02.04.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum at 9:42 am by timfarrar
The proxy statement filed by Clearwire on Friday morning made for interesting reading, not least in guessing the identity of some of the companies that Clearwire has talked to over the last couple of years. Some are obvious (A=T-Mobile, B=AT&T, C=MetroPCS, D=China Mobile, F=LightSquared, H=Verizon) and some are more speculative (E=Google? G=one of the hedge funds invested in Clearwire, I=Samsung or Qualcomm?), but what stands out is the lack of bids for Clearwire’s spectrum at an attractive price.
In particular, Clearwire didn’t find the bid from T-Mobile (in fall 2010) to be “compelling” and was unable to reach agreement with MetroPCS (in fall 2011) on the spectrum to be included in any deal (i.e. owned vs leased) or the price. Clearwire notes that even DISH’s bid at a price of $0.19/MHzPOP “related to the acquisition of higher quality spectrum assets of Clearwire and would leave Clearwire with less valuable spectrum assets”, implying that it is mostly for owned and/or contiguous spectrum (as I suspected), and implying that the price for the spectrum that Clearwire would be left with could be rather lower.
However, the fundamental reason for Clearwire to acquiesce to the Sprint bid appears to be that Clearwire has been unable to find a second wholesale customer for its network. That target customer appears to have been AT&T, given the financials for the MCC (Multi-Customer Case) set out in the proxy, which assumed that the second customer would generate approximately 1.5 times the revenue produced by Sprint, or in other words would have had around 90 million customers who could use the Clearwire network.
AT&T certainly took quite a lot of interest in Clearwire, conducting “extensive due diligence” in fall 2010 (though ultimately declining to submit an offer, presumably opting instead to pursue the T-Mobile merger) and then resuming discussions (at AT&T’s initiative) in February 2012:
In February 2012, Party B approached the Company about restarting discussions about a possible spectrum sale and commercial agreement. The conversations between the parties focused on technical issues and the spectrum that the Company could potentially make available for sale. Party B made it clear during the discussions that a transaction with the Company was one of the several options it was pursuing in order to satisfy its spectrum needs. Party B terminated further discussions with the Company in May 2012 after it had determined to pursue one of the other options to satisfy its spectrum needs.
AT&T’s deep dive into “several options” in the first half of 2012 (after rejection of the T-Mobile bid) appears to have been very extensive, and focused largely on options to meet longer term spectrum needs (3+ years out). Of course we know that AT&T ultimately decided to buy NextWave, after approaching NextWave initially at the beginning of April. However, I’m told that AT&T also approached LightSquared in early 2012 with a view to buying the 1670-75MHz spectrum block (when LightSquared indicated it was considering a sale of these spectrum leases), and its inconceivable that AT&T didn’t also discuss with DISH the possibility of buying the 2GHz MSS spectrum (when it actively tried to interfere in DISH’s FCC proceeding).
Was AT&T scared off by the FCC’s denial of DISH’s ATC waiver request in early March, or simply by Charlie Ergen’s high asking price. More than likely it was the latter, given AT&T’s initial low ball $350M offer for NextWave’s spectrum in April 2012 (after the waiver denial, but presumably when discussions with DISH were still ongoing), followed by a decision to offer rather more in early June, after AT&T had reached a decision on its preferred spectrum option. Around the same time DISH also began exploring options with Clearwire and MetroPCS, leading up to its parallel bids to take over MetroPCS and buy spectrum from Clearwire in August 2012.
I’ve often thought that AT&T’s interest in WCS could be independent of a possible purchase of DISH’s spectrum, with WCS providing a “high band” option for dense urban networks (as a direct alternative to Clearwire’s BRS/EBS spectrum), while DISH’s spectrum provides a “mid-band” alternative to PCS or AWS. Indeed, after AT&T gave up a large slice of its AWS spectrum to T-Mobile as part of the break fee, it was plausible to think AT&T would have a potential shortfall in its mid-band spectrum assets, which would make DISH’s spectrum particularly attractive. However, it appears that AT&T may instead have looked at DISH’s spectrum more as “what do we need for 3+ years out”, considering it alongside WCS and BRS/EBS, which would almost certainly lead to a mismatch of valuation expectations with Charlie Ergen.
