Its certainly been an eventful week for LightSquared (why is it that whenever I go on vacation something significant seems to happen?) and press reports have indicated that we are now moving a lot closer to my prediction in January that creditors would force the company into bankruptcy before all the money had gone, with Mr. Icahn apparently indicating that he is seeking a debt for equity swap to squeeze out Harbinger.
Mr. Falcone has responded by suggesting that he is “seriously considering” a “voluntary bankruptcy” as “one of several options” for the company. More pointedly, yesterday he indicated (in a very explicit reference to Icahn) that this would be an attempt to “protect the company from creditors who are more interested in a quick flip”.
Of course, the idea that Harbinger could remain in control rests on Falcone’s view that “a bankruptcy would not necessarily wipe out the equity holders of LightSquared because the spectrum it owns retains value” (something that I’m told debtholders consider simply “delusional”). At this point in time, the LightSquared spectrum is only usable for satellite services, which its very hard to believe could generate any positive value (because it would be difficult and time consuming for the satellite business even to reach cash flow breakeven).
As I’ve said in the past, the best case is that 20MHz of the spectrum might be usable in a decade or more for a terrestrial service, but if you have to wait a decade for the spectrum to be usable, and LightSquared’s “$10B waiver” has been withdrawn, then its hard to see why anyone would pay more than the $1.4B DISH paid for 20MHz of TerreStar spectrum last summer. Unfortunately using the spectrum at all would require maintaining the lease deal with Inmarsat at an NPV cost of somewhere between $1.5B and $2B (depending on the discount rate applied), which would need to be deducted from the above sum, and so its not clear that there is any positive value for the spectrum under this scenario either.
The last remaining hope to have some usable (and valuable) spectrum in the near term is to engineer a spectrum swap, but that would rely on the DoD showing some goodwill towards LightSquared, something which has hardly been evident to date.
As a result, after a voluntary bankruptcy filing, we would be thrown headlong into a valuation fight, where the debtholders tried to argue to the judge that LightSquared’s likely attribution to itself of a $2B-$3B valuation and proposed cramdown of the first lien debt was simply not feasible. It is difficult to see LightSquared prevailing, when the basis for a high valuation of the spectrum is simply not sustainable. However, these arguments will tie the company up in court for the rest of the year, and in the interim presumably Harbinger would try to stay in charge.
The timing of a bankruptcy filing is likely to be dictated not only by the April 30 expiry of LightSquared’s waiver in respect of the covenant breach from the termination of the Sprint agreement, but also by the status of LightSquared’s Cooperation Agreement with Inmarsat. Earlier this week, a deal appeared to be on the table whereby LightSquared would make the missed February payment of $56M and give up any claims that Inmarsat had failed to complete Phase 1, in exchange for a two year deferral of further payments. However, LightSquared appears reluctant to pay out additional money to Inmarsat when a bankruptcy filing would also prevent Inmarsat from terminating the Cooperation Agreement and could still allow LightSquared to reach a resolution with Inmarsat later on if that was felt to be useful. As a result, I expect LightSquared’s bankruptcy filing to come before the April 20 deadline on which Inmarsat can terminate the Cooperation Agreement for default, and plausibly it could be made over the weekend of April 14/15.
Mr. Falcone has also taken to the press to accuse “the FCC of bowing to special interests” by blocking his “shovel ready” project. The article suggests that he “first got into the telecom business in 2010″ when he “placed a $14 billion bet on what he thought was a sure thing”, which of course is revisionist history at its worst. In fact Mr. Falcone had been an investor in the predecessors to LightSquared and TerreStar since 2004, and made most of his purported $2.9B investment well before 2010.
Since the FCC granted the SkyTerra transfer of control (including various ATC license modifications and what appears to have been an implicit promise of a later waiver) to Harbinger in March 2010, the investment has mostly come from third parties. By my calculations, Harbinger has only invested about $700M into LightSquared over the last two years (including the cost of buying out minority equity investors in SkyTerra), while other investors have put in roughly $2B.
A better account of the history would be that by late 2009 (when Harbinger decided to buy out the other investors in SkyTerra), Harbinger had already invested over $2B in this project which had all gone to waste. At that point, Mr. Falcone desperately tried to rescue his losing bet (with assistance from the FCC) by persuading other people to invest their money into this supposedly valuable spectrum.
Remember that Harbinger also invested almost $1B in TerreStar’s equity and preferred shares from 2005 through 2010, attempting the same trick of converting satellite spectrum for terrestrial services, and that also was lost when Echostar acquired TerreStar’s senior debt and pushed Harbinger out, just as Icahn is likely to do in LightSquared. Ironically, back in August 2010, when TerreStar was on the point of bankruptcy, Falcone also claimed to Reuters that TerreStar’s senior debt was easily covered by its spectrum value. He was wrong then, as DISH’s ultimate bid was just enough to pay off the senior debt (which Echostar held the majority of) at par and unsecured creditors lost most of their claims (while the equity in TerreStar Networks was worthless). In the case of LightSquared it appears he will be wrong by an even greater margin, because GPS interference and the Inmarsat lease costs will dramatically reduce any interest in buying the LightSquared spectrum, and make it hard even for secured creditors to realize much of a recovery.
