT&T has finally announced that it has agreed to acquire DirecTV for $95 per share, and has indicated that “AT&T will use the merger synergies to expand its plans to build and enhance high-speed broadband service to 15M customer locations, mostly in rural areas where AT&T does not provide high-speed broadband service today, utilizing a combination of technologies including fiber to the premises and fixed wireless local loop capabilities.”
That sounds a lot like AT&T intends to steal DISH’s concept of a fixed wireless broadband connection to rooftop antennas collocated on a satellite TV dish. Indeed, its hard to think of any other way for AT&T to advance an out-of-region TV+broadband strategy, in places where it isn’t the incumbent telco. Of course, the obvious rejoinder is “so why didn’t AT&T buy DISH instead and get hold of its spectrum”.
However, its important to remember that AT&T has already turned down the opportunity to buy DISH twice in the last few years, in 2007/8 and 2012, both times apparently because it refused to pay Charlie Ergen’s asking price. And it seems the same is still true: my understanding is that Ergen has advertised his price to AT&T (and presumably Verizon as well) and indicated it was take it or leave it. Once again AT&T chose to leave it and this time moved on to negotiate with DirecTV instead (just like AT&T jumped to NextWave back in spring 2012).
DISH’s price is pretty clear: in DISH’s Q1 conference call Ergen indicated that his spectrum should be valued at twice the amount that the AWS-3 spectrum is sold for in the upcoming auction, and that he expected the AWS-3 price to be higher than the $5B-$10B range cited by analysts. That implies a price of $20B+, in line with the value ascribed to spectrum in DISH’s current stock price, although perhaps not quite as high as the $26B cited by some reports.
I’ve been skeptical of such high valuations, and think that the value of DISH to an acquirer should include value for both its spectrum and its 14M rooftops, which are potential sites for future small cell network deployments. I would go as far as to say the $20B of value could be attributed half to the spectrum and half to the sites, since 1M small cells generating $100/month in small cell hosting fees would certainly be worth $10B.
If AT&T is thinking likewise, and expects future spectrum auction values to be rather lower than Ergen’s purported $1.33+/MHzPOP ($20B for 50MHz), then even if AT&T was prepared to pay $20B for DISH’s assets (excluding the satellite TV business itself) it would make more sense to buy DirecTV, which can provide the rooftop sites, and for AT&T to acquire the spectrum later. AT&T can look forward to a fairly clear run in the auctions, due to the amount of spectrum on offer over the next year, especially if Sprint and T-Mobile are consumed with trying to get regulatory approval for a merger during that period.
Indeed AT&T has indicated that it plans to buy spectrum in the incentive auction next year and will bid at least $9B for 20MHz of spectrum. That is only $1.50/MHzPOP, little more than Ergen is valuing his spectrum at, for spectrum that should offer rather better deployment economics for rural wireless broadband. It hardly seems to be a coincidence that the DirecTV deal was secured just a few days after the FCC came out with revised incentive auction rules that were acceptable to AT&T.
Ergen has justified placing a higher value on DISH’s spectrum because the AWS-4 band can all be converted to downlink, which should be much more valuable than uplink, as the majority of traffic is directed to the user. Even if that is true (and AT&T doesn’t seem to agree, because it appears to have foregone the option to convert the WCS A and B blocks to all downlink), it is partially offset by the lower efficiency (bps/Hz) of uplink traffic. More importantly, if DISH (or a buyer) actually deployed a fixed wireless broadband network using DISH’s spectrum, it would need to use uplink as well as downlink, so AWS-4 could not simply be all converted to downlink. Only if DISH’s spectrum were to be used in mobile networks, as supplementary downlink for the PCS and AWS bands, could it be used in an all-downlink configuration, and then AT&T or Verizon would have to buy the spectrum and put the effort into standardizing these new bands.
So it would be entirely logical for AT&T to conclude that for fixed wireless broadband and small cell hosting, its simply not worth paying Ergen’s asking price. Instead, by buying DirecTV, AT&T gets the sites it needs thrown in for free with DirecTV’s satellite TV business, and the FCC has now created the right conditions for AT&T to buy the spectrum it needs in the upcoming auctions.
This of course leaves DISH in a difficult position, because Verizon has indicated that it doesn’t believe that deploying wireless connections to rooftop satellite TV antennas makes sense (both DirecTV and Verizon were skeptical after their previous joint trial), so it wouldn’t attribute much value to DISH’s rooftop sites. In any case, after buying Vodafone’s stake in Verizon Wireless, Verizon’s balance sheet would be unlikely to accommodate a near-term purchase of DISH.
So perhaps Ergen’s last option for a near-term deal is a partnership with Sprint, to facilitate a fixed wireless deployment and allow Masa Son to fulfill his promise of competing in fixed broadband if Sprint is allowed to purchase T-Mobile. Even for mobile users, Sprint certainly needs tens if not hundreds of thousands of new cellsites if it is going to deploy its 2.5GHz spectrum beyond urban cores, and DISH’s rooftops would be the best way to get that at reasonable cost.