Instead AT&T now appears to be focused on a combination of its 700MHz LTE network (bulking up with the B block purchase from Verizon) plus smaller amounts of cellular, PCS and AWS spectrum (including the acquisition from ATNI/Alltel and the AWS spectrum included in the NextWave purchase) to meet its near term needs. The 12MHz of Qualcomm 700MHz D/E block spectrum would then be used for supplementary downlink to relatively narrow 5x5MHz cellular, AWS or PCS LTE deployments in urban areas from 2014 (though DISH’s 700MHz E block holdings could spoil any prospects of deployment outside the 5 major metropolitan areas where AT&T owns the entire band). This would explain why AT&T has retained 10MHz of AWS spectrum in Los Angeles, splitting the AWS A block spectrum with Verizon as part of the 700MHz B block deal.
Although its not been widely recognized, AT&T has already started to deploy LTE within its AWS spectrum in a few markets, and is now emphasizing the capacity enhancements available from small cell technology. Indeed, given the backlash against just the two modestly sized spectrum purchases from Verizon and ATNI, its hardly conceivable that AT&T could be planning to buy DISH’s spectrum in the near term as well. However, if AT&T was going to do another spectrum deal in the near term (which may now be unlikely), I’d bet that using Leap or US Cellular’s spectrum (perhaps even selling their customers to Sprint or T-Mobile?) would be more in line with AT&T’s current spectrum strategy than a deal with DISH.
So where does that leave Charlie Ergen? Perhaps he really does need to secure a deal with Clearwire not just to make it impossible for Sprint to get control of Clearwire’s spectrum, but also so DISH has a way forward to a near term deployment? Alternatively, moving towards a deal with LightSquared and a reorganization of the AWS-4 band to create additional downlink spectrum (as I suggested in December) could continue to create problems for Sprint (given its desire to purchase the H block) without committing DISH to a near term buildout. Either way, it seems that in the near term, Ergen might be more likely to be a buyer than a seller of spectrum.
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01.10.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 4:49 pm by timfarrar
In the wake of Dish’s counterbid for Clearwire, most attention has been focused on trying to discern Charlie Ergen’s objective: does he actually want to buy Clearwire or not? Many seem to think his intention is actually to secure a network sharing partnership with Sprint. However, this doesn’t seem very likely, in view of Ergen’s comments last year about how he looks at “business relationships”, and Sprint’s attempts to talk up a deal with Dish (rather than vice versa).
If Dish’s offer is going to prompt a near term deal with someone else, then it still seems the most likely options would be AT&T or DirecTV: the spectrum cap would create more problems for AT&T if Dish owned additional BRS spectrum (and as discussed below, it is likely that much if not all of the spectrum that Dish has offered to buy from Clearwire would be subject to the spectrum cap), while DirecTV probably would find Dish a less attractive merger partner if major wireless buildout commitments were already in place. As a result, I think if Dish appeared to be making progress with a Clearwire deal, then that might prompt AT&T to act more quickly than it would otherwise do. With Ergen reiterating his lack of desire to sell spectrum, it also seems like the message to AT&T is that a knockout bid for the whole of Dish is the only acceptable option.
As I noted on Tuesday, Dish’s potential offer for Clearwire does seem like a good deal for Dish, especially if the bid is mostly or all for owned BRS spectrum. Dish has offered to buy 11.4B MHzPOPs, which equates to about 38-39MHz on a near national basis, with the option to buy or lease another 2MHz from an adjacent channel to bring the total holding up to 40MHz (presumably to support two 20MHz or four 10MHz TDD channels). It seems likely that Dish would want contiguous spectrum for maximum flexibility, and if Dish was able to buy spectrum from “an adjacent channel” then that channel boundary must be in the BRS band. Thus the most plausible channels may be either the 6MHz BRS-2 channel plus the 6 adjacent 5.5MHz E1-E3 and F1-F3 channels (39MHz in aggregate running from 2618MHz to 2647MHz, all of which is in the BRS block and subject to the spectrum screen) or channels F3, H1-H3 and G1-G3 (38.5MHz in aggregate running from 2651.5MHz to 2690MHz, 22MHz of which is in the BRS block and subject to the spectrum screen).