After today’s FCC Open Meeting there is a lot of speculation about the content of the 2GHz NPRM and NOI which is expected to emerge very shortly. The FCC indicated that it would reallocate the entire 40MHz of spectrum (2000-2020MHz uplink/2180-2200MHz downlink) to terrestrial services, redesignating it as the AWS-4 band. Many have assumed that this means that DISH would secure unlimited terrestrial rights across the whole band, with no givebacks, but the FCC was careful to indicate in the press conference afterwards that “flexibility applies across the whole band” but not that DISH will get flexibility across the entire 40MHz.
UPDATE: The NPRM has now been released and it appears that there is no definitive requirement for DISH to give back any spectrum, and it would simply be allocated terrestrial licenses nationally in exchange for a buildout criteria of 30% of the population within 3 years (not dissimilar to the 100M POPs agreed to by LightSquared) and 70% of the population in each economic area within 7 years (a somewhat less onerous requirement than LightSquared). Though the possibility is raised that DISH will move up by 5MHz and possibly even give up another 5MHz of uplink spectrum, there is no mention of a larger amount of spectrum being returned to the FCC in exchange for these terrestrial rights, suggesting that Charlie Ergen has played a stunningly good hand of poker to achieve such a result. Of course, it would not be in the least bit surprising to see accusations of a windfall emerge, just as they did with LightSquared.
The FCC has also accompanied the NPRM with an NOI, which proposes a “variation of the AWS-4 band plan” intended to “extend the AWS-1 and PCS spectrum with 65MHz of usable bandwidth”. This alternate plan involves converting the MSS uplinks to downlink spectrum, so that the entire 1995-2025MHz band would be additional PCS downlink spectrum. In exchange the MSS licensee could be granted access to the 1695-1710MHz band which would be paired with 2180-2200MHz as an AWS extension band. This hardly seems to be something that DISH would be keen on, given that it would involve defining another non-standard band class, and would not be compatible with the existing 2GHz satellite services, which DISH might at some point want to explore in Europe.
What is striking is that the FCC’s proposals are hard to reconcile with the requirement in the payroll tax bill back in February that the FCC should identify a “additional 15MHz of contiguous spectrum” to be auctioned, which is why I had assumed the NOI would propose that DISH gave up 10MHz of spectrum and moved its uplinks up by 5MHz into the 2020-25MHz J-block spectrum, as I indicated back in February.
In this context it is hard to see why the FCC bothered with the NOI, unless it is to use this to put more pressure on DISH to give up part of its uplink spectrum. I had guessed that the NOI would be the FCC’s preferred outcome and so NPRM would propose far more unfavorable terms for DISH. In other words, the NPRM would be “designed to fail” in order to drive all parties to a solution which would free up a greater amount of spectrum for auction.
Now we will have to see how commentators react to the NPRM. Could further pressure be brought to bear over the potential windfall, leading to a proposal that DISH gives up an extra 5MHz of uplink spectrum and create the 15MHz block of spectrum for the FCC? If not then the FCC will presumably have to look elsewhere for spectrum to meet the Congressional mandate, unless it perhaps claimed that it is not possible to auction the H-block due to interference concerns in the 1915-1920MHz band, and so the 1995-2010MHz block would meet this mandate. More importantly, the FCC appears to be betting that DISH will actually build out a network to introduce competition to the US wireless market, and so if the end result (after the November election) is a takeover bid from AT&T, it will be interesting to see what attitude the FCC takes to such a bid. If that occurs, and goes through without any further givebacks, then the FCC might very well be seen to have failed in its attempts to maximize the value of spectrum for the public interest. On the other hand, perhaps that could be the point at which an additional 5MHz of spectrum might be given up.
FURTHER UPDATE: As an aside, the NOI doesn’t appear to do much for LightSquared’s hopes of creating substantial incremental value for its Crown Castle lease in the 1670-75MHz block. LightSquared is apparently busy trying to extend its financial runway, but it may now be more difficult to avoid the looming financial crunch at the end of the second quarter of 2012, when LightSquared must repay a roughly $300M loan to its creditors.
After the FCC’s release yesterday evening of the agenda for the March 22 Commission Meeting, we are soon going to find out if DISH has struck a deal with the FCC to secure a waiver of the ATC restrictions in the 2GHz MSS band. Some commentators have seen the FCC agenda as a negative sign, pointing to potential delays in DISH’s deployment, based on the comments made by Charlie Ergen last week.