If not, and Sprint bids for T-Mobile anyway, then DISH will have to go all out to block that deal. Of course, the most likely way to resolve the difference in expectations about the size of the break fee (Sprint has offered $1B, but DT wants nearer $3B) would be to offer T-Mobile some of Sprint’s 2.5GHz spectrum instead of more cash. However, that would provide DISH with an even bigger incentive to block Sprint’s bid, as giving DISH the opportunity to acquire some 2.5GHz spectrum is precisely what Ergen wanted Softbank to concede when they battled over Clearwire last year. If DISH does succeed in blocking a Sprint bid for T-Mobile, and T-Mobile is left with 20-40MHz of 2.5GHz spectrum, then there would be every reason for DISH to look at buying T-Mobile next year, as the only remaining way to make use of DISH’s spectrum assets.
Google’s Project Loon has been in the news again this week, with confirmation that Google will now look to partner with cellular operators to use their licensed spectrum rather than acquiring its own spectrum. Indeed yesterday the FCC issued an STA to permit continued testing in Nevada, using T-Mobile’s AWS-1 F-block LTE spectrum.
I’m particularly intrigued that Astro Teller of Google indicated that in late 2012/early 2013 the company spent “six months negotiating with ‘large companies’ to buy [a relatively thin piece of] harmonized spectrum,” but the plan was vetoed by Larry Page. Its pretty clear that the only “relatively thin” piece of “harmonized” (i.e. multi-country) spectrum out there is MSS spectrum and it was reported in November 2012 that Google had held discussions with DISH about their spectrum. Presumably similar discussions were held with other MSS operators like Globalstar as well (although at least as of late 2012 Google might not have considered Globalstar to be a “large” company on the scale of DISH or even Inmarsat).
However, the idea of partnering with individual wireless operators in different countries is completely incompatible with the concept of using balloons which can travel around the world in 22 days, because of course different spectrum would need to be used in each country. The obvious conclusion to draw is that Google will soon be moving on from balloons to its new Titan drones, which can stay in a defined area and be configured with a specific payload that would use the spectrum available there, just as Facebook predicted. Interestingly drones would operate at the same altitude of “up to 65000ft” and therefore might conceivably even be covered by Google’s current FCC STA. So how soon will we see this change happen?
Today’s ruling from Judge Chapman on the LightSquared bankruptcy case took four hours to read from the bench, and has not been issued as a formal order, apparently to give the parties involved until to negotiate and find a settlement, before they are ordered to mediation under Judge Drain. However, the oral ruling effectively sets out the parameters for that negotiation, most notably that part of SPSO’s debt is subject to subordination, and though SPSO may be treated differently than other secured debtholders, it may not be discriminated against. Though the judge apparently found Moelis’ valuation more appropriate than that offered by SPSO’s experts, she agreed that it was not valid without FCC approval of LightSquared’s license modification requests.
This appears to be a clear invitation to LightSquared and Harbinger to buy SPSO out of the capital structure if they are prepared to wait around for FCC approval. In that case the main subject of negotiation would be how much is paid to SPSO in respect of its debt, and whether a) that is acceptable to Ergen and b) viable for LightSquared to raise in addition to the amount already contemplated in the reorganization. The judge did not determine a specific amount of Ergen’s $844M in purchases which will be subject to subordination, but did give a range of dates that should be considered: the $320M (face value) in purchases in April 2013 were said to be on DISH’s behalf (and therefore subject to subordination), the $287M bought before October 2012 would not be subordinated and the $238M in purchases between October 2012 and March 2013 might or might not be subordinated.
Moreover, it seems that the extent to which any of these purchases would be subordinated will be dependent on the actual damages caused to LightSquared through the delay in negotiations and increased legal fees associated with the case due to the delays in SPSO closing its trades. As a result it appears only a proportion of the $320M-$558M would actually be subordinated. Given that the time taken to close the bulk of these trades was around 2 months, and LightSquared’s total operating costs including interest are around $1.5M per day, it is quite plausible that the amount actually subordinated could be no more than $100M. This would mean LightSquared having to find as much as $1B (including interest) to buy SPSO out of its capital structure.
Of course, its highly unlikely that Ergen would have been prepared to accept less than the $700M he paid for the debt in the first place, but if the potential damages in the form of subordination are relatively limited, then despite Judge Chapman’s criticism of Ergen’s testimony and behavior, he is still likely to be in a very strong position. Conversely, Phil Falcone will have a much harder time coming up with a plan that will retain value for his equity holdings.
I’m also left wondering about what David Daigle of CapRe, as the biggest single LP debtholder other than Ergen (with $331M in LP debt at face value), will now do, because as Falcone indicated in an email earlier this year “I believe [D]aigle is determined to reduce our position to nothing“. An alliance between CapRe and SPSO to push a debt to equity conversion of the LP debt would probably make it all but impossible for Harbinger to retain value in the reorganization, even if as much as $300M of SPSO’s debt was subject to subordination.
Elimination of Harbinger’s position would be equally unacceptable to Falcone, and thus it seems rather unlikely that agreement will be reached in the next couple of weeks. The best bet would therefore be to assume we will be headed to mediation and yet more DIP financing from the LP holders to extend the process for a couple more months, probably ending up either in an auction with credit bids or directly in a debt-to-equity swap. That presumably means no money for Inmarsat in June. It also implies that the probability of LP debtholders getting paid out in cash with accrued interest anytime soon has also decreased significantly. However, in the medium term it may be better news for GPS, because the debtholders would probably be prepared to drop LightSquared’s current lawsuit against the GPS industry, if it helped their efforts to get the necessary approvals from the FCC.