Most observers would consider this part of the BRS spectrum to be the most valuable part of Clearwire’s holdings, and if particularly if the 2618-2647MHz block of spectrum was sold to Dish, then Clearwire’s remaining spectrum holdings could be substantially less useful to Sprint (or anyone else) in the future. Moreover, if Dish could then take posession of the shared network infrastructure in the event of a Clearwire bankruptcy, there might be very few pieces left for Sprint to pick up.
Why then would Dish be offering to buy up to 100% of Clearwire’s equity as well? Remember that an offer to buy the equity wasn’t part of Dish’s offer back in November, and now appears to have been included simply to trigger the “fiduciary out” to the “no shop” in the Sprint merger agreement. Ergen wouldn’t expect Sprint to sell its shares to Dish, and many of those equity holders like Crest who are betting that the Clearwire equity ought to be worth $5+ per share might not take a $3.30 offer either. Thus it is far from certain that Dish would in the end purchase a large slice of Clearwire equity whose value might be impaired by the spectrum sale.
What is most intriguing is that Clearwire’s executives (as opposed to the board) are apparently very keen on a Dish deal, describing it as “doable but complicated”. That’s perhaps unsurprising because in many cases their interests are significantly different to those of the Clearwire board (and shareholders): with Ergen they would keep their jobs and be responsible for a new independent LTE network build, whereas under Sprint ownership they would likely all be fired.
I understand that Clearwire executives may have been working on a deal with Dish since last summer (I mentioned it in a blog post in September), and note that MetroPCS’s proxy in November indicated that someone (likely Dish) had suggested splitting Clearwire between themselves and MetroPCS back in June 2012, while Dish started acquiring significant quantities of Clearwire debt in the second quarter of 2012. In addition, I’m told that Clearwire renegotiated a significant quantity of spectrum leases (covering more than 1.4B MHzPOPs) between September and November 2012, suggesting that they were preparing for the disposal of significant amounts of their spectrum, either bringing more leased spectrum into use, or selling those leases to Dish.
Given Sprint’s arguments that Dish’s current proposal will go through because they will vote against it, Clearwire management presumably have been working to structure a transaction that could be undertaken without board or shareholder approval, perhaps in the form of the spectrum sale desired by Dish (which could well fall below the 20% of assets requiring approval) plus either a modest tender offer for some of Clearwire’s shares, without any board representation, or no equity purchase by Dish at all.
This leaves open the possibility that if Clearwire’s minority shareholders reject Sprint’s bid, then a spectrum sale and network sharing agreement with Dish would be the only offer left on the table. Of course, that might also prove to be a pyrrhic victory for Crest, if the end result is a Clearwire with significantly diminished spectrum assets (possibly with little easily saleable spectrum) and a network that Dish could simply take over in the event of a bankruptcy.
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01.08.13
Posted in Clearwire, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 5:11 pm by timfarrar
So DISH has now made a (preliminary) public offer to acquire up to 100% of Clearwire’s shares at a price of $3.30, as part of a complicated transaction to acquire 25% of Clearwire’s spectrum (11.4B MHzPOPs for $2.2B, i.e. $0.20 per MHzPOP) and enter into a network sharing agreement for a buildout of both this 2.5GHz and DISH’s existing AWS-4 spectrum.
As indicated in Clearwire’s press release, last fall, before the Sprint Agreement, DISH had expressed interest in acquiring these spectrum assets and entering into the network sharing agreement, largely confirming my analysis, but with Clearwire responsible for the network buildout, not DISH (though I assume DISH would ensure that the buildout agreement allowed it to take over the network if Clearwire went under). It still seems like a reasonable guess that 2.5GHz could have been used to provide a solution for fixed broadband access, especially given DISH’s recent assertions that “it won’t just be about wireless”.