However, another way to look at this announcement is that the FCC is simply moving to implement the provisions in the spectrum bill signed by the President last week (including the proposal for “an alternative band plan…at 1695-1710 MHz”), which as I pointed out, clearly indicates that DISH would potentially give up 10MHz of spectrum and move its uplink band up by 5MHz to enable use of the PCS H-block.
Assuming that DISH gives up half of its uplink spectrum and this is converted into an additional 10MHz unpaired downlink at 2000-2010MHz (with an implicit guardband at 2010-15MHz), thereby maximizing the value of spectrum to be included in a future auction (and allowing Sprint the possibility of a 10x20MHz LTE Advanced network), then a rulemaking would certainly be needed to develop service rules for this new band configuration. However, it seems unlikely that the FCC would want to go back on what appears to have been a carefully engineered compromise passed by Congress just a couple of weeks ago. Given that Sprint’s agreement to settle its litigation against DISH back in October was also likely founded on a desire to gain access to the H-block spectrum, it wouldn’t just be DISH that would be upset by such a decision.
The proposed rulemaking may also achieve a couple of other purposes for the FCC. First of all it allows any deployment timetable to be keyed off the point when the new rules become final, thereby solving the arguments over whether the clock should start running on DISH’s buildout now or in 2015. Secondly it may help to push any bid by AT&T to buy DISH out beyond the November 2012 election and provide time for DISH to pull together an alternative consortium of partners (which might include one or more of T-Mobile, MetroPCS, DirecTV and America Movil). The wholesale access conditions contemplated by the Commission could then ensure that AT&T would not be able to unwind other partners’ access to this network in the future.
UPDATE (3/2): The FCC has just approved the transfer of control for DBSD and TerreStar this evening, but denied DISH’s application for the waiver, deferring this issue to the NPRM which will be considered at the Commission meeting on March 22. It appears that the FCC still wants to pursue the path outlined above, but was worried about the ramifications of granting the waiver without consideration of the proposed deal in a full public rulemaking, especially in the context of impending litigation from LightSquared. This also should allow the Commission to push any prospective bid from AT&T for DISH beyond the November 2012 election. However, with DISH noting in their results call that a refusal to grant the waiver could cause them to significantly change their plans, it will be very interesting to hear DISH’s reaction and see whether they will take this proposed deal off the table (for example by returning to the dual mode handset model contemplated by the original ATC rules), thereby torpedoing the FCC’s chances identifying 15MHz of additional spectrum to auction as Congress mandated last month.
FURTHER UPDATE (3/2): It sounds like the FCC is doing its best to reassure DISH that the outcome of the rulemaking is going to result in the band being redesignated for terrestrial-only services, and that a ruling will come before the end of the year. DISH’s response (with its reference to delaying “the advancement of some of President Obama’s and the FCC’s highest priorities”) appears to hint at the real reason for this delay, that after the LightSquared debacle, the White House simply doesn’t want any more trouble before the November 2012 election, and certainly doesn’t want to contend with an AT&T takeover bid for DISH in that timeframe.
Close scrutiny of the spectrum related legislation in last week’s jobs bill appears to give a pretty comprehensive outline of the deal that is to be expected between the FCC and DISH over its transfer of control and waiver request for the TerreStar and DBSD spectrum. In particular, the FCC is tasked with auctioning the H block spectrum (1915-20/1995-2000MHz) and extended AWS-3 block (2155-2180MHz) plus 15MHz in the 1675-1710MHz band (presumably the 1695-1710MHz block previously recommended by the NTIA, though note update below), as well as identifying an additional 15MHz of contiguous spectrum to be auctioned.
Assuming that this additional 15MHz of spectrum is intended to be contiguous with the other spectrum listed above (rather than being a single 15MHz contiguous block), then it appears that DISH will give up 2x5MHz of its 2x20MHz of DBSD/TerreStar spectrum (2000-05/2180-85MHz), and move its uplink frequencies up by a further 5MHz into the original J block uplink (2020-25MHz) in exchange for the waiver, and so that there is no windfall to be criticized as in the case of LightSquared.
This would leave DISH with 2x15MHz of spectrum at 2010-2025MHz (uplink) and 2185-2200MHz (downlink) and would implicitly create a new guardband in the 2000-2005MHz block (though the FCC would apparently still be supposed to auction this spectrum) and a new paired block at 2005-10/2180-85MHz to be auctioned (though this block would likely be repurchased by DISH or its partners in the ensuing auction because it would have relatively little value to other players). As Walt Piecyk at BTIG Research previously noted, Sprint should also then be well positioned to add the H-block spectrum to its G-block LTE network (assuming that the 1915-1920MHz uplink would not interfere with the PCS downlink spectrum at 1930MHz).
