The plan all along?

Posted in Clearwire, DISH, Financials, Operators, Spectrum, Sprint at 7:09 pm by timfarrar

Now that Clearwire’s board has urged its shareholders to reject the Sprint bid, and Sprint has initiated litigation to try and block DISH’s tender offer, it seems Charlie Ergen has a good chance of achieving his objective: to ensure Sprint is unable to make use of Clearwire’s spectrum and enhance its network capacity as SoftBank desires. DISH has indicated that it will now focus on its Clearwire tender instead of making a further bid for Sprint in advance of today’s deadline.

While that doesn’t rule out DISH making another higher but unfinanced offer to disrupt the Sprint-SoftBank vote next week, it seems Ergen might be better off having SoftBank complete a takeover of Sprint and then discover that its $21.6B investment will go to waste unless Sprint agrees to sell DISH the 40MHz of Clearwire’s spectrum that Ergen wants.

So I’m left wondering if DISH’s actions have all been part of a grand plan:
a) keep making offers that persuaded Clearwire shareholders (and ultimately the Clearwire board) to reject the Sprint takeover
b) make an uncommitted bid for Sprint to persuade SoftBank to overpay for Sprint
c) make noises about LightSquared’s spectrum to persuade Sprint to raise its bid for Clearwire by less than expected
d) come in with a much better offer for Clearwire shares at the last minute, which was high enough to ensure that the Sprint bid for Clearwire will be rejected
e) hedge the bid with just enough conditions that will ensure that Sprint is unable to make use of Clearwire’s spectrum and that Clearwire, DISH and Sprint are tied up in litigation for months to come.

Given that sequence of events, its reasonable to ask if SoftBank really wants to own Sprint without the Clearwire spectrum? If not, then will SoftBank have any option other than to ultimately do a deal with Ergen on his terms? If you think that’s unlikely, then you only need look back to the Cablevision-DISH trial over Voom last fall, where DISH had a terrible position in the courtroom, but still managed to get to a settlement which achieved Ergen’s objectives (including a purchase of the MVDDS spectrum which will be part of DISH’s planned wireless broadband network).

After all, remember that DISH still has a number of options to make SoftBank’s life even more miserable, including mounting a rival bid for the PCS H-block spectrum which Sprint desperately needs to enhance the capacity of its existing LTE network.

So maybe the question is now when not if SoftBank will be forced to settle with DISH? As Vijay Jayant told The Hollywood Reporter in April “Charlie’s attitude is, ‘At some point, they’ll negotiate with me on my terms.’ He’s bluffing until he’s not.”


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.


Gogo’s bubble era IPO

Posted in Aeronautical, Financials at 4:25 pm by timfarrar

Gogo’s IPO roadshow is taking place this week (with completion apparently expected next Tuesday) after the company filed a revised S-1 on Monday June 10 indicating that it is seeking to sell 11M shares at between $15 and $17, giving the company an enterprise value (at the midpoint of this range) of approximately $1.3B (or even higher if you assume, as Gogo does, that the cash it raises needs to be spent on upgrading Gogo’s network to ATG-4, including doubling the number of cell sites by 2015). That seems pretty optimistic given the modest revenues that Gogo generates at present ($235M in 2012) and the losses that the company is making outside its well established Business Aviation segment.

I’ve not yet completed my forthcoming aeronautical communications market report, but I know a lot of people will be looking for some realistic numbers to value the company. So I decided to pull together my detailed estimates for Gogo through 2017, into a 21 page profile and analysis which I’ve published today. You can find a report summary and contents list here, and an order form here. And if you decide to buy my aeronautical market report when its available later this summer, you’ll receive a full credit for the price of the Gogo report.

Feel free to contact me for more details. As a taster, here’s the latest quarterly growth breakdown including 2013Q1. The last quarter is quite significantly short of my estimates, as despite the improving take rate trend line, Gogo took a significant hit on Average Revenue Per Session compared to 2012Q4.

UPDATE 6/13: And here is a comparison with the various analyst forecasts for Gogo which were given out at the roadshow. I’ve left off the names, to spare people’s blushes, but the bank that forecast this to be a $1.6B business in 2017 has clearly been drinking the same Kool Aid as Global Eagle.