Its notable that the price offered for this spectrum (which is likely the best slice of Clearwire’s spectrum, presumably almost entirely the owned BRS spectrum, not the leased EBS spectrum) is only $0.20 per MHzPOP, far below the valuation of up to $30B ($0.70/MHzPOP) put on the spectrum by Clearwire’s minority shareholders, and only in line with the book value of around $0.19/MHzPOP used for owned spectrum in Clearwire’s 2011 10-K. Given that the book value for Clearwire’s leased spectrum is less than a third of the level of the owned spectrum (on a per MHzPOP basis), and the NPV of the spectrum lease payments is of order $0.05/MHzPOP, Ergen’s proposed acquisition might leave Clearwire with much diminished value for its remaining spectrum holdings.
Of course much of the money that DISH offers for this spectrum would simply return to DISH via repurchase of Clearwire’s first lien debt (which DISH has spent $750M on acquiring). DISH’s new offer at least provides a potential exit for Clearwire’s shareholders, but that’s a modest incremental cost to get Clearwire’s most valuable spectrum and what is most likely a cheap AWS-4 network buildout.
While Ergen’s offer therefore seems like a deal that would be good for DISH, its hard to see that DISH could realistically expect to succeed, given Sprint’s majority ownership of Clearwire’s equity and expressed intention to block this deal. However, what Ergen will certainly achieve is to give Crest and Mount Kellett far more ammunition in their fight against the Sprint takeover, potentially tying up the proposed Sprint buyout for months. Its hard to tell what the Delaware courts will say, though it seems rather implausible that the FCC would block Sprint’s takeover of Clearwire.
If Clearwire turns down the Sprint bridge funding, but is unable to accept DISH’s offer, then Clearwire’s financial position will grow weaker, increasing Sprint’s leverage as time goes on. I’d therefore expect Sprint to refuse to budge on its offer, in the absence of a reversal in the Delaware courts, and though Softbank might want all this to simply go away, the gap between what the Clearwire minority shareholders are demanding ($5 per share) and what Softbank is prepared to pay might just be too big to paper over.
As a result, it seems this battle will continue to provide entertainment (at least to outside observers) for months to come and show Sprint that if you mess with Ergen (via Sprint’s intervention in the AWS-4 proceeding at the FCC) then you should expect to get a taste of your own medicine.
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12.27.12
Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum, Sprint at 3:20 am by timfarrar
Now that DISH’s attempts to bid for MetroPCS and do a deal with Clearwire appear to have been stymied by T-Mobile and Sprint respectively, the obvious question is what is Charlie Ergen’s Plan C? After all, last week DISH raised another $1.5B in a debt offering, “to be used for general corporate purposes, which may include spectrum-related strategic transactions”.
I’ve wondered if DISH has many options left other than to sell to AT&T, but it now appears that Ergen may have other plans, which are likely to be revealed within the next three weeks. After all, DISH asked the FCC to extend the comment period on the Sprint-Softbank deal until January 21, and DISH has 30 days from the publication of the AWS-4 Order on December 17 to decide whether to protest the proposed license modification.
While it is possible that Ergen could use the $1.5B that DISH has raised to mount a counterbid to either Sprint’s takeover of Clearwire, or T-Mobile’s takeover of MetroPCS, others think he is contemplating use of the money for a potential H-block bid, in order to persuade Sprint to enter into a more attractive hosting agreement. However, there is a far more intriguing possibility, which could explain why Sound Point started buying up more LightSquared debt at precisely the time when Clearwire decided to go with Sprint instead of DISH’s offer. That is an attempt to buy up all of LightSquared’s first lien debt, followed by a battle to oust Falcone when LightSquared current exclusivity (to propose a plan for emergence from bankruptcy) expires at the end of January.
Then DISH could propose in mid January that the AWS-4 uplink spectrum is instead converted to downlink spectrum (in line with a suggestion made by the FCC back in March), and LightSquared’s uplink spectrum would be used to provide an alternative uplink.