Alternatively if the FCC really does intend to auction a single contiguous 15MHz block then I would expect DISH to give up 10MHz of its uplink spectrum, and move up into the J block uplink, creating an asymmetric 10x20MHz allocation with 2015-2025MHz uplink and 2180-2200MHz downlink. That might allow an extra 10MHz downlink of downlink to be inserted above the H block (at 2000-2010MHz), with an implicit guardband left at 2010-15MHz. Given the much higher value of downlink spectrum in a carrier aggregation model, this trade would potentially allow the FCC to raise much more money from a subsequent auction (though it would also prevent DISH from buying back the 2x5MHz it had given up).
Based on an ex parte filing by DISH last week, the company is also prepared to accept conditions to “facilitate competitive carriers’ access to DISH’s planned nationwide wireless network”, and presumably with these concessions the FCC would permit a relatively relaxed buildout mandate as DISH has requested. An extended timeline would also help DISH because the re-auction of the spectrum they would give up would probably come ahead of the activation of their new network, and potentially therefore allow 2x20MHz operations from launch (assuming DISH repurchased the spectrum).
However, AT&T is fighting a rearguard action to impose the same buildout conditions as LightSquared and therefore remove DISH’s flexibility to ally with alternative partners, which it seems could include not just MetroPCS or DirecTV but perhaps even T-Mobile and/or America Movil. Of course the more credible DISH’s alternative plan is, then the higher the premium that AT&T would have to pay to take over DISH, but based on DISH’s filing there appears to be no doubt that the FCC is determined to ensure wholesale access to DISH’s LTE Advanced network remains available to other operators, whether or not DISH is taken over by AT&T. After approval of the TerreStar transfer of control by the Canadian regulator two weeks ago, it now appears that the FCC is expected to announce its ruling in the first half of March, so we should know the answer to all of these questions very soon.
UPDATE (2/22): With respect to the 15MHz of spectrum to be identified in the 1675-1710MHz band, this was originally expected to be an uplink band (to be paired asymmetrically with the AWS-3 downlinks), and would therefore most appropriately be located next to the AWS-1 uplinks at 1710-55MHz. However, I understand that there is pressure to use this 15MHz of spectrum for either carrier aggregation downlinks or TDD operation, which would not be feasible right next to the AWS-1 uplinks. As a result, it is plausible that the 15MHz of reallocated spectrum could be moved to the bottom of the band (1675-90MHz), adjacent to Crown Castle’s 1670-75MHz block, which is leased to LightSquared Inc.
Harbinger has previously stated that it plans to sell this spectrum to raise money and the potential windfall from the spectrum bill creating a contiguous 20MHz block of spectrum might increase its value significantly. Harbinger would presumably hope to pay off the term loan of roughly $300M which is due for repayment on July 1 (this is separate from the debt secured by LightSquared’s satellite assets), and that would require the 5MHz block to achieve a value of around $0.35-$0.40/MHzPOP once the costs of buying out the Crown Castle lease are taken into account. Though that may be feasible, with only a small 5MHz sliver of spectrum being sold, it seems unlikely that this sale could raise enough to provide a meaningful amount of additional capital or any return to Harbinger on their previous investment in the company. In addition, it is much harder to see any use for the 8MHz of 1.4GHz spectrum leased from TerreStar, and so it is unclear how long this lease will continue. However, for once it seems plausible that Harbinger might have finally found one small block of spectrum that the government can enable them to actually make a profit on. Its just a shame that so much more money has been wasted on unusable satellite spectrum in the meantime.
Today, the complexities of both the LightSquared and DISH regulatory processes both got even more messy. In the DISH waiver proceeding, AT&T filed an ex parte submission urging the FCC to impose buildout conditions on DISH similar to those imposed on LightSquared (260M POPs within 5 years 9 months), rather than any financial clawback to address the increase in value of the spectrum that a waiver would produce. AT&T also asks for conditions to be imposed on DISH’s 700MHz spectrum in line with the conditions imposed on AT&T’s recent purchase of spectrum from Qualcomm.
This submission is a blatant attempt by AT&T to put a thumb on the scales, as the FCC weighs up the appropriate balance between buildout mandates and clawback of any windfall. The reason for AT&T’s action at this very late stage in the process appears to be that DISH is trying to play off AT&T’s prospective bid against a potential venture with MetroPCS. MetroPCS would certainly be unwilling to commit to a 260M POP buildout, so if the FCC conceded AT&T’s demands, they would be the only game in town and DISH would lose its leverage in price negotiations. We’ll find out soon enough if AT&T’s gambit succeeds, but few would bet against Charlie Ergen’s poker playing skills after the events of the last year.
In the even more complex LightSquared process, the FCC has today issued a Public Notice establishing a Pleading Cycle in respect of LightSquared’s December 2011 Petition for Declaratory Ruling, which sought to establish that GPS receivers were not entitled to interference protection. This Pleading Cycle, with comments due by Feb 27 and replies by March 13, almost certainly pushes back an FCC ruling on the LightSquared testing into the second half of March, because the FCC would want to deal with all of these issues simultaneously. As a result, attention is now likely to be focused around April 1 (appropriately enough All Fools Day), when LightSquared is due to make the next interest payment on its debt and another ~$30M payment to Inmarsat.