That would be logical, because it will be years before LightSquared is able to use its L-band downlinks, and the 1675-80MHz band is unlikely to be given away to LightSquared for nothing (as opposed to being auctioned). It would also make the full 20MHz of AWS-4 uplink spectrum usable for downlinks, and make an H-block counterbid by DISH far more plausible, because the H-block downlink (1995-2000MHz) could be combined with the AWS-4 spectrum between 2000-2020MHz, putting Sprint under further pressure. The FCC might also like to see the risk of litigation with LightSquared being taken off the table, as well as the prospect of higher bids for the H-block, even if the end result was a further delay in deployment of the AWS-4 spectrum.
Why would Ergen choose this risky path, with its inherent delays in buildout, rather than a simple sale of spectrum to AT&T at this point in time? Presumably AT&T has not yet made a knockout bid to buy the AWS-4 spectrum, while if DISH gained additional downlink spectrum adjacent to the G and H blocks, it would be far better positioned to strike a deal with Softbank to provide auxiliary downlinks for Sprint’s LTE network if AT&T doesn’t come to the table.
In addition, because Sprint is tied up with Softbank (and Clearwire) and T-Mobile with MetroPCS, there are few good partnership options available that would enable DISH to pursue a network buildout at the moment. The FCC has given Ergen 4 years for the initial AWS-4 deployment and even if that deadline is missed, the full buildout (to 70% of the population) can be undertaken in 6 years.
As a result, DISH has little to lose by taking some time to explore alternatives, seek to build up even more valuable spectrum assets, and hope that an attractive deal emerges for either a sale or network buildout in a year’s time. If DISH does go down this path, then LightSquared’s bankruptcy case, which has largely fallen off the radar screen in recent months, could be about to get very interesting.
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12.15.12
Posted in Clearwire, DISH, Financials, Operators, Spectrum, Sprint at 5:04 pm by timfarrar
My sources appear convinced that DISH made an informal offer to Clearwire management sometime ago, and that Sprint has been playing catch-up in its recent actions, after assuming for several years that it faced little pressure to buy Clearwire, because no-one else wanted that spectrum. It seems that Sprint reached out to Softbank in the summer, after realizing that it was facing a challenge from DISH, seeking funds to boost its position in the market (and to help acquire spectrum). At that point Sprint also moved to vigorously oppose DISH’s AWS-4 proposal, trying to delay DISH, while it sought an agreement with Softbank.
However, opinions appear to differ about whether Sprint actually wants to buy Clearwire, or is simply trying to spoil DISH’s plans. My guess is that Sprint’s preferred outcome would be for DISH to sell its AWS-4 spectrum to AT&T, allowing Sprint to pick up PCS spectrum that AT&T would have to sell, and Sprint would only later pick up some of Clearwire’s spectrum at an even lower price than is currently being offered. If DISH does achieve a deal with Clearwire then Sprint’s plans would be spoiled on two fronts: it wouldn’t be able to pick up more PCS spectrum (except the H block) in the near term, and Clearwire might not run out of money and fall into Sprint’s arms in the next few years as Sprint apparently hopes. As a result, Clearwire is now playing a central role in an intricate game of three dimensional chess between Ergen and Hesse.
Although we know what Sprint’s current offer to Clearwire consists of (namely up to $2.97 in cash for the remaining equity, assumption of Clearwire’s debt, plus a bridge loan of $800M to accelerate Clearwire’s LTE buildout), it is harder to determine what an offer from Ergen might entail. Nevertheless, considering the objectives of both DISH and Clearwire (in the absence of a compelling take-out bid for the spectrum of either company) may help to narrow down what Ergen’s alternative offer could be.
From Clearwire’s point of view, the near term objectives are to extend the cash runway, find a way to cut down on the costs of the WiMAX network (decommissioning at least half of the existing sites that will never be built out for LTE) and build out the LTE hotspot network at the lowest possible cost. The hope is that by doing all of these things, Clearwire will be able to hold onto (the vast majority of) its spectrum assets, which will become more valuable over the next 3-5 years as an international 2.6GHz band LTE ecosystem emerges.
From DISH’s point of view, the near term objectives are to deploy an AWS-4 network at minimum cost to meet the FCC’s buildout criteria, get into the wireless business sooner rather than later, come up with a residential broadband solution for its satellite TV customers, and perhaps above all persuade AT&T that DISH is serious about moving forward with a buildout (so AT&T will have to purchase DISH or at least pay up for the AWS-4 and 700MHz E block spectrum).