The most intriguing issue in the Public Notice is the FCC’s subtle attempt to decouple the resolution of GPS interference from LightSquared’s January 2011 waiver, suggesting that any provision of the “terrestrial portion of service” is subject to the “Interference-Resolution Process” which “to date…has not been completed”:
On January 26, 2011, the International Bureau granted LightSquared Subsidiary LLC (a subsidiary of LightSquared Inc., hereinafter also referred to as LightSquared) a conditional waiver of the ATC “integrated service” rule, thereby establishing certain conditions that LightSquared must meet before it can provide the terrestrial portion of service contemplated by its proposed integrated satellite and terrestrial 4G wireless network. The Conditional Waiver Order prescribed an Interference-Resolution Process by which LightSquared would work with the GPS community to resolve concerns raised about potential interference to GPS receivers and devices that might result from LightSquared’s planned terrestrial operations. As a condition of commencing such commercial operations, the Conditional Waiver Order required that this process first be “completed,” a term defined as the point at which “the Commission, after consultation with NTIA, concludes that the harmful interference concerns have been resolved and sends a letter to LightSquared stating that the process is complete.”
The reason for this is because LightSquared has indicated that, in the event it was blocked from operating, it would withdraw the January 2011 waiver application and claim it had the right to operate a dual-mode (satellite-terrestrial) service under the conditions of the FCC’s 2005 rulings. While that might not be economically viable (or practical), the FCC would presumably then be forced to step in to protect GPS and thereby supposedly “infringe” on LightSquared’s claimed “property rights”. The Petition for Declaratory Ruling is also an attempt to eviscerate the interference protections contained in the 2005 rulings (referred to as CFR 25.255) and thereby make the supposed infringement of LightSquared’s rights all the more obvious.
Thus, from this Public Notice, it does appear that the FCC is at least cognizant of LightSquared’s legal strategy, and is likely (as I predicted) to ultimately rule that the Interference-Resolution Process should be prolonged (and extended to cover GPS receiver/interference standards) and that in the interim LightSquared will be prohibited from commencing any terrestrial operations. LightSquared is apparently contending that this wouldn’t constitute a MAC on its debt covenants, but I suspect that’s an argument some of the debtholders (including Mr. Icahn) will want to test in court.
All this makes for a very complicated set of legal arguments, but one additional piece of information did emerge today that sheds some light on the big picture of why it has been so hard for spectrum holders to monetize their assets, and why the FCC has come in for so much well deserved criticism. DSL Prime is reporting that growth in mobile data usage is running at less than half the level predicted by Cisco and that the FCC staff “demanded their name be taken off” the FCC’s October 2011 demand forecast, because they “didn’t believe the claims in this paper”. However, with so many gullible journalists and investors buying into the idea of a (manufactured) “spectrum crisis” rather than a “spectrum bubble“, perhaps its a bit less surprising that LightSquared has been able to raise over $2.5B of investment in the last 18 months.
This evening Reuters is reporting that Mr. Falcone is examining “the potential for selling [LightSquared's] right to certain spectrum leases” to “raise cash for his financially strapped telecom start-up”. Those leases are presumably the 8MHz of 1.4GHz spectrum that LightSquared leases from TerreStar Corp and the 5MHz of spectrum at 1670-75MHz that is leased from Crown Castle. However, its hard to see how LightSquared could raise any meaningful amount when any buyer would have to take over the underlying lease obligations ($24M per year for the TerreStar spectrum and $13M per year for the Crown Castle spectrum) and there is no clear buildout plan for either band. Indeed LightSquared had not even planned to include the 1.4GHz spectrum in its LTE network, instead entering into an agreement with Airspan Networks in August 2010 under which Airspan would “exclusively market LightSquared’s 1.4 GHz wireless spectrum” to the utilities industry as “a comprehensive solution for Smart Grid and Smart Utility applications” (though with no visible success to date).
Other news emerging today is that I’m told the NTIA plans to release its report on the November 2011 testing next week, presumably accompanied (concurrently or very shortly thereafter) by its recommendations to the FCC. It appears that the NTIA will back the PNT Excom recommendations (most likely including that there should be no further testing at this time and that there should instead be a consultation on GPS receiver standards), and it could hardly do otherwise, given that the test procedures criticized by LightSquared were specified by NTIA in the first place. Remember also that last August Mr. Strickling believed LightSquared was “in Wonderland” in thinking it could move forward after the initial test results came out.