Clearwire and DISH therefore have a clear alignment of interests with regard to Clearwire’s existing WiMAX network: a sale of these assets to DISH would reduce Clearwire’s expenses, raise a significant amount of cash (that wouldn’t have to be used to pay down the first lien debt), provide a network sharing agreement for the LTE buildout, get DISH into the wireless business more quickly and at lower cost, and provide a fixed broadband solution for satellite TV customers (via Clearwire’s original fixed wireless service, perhaps integrated with a satellite TV antenna to extend the range compared to an indoor modem).
My guess is that DISH would likely pay around $1.5B for Clearwire’s WiMAX network (which cost roughly $4B to build), which might therefore fall below the 20% of asset value cutoff point at which a sale would require approval by Clearwire’s board. DISH would likely also acquire Clearwire’s retail WiMAX customer base and presumably also provide service to the wholesale WiMAX customer base (adding another point of leverage over Sprint) – perhaps DISH would pay up to an additional $500M for these customers.
What is more uncertain is what would happen about the spectrum required for DISH to run the network. Clearwire has a strong interest in establishing a high valuation benchmark for its spectrum, likely $0.30 per MHzPOP or above, and DISH would also want to ensure that perceived spectrum prices are high, if it still hopes for a knockout bid from AT&T. DISH likely needs 20-30MHz of spectrum, covering perhaps 200M people, implying that DISH might have to spend at least $1.8B to $2.7B if it was to buy this amount of spectrum from Clearwire. On the other hand, DISH might opt for primarily leased spectrum, reducing the price somewhat, or simply agree say a 5 year lease with Clearwire, perhaps with a fairly significant prepayment.
Overall, I could envisage DISH paying Clearwire anything from $2.5B in the near term (based on a spectrum lease), up to perhaps $4B+ (assuming a reasonably significant spectrum purchase). Part of this payment would presumably be made by contributing the substantial amount of Clearwire debt already owned by DISH (which cost $750M), and going forward Clearwire would then presumably have a network sharing deal with DISH, so that Clearwire could rollout its LTE hotspots in urban areas and DISH could roll out wide area coverage in the AWS-4 band.
I assume the remaining Clearwire debt would be refinanced, allowing the equity holders to pursue their bet that Clearwire’s spectrum will increase in value. Of course that may not be an expectation that Intel, Comcast and Bright House necessarily share, so Sprint obviously hopes it can persuade these strategic investors to block a deal with DISH. If not, then the question remains, will the DISH deal go through, or will it be derailed by a knockout bid from another party: either Sprint paying the $5+ that shareholders are demanding for Clearwire or AT&T buying DISH for $80 per share?
[UPDATE 12/17] So Sprint has convinced the Clearwire board to accept its offer of $2.97, and it looks like Hesse may have come out on top in this round of the chess game. The determining factor appears to have been the lack of confidence from Clearwire’s management and board that there would ever be a second major wholesale customer for its TD-LTE rollout, as Verizon, AT&T and T-Mobile weren’t interested in buying capacity from Clearwire. In the presentation discussing the deal, Clearwire confirmed that there had been another “credible, but preliminary, proposal” in the “past several weeks” presumably from DISH, but all potential options for spectrum sales had “values well below those recently speculated”. Clearwire also noted that the “existing governance arrangements” left the company “unable to secure new partnerships”. Of course, the deal locks up Clearwire pretty well, because the $80M per month of financing that is being advanced by Sprint is convertible to equity at only $1.50 per share, and Sprint is not obligated to go through with the purchase of Intel, Comcast and Bright House’s stakes if the acquisition is rejected in the independent shareholder vote (but might then come back with a lower bid).