I’m also told that LightSquared is trying very hard to pressure the FCC to overrule the NTIA, and order that the high precision testing should start within the next two weeks. However, that hardly seems plausible given the political firestorm that would be ignited by a public disagreement between the FCC and NTIA. Messrs. Genachowski and Strickling will be in Geneva this weekend for WRC-12 and it sounds like they will be very busy trying to avoid that situation. As a result, we might well see the same outcome as in September, when the release of the NTIA letter was followed very quickly by an FCC response (which in that case was to adopt the NTIA recommendation). It definitely looks like next week will be a very busy one, so follow me on Twitter @TMFAssociates for all the latest information.
UPDATE (1/22): It appears that the NTIA recommendations letter will have to wait for Mr. Strickling to return from Geneva, so we may not see it until the week of Jan 30. I also now expect the FCC to order a (pretty lengthy) GPS receiver standards rulemaking, which will allow for further testing and debate on when the lower band spectrum might be useable for terrestrial services (think 2020 or thereabouts, though we won’t have any definitive transition timeline until 2013 or even 2014) and conveniently put off any decision until after the November election. Of course, because LightSquared will be unable to operate its terrestrial network in the meantime (almost certainly a MAC for its loan covenants), that will likely set off a major battle amongst the debtholders about what to do next, with Mr. Icahn likely to try and force LightSquared into bankruptcy in the near future, while some other debtholders might be more supportive of Mr. Falcone if they still believe he can see this process through.
Assuming that the FCC did agree with the NTIA and stated that it was prohibiting LightSquared from commencing terrestrial operations for the foreseeable future, the most interesting question will be the grounds for its legal authority in doing so. LightSquared has indicated that it would withdraw the waiver request in these circumstances, and that it believes this would render the condition (requiring GPS interference concerns to be resolved) imposed in the January 2011 order null and void. In that case, the FCC would probably have to fall back on the authority that the GPS industry (plus others such as CTIA) have asserted all along (and LightSquared has challenged, most recently in its Dec 2011 Petition for Declaratory Ruling), that CFR 25.255 (“If harmful interference is caused to other services by ancillary MSS ATC operations, either from ATC base stations or mobile terminals, the MSS ATC operator must resolve any such interference”) provides absolute protection against LightSquared being permitted to cause harmful interference. In that case we could expect to see LightSquared launch legal action very quickly, in line with the position adopted in its December petition.
As I remarked in an interview for the Satellite 2012 downlink newsletter yesterday, 2011 has seen a dramatic deceleration in MSS revenue growth, with wholesale service revenues now expected to grow by less than 3% in 2011, compared to the 7%-8% growth seen in each of 2008, 2009 and 2010. Yesterday we also released our latest industry report which gives ten year forecasts for MSS industry growth. In the L-band market (including Inmarsat L-band, LightSquared, Thuraya, Iridium, Globalstar and Orbcomm) we project cumulative revenue growth from 2010 to 2020 of only 4% p.a. and even when Global Xpress is added to Inmarsat’s revenues in the latter part of the decade, the overall cumulative growth rate is only increased to around 6% p.a.
This represents a striking contrast with widely quoted forecasts from Euroconsult and NSR, that the MSS market (excluding GX) will grow at 7% p.a. over the decade (Euroconsult) or 10% p.a. from 2010-15 (NSR). These optimistic forecasts seem to have achieved wide currency with analysts and bankers, who have argued (for example at the Satcon conference in October) that the MSS industry is more attractive than the FSS industry because of its much faster growth profile. One example that stands out is a JP Morgan analyst report on Inmarsat, published last Thursday, which gives an upbeat assessment of Inmarsat’s prospects and projects a target price of 800p per share (roughly double the current level). Not only does JPM expect LightSquared’s spectrum lease payments to be continued indefinitely after they file for bankruptcy (which is ludicrously unrealistic once you understand that LightSquared’s political backing has evaporated and even the FCC has basically given up on them, but may reflect the fact that JPM co-led (with UBS) the sale of LightSquared’s first lien debt earlier this year), but they expect Inmarsat’s core L-band business to resume growth at 2.5% p.a. from 2012 and Global Xpress to achieve Inmarsat’s target of $500M in annual revenues after 5 years.
Where do we differ with Euroconsult and NSR? It appears the primary source of the discrepancy is in our expectations for the maritime and aeronautical L-band markets. According to the JPM report, NSR is projecting 11% p.a. and 13% p.a. growth respectively for the maritime and aeronautical segments between 2010 and 2015. We are told that Euroconsult also takes a relatively optimistic view of the outlook for the maritime and aeronautical L-band markets. However, our expectations are that wholesale maritime and aeronautical L-band service revenues will actually decline between 2010 and 2020, as customers move to Global Xpress and other VSAT solutions. As a result, future L-band growth will have to come from land-based services, particularly low speed data and (to a much lesser extent) handheld satellite phones. That’s relatively good news for Iridium and Globalstar (as well as Orbcomm, if they can continue to gain momentum), but its still unclear whether ~8% p.a. growth in land MSS revenues will be sufficient for all of these companies to thrive in the face of what will inevitably be an ever-increasing focus by Inmarsat on this part of the MSS market.