So now Ergen appears to have struck out twice in his attempts to enter the wireless market, being rejected by both MetroPCS and Clearwire. Will he follow the FCC’s signal and sell his spectrum to AT&T? If so, the price may not be as attractive as many hope: if there are few other options then my earlier estimate of $0.30 to $0.40 per MHzPOP sounds closer to the mark than the inflated $1 per MHzPOP speculation we saw last week. Those expecting a higher bid for Clearwire were banking on a spectrum crisis forcing other operators to make use of Clearwire’s capacity in the next few years, which Clearwire management clearly didn’t believe would happen. Now the question appears to be whether Ergen still believe his spectrum will become more valuable over time, or if instead he will just take the money as Clearwire did.
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12.13.12
Posted in DISH, Financials, Operators, Regulatory, Spectrum at 1:31 pm by timfarrar
Today Sprint made an SEC filing stating that it had offered to buy the remaining shares in Clearwire for $2.90 per share, far below the $5+ that some think Sprint will have to pay to buy out the hedge funds that have invested in Clearwire with an expectation that the company’s spectrum is hugely valuable. Of course, as many have noted, Clearwire’s spectrum is seen as very desirable by Softbank, and could enable Sprint to rollout a much higher capacity urban LTE network, given the huge amounts of spectrum that Clearwire holds.
However, the underlying story here is far more complicated: why has Sprint made such a low offer, and why now? After all, even if the remaining strategic investors (Comcast, Intel and Bright House) are willing to take the $2.90 and run, they wouldn’t be able to command the majority of non-Sprint-affiliated holders of Clearwire’s equity needed to approve the deal. It appears that one (possibly the key) motivation is that if the strategic investors do accept Sprint’s offer then this would potentially block any alternative deals by Clearwire for several months (until the Softbank deal closes), as according to Sprint’s filing:
“Under the terms of the Sprint Proposal, each of Comcast, the BHN Entities and the Intel Entities would enter into a voting and support agreement with Clearwire with respect to the Proposed Transaction, which will provide that such Equityholders will vote (i) all voting shares of Clearwire owned by such Equityholders in favor of adopting the definitive merger agreement and approving the transactions contemplated thereby and (ii) against other acquisition proposals. These voting obligations would apply whether or not the Proposed Transaction is recommended by the Board of Directors of Clearwire. The voting and support agreement would also provide that such Equityholders would provide any waivers and consents needed to effectuate the Proposed Transaction.”
It’s surely not a coincidence that this offer came on the same day that Charlie Ergen received approval from the FCC for terrestrial use of his AWS-4 spectrum, with DISH stating that it “will consider its strategic options and the optimal approach to put this spectrum to use for the benefit of consumers”. After all DISH appears to have had a potential deal with Clearwire on the table for several months, held up only by delays in the FCC’s approval (which were largely caused by Sprint’s intervention via efforts to gain access to the H-block), and has bought $750M of Clearwire’s debt. The existence of other offers also seems to be confirmed, at least obliquely, by Clearwire’s indication that the Special Committee of the Clearwire Board of Directors, was “previously formed to review potential indications or proposals, including from Sprint”. However, DISH’s offer to buy some of Clearwire’s network and spectrum assets may not provide much if any near term value for the equity investors, perhaps making the strategic investors think that Sprint’s “bird in the hand” will be a better bet.
So what is Ergen up to? Rumors have persisted that Carlos Slim is allied with Ergen and that he has also been looking closely at Clearwire in recent weeks, while I’m told that today Sound Point has suddenly started moving aggressively to buy up more of LightSquared’s debt. Could Ergen and Slim be trying to acquire spectrum across multiple bands, by purchasing assets from Clearwire and positioning themselves to use some of LightSquared’s spectrum after a resolution (in the distant future) off GPS interference issues?
I’ve wondered recently whether Ergen has little choice other than to sell DISH’s spectrum to AT&T because there are few alternative partners available. However, it seems that Ergen may not yet have given up on a deal with Clearwire, making Sprint ever more desperate to block it. If Sprint is now able to tie up Clearwire for several months, then that would probably delay any deal beyond Ergen’s window for making a decision about how to proceed. Sprint has also been spreading rumors of its own potential deal with Ergen as a way to pressure Clearwire’s strategic investors to accept the offer from Sprint: the story was reported by Bloomberg last Friday, but first emerged somewhat earlier