If you are interested in our latest report, which also includes a detailed analysis of Inmarsat’s maritime market outlook and forecasts for in-flight passenger communications services, as well as discussion of the current prospects for terrestrial use of MSS spectrum, please contact us for more details about our MSS information service.
In addition to Sprint’s announcement today that it plans to offer new debt in a private transaction, Sprint has more quietly been rounding up additional money from both LightSquared and DISH. In Sprint’s most recent 10-Q, filed yesterday, the company notes that “In September, the [spectrum hosting] arrangement was amended to change the September 30, 2011 contingency date for LightSquared’s performance to December 16, 2011. The December 31, 2011 contingency date remained unchanged. This amendment also provided for an additional prepayment of $20 million, which was received in October 2011.” Today, Sprint has told the FCC that “DISH and Sprint have today reached an agreement to settle all of these [reimbursement] disputes among Sprint, DISH, and their subsidiaries and affiliates in a mutually satisfactory manner” and will presumably therefore be paid a significant proportion of its $220M claim against DBSD and TerreStar ($110M per company) for BAS relocation expenses.
UPDATE (11/7): DISH has now revealed that it will pay Sprint a total of $114M, though it is not yet clear if Sprint will retain any additional claims in the bankruptcy cases of DBSD and/or TerreStar Networks.
However, the two disclosures appear to have rather different consequences for LightSquared and DISH. In the case of LightSquared, this represents another $20M of expenditure over and above the amount assumed in my analysis earlier this week. More importantly, Sprint has set a precedent under which it will now presumably expect to be paid even more money when LightSquared is unable to meet the revised deadline of December 16 and the second deadline of December 31 (and of course it is certain that the FCC will not be able to rule by then, because LightSquared’s proposed filter for precision GPS equipment is not being tested by the government this month, as LightSquared has now admitted).
I also now suspect that Boeing’s vendor financing loan may simply have been extended (perhaps by 12 months?), from its original December 2010 repayment deadline, and a new deadline is likely to occur relatively soon, because Boeing will need some certainty about whether the SkyTerra-2 satellite will be available for its MEXSAT project. If Boeing does insist on repayment (of what would now be $130M+) within the next few months, then (faced with the unpalatable alternative that LightSquared forfeits the ground spare satellite and potentially jeopardizes its ATC license) LightSquared could well run out of money before its next first lien interest payment in April. Specifically, my estimate on Monday was that LightSquared would have about $170M in cash at the end of Q1 2012, which would not be sufficient to cover a payment of $130M+ to Boeing, plus the $20M already paid to Sprint and the additional payments that are now likely in respect of the December deadlines. Even without making any repayment to Boeing, if LightSquared needs to pay Sprint an extra $20M for each additional 3 month deadline extension, then it would have barely enough money to make the interest payment due on April 1, 2012.
In the case of DISH, it appears that the news of a Sprint settlement is more positive, as it removes one of the main roadblocks to the FCC approving a transfer of control of the DBSD and TerreStar assets to DISH. However, DISH’s requested ATC waiver has come under more pressure, with AT&T now joining the CTIA in pressing for the waiver issue to be considered in a full rulemaking proceeding. Interestingly, both AT&T and the CTIA raise the question of a windfall, with the CTIA explicitly noting (footnote 21) that:
While DISH argues that it took into account the possibility of future flexibility for the spectrum during the bankruptcy process, certainly other parties were not factoring that into the process. Moreover, 40 MHz of nationwide, terrestrial broadband spectrum would not be valued at $2.8 billion. When looking at past valuations for such spectrum assets, a valuation of 3 to 4 times this would be more realistic if terrestrial rights were guaranteed.
Of course, that statement once again highlights the issue of LightSquared’s own $10B windfall problem which the GPS industry are now making so much of, and makes it harder for the FCC to grant DISH a waiver without some way to recover value for the Treasury. As a result, it is plausible that (with the transfer of control and ATC waiver being processed by the FCC in separate dockets) a ruling on the transfer of control could come ahead of any waiver decision.
UPDATE (11/14): A November 9 ex parte filing from DISH appears to confirm that the FCC is concerned about the “windfall” issue and might separate the transfer of control ruling from the waiver requests.
Next week on September 7, Iridium is announcing “a new force in personal communications that aims to address the growing expectation of connectivity everywhere, all the time” which is “more than the launch of a single product”. There have been a couple of rumors about what this might be, firstly a commercial version of the Netted Iridium PTT service that has been such a success with the DoD, in conjunction with the new 9575 phone (which has a convenience key that could support such functionality) or secondly a Bluetooth-enabled device (similar to inReach or SPOT Connect) that is voice and data capable and can connect to standard cellular phones (a concept that has been put forward on multiple occasions by various MSS operators, including ICO Global back in 2001 and is already possible on Inmarsat BGAN terminals). Of course there may be some third unknown possibility, but of these two options it appears that the first is a more differentiated concept and may be nearer to realization at this point in time.
This week Inside GNSS reported some interesting insights into the LightSquared/ GPS interference debate, including a meeting in Washington DC last Friday August 26, “brokered by NTIA” which “suggested that a new test period — of 90 days or more may be needed”. The article also mentioned “Guidance from the White House” which mandates that officials “cannot attack LightSquared” because “President Obama apparently sees LightSquared’s plan as a centerpiece of a wireless broadband initiative that he hopes to make part of his re-election campaign”. More information may emerge at the rescheduled September 8 hearing of the House Committee on Science, Space, and Technology, which could be especially controversial as “NTIA reportedly is refusing to release information about the effect of GPS denial of service submitted by federal agencies” (similar to the devastating FAA assessment) to the Committee chairman.
Finally, a little more clarity emerged on how the claims of TerreStar’s various creditors will be treated, after the bankruptcy judge ruled on August 19 that the first lien debtholders have a valid lien on the proceeds of TerreStar Networks’s spectrum licenses. As a result, it now appears that in the TSN bankruptcy, there may be as little as $30M-$40M of cash left for the unsecured creditors ($1111M left of distributable value after paying the DIP and PMCA loans vs secured claims of $1077M as of August 31), who have total claims of $460M (including $179M for the 6.5% Exchangeable Notes and $104M for Sprint), although of course some of these claims (including an intercompany loan of $57M from TerreStar Corporation) are being challenged and TSN has asserted quite sizeable claims in the TSC bankruptcy (which could increase the total recovery, albeit in New TSC Notes, by tens of millions of dollars). However, this certainly means that Harbinger is taking yet another hit on its TSN investments, when it was buying Exchangeable Notes at as much as 82 cents on the dollar last November and the return to unsecured creditors is estimated to be only 10 to 15 cents on the dollar.
In the TSC bankruptcy, the Plan of Reorganization that has been filed contemplates that unsecured creditors (including potentially Elektrobit and TSN) with total claims estimated at $136M will receive “New TSC Notes” with “face amount equivalent to estimated Allowed Claims” secured by the estimated $177M value of the 1.4GHz spectrum. The Preferred Stock holders ($90M of Series A held by Highland and $318.5M of Series B, the majority of which is held by Soros and Harbinger) will fund an exit facility of $6.5M and receive all of the new equity in TSC, while the 1.4GHz spectrum lease (with Harbinger/ LightSquared) will remain in place providing $2M per month of revenue for TSC and more than covering the estimated $12M annual interest expense on the New TSC Notes.
It seems that Sprint is not having much luck with timing when it comes to the announcement of its 4G strategy. Back in March it was apparently poised to announce a deal with LightSquared at CTIA, which was derailed by the AT&T/T-Mobile merger announcement. Now Sprint has just sent out invitations to its October 7 strategy update, only for the DoJ to announce it is filing suit to block the merger.
As Sprint attempts to write the “fourth chapter” in its 4G strategy for this October event, it appears the upheaval caused by this unexpected DoJ announcement could very well complicate its plans. It has been reported that Sprint has engaged in discussions with several cable companies, but most coverage had focused on whether this would lead to a takeover bid for Clearwire. However, there isn’t much need for a resolution of the Clearwire situation ahead of October 7 – what Sprint really requires is a solution for its wide area LTE coverage rollout rather than the urban capacity enhancement that Clearwire intends to provide. With little probability that it can use LightSquared’s spectrum in the immediate future, and only a limited quantity of its own PCS spectrum available for LTE, I think its more likely that the next chapter of Sprint’s strategy would have involved the cable operators exchanging their SpectrumCo AWS holdings (a near national 20MHz block acquired for only $0.43/MHzPOP in the 2006 auction) for an equity stake in Sprint itself.
Now the DoJ’s actions this morning have introduced considerable uncertainty about whether this would be the best way forward for Sprint, both because a Sprint/T-Mobile merger could ultimately be back on the table, and because the cable companies could potentially sell their AWS holdings to T-Mobile, which was previously regarded as the obvious purchaser for these assets. Thus I think on balance its now less likely that Sprint will have a major new agreement with the cable companies to announce in October.
There could also be repercussions for DISH’s filing with the FCC for a waiver of the ATC restrictions in the 2GHz band. There are certainly many positives, in that either T-Mobile or AT&T could once more become a viable partner for DISH, but it also seems likely that the FCC may be unwilling to decide how it will handle the DISH application (and more particularly what conditions it will agree to) until the ultimate disposition of the AT&T/T-Mobile merger is decided. That’s because there will be less need to insist on DISH becoming a standalone competitor (and perhaps even to provide wholesale access commitments) if there are still going to be four national wireless operators in the market, though of course the FCC will still want to ensure that DISH does not simply flip the spectrum to one of those “big guys”, as some people apparently think it will do.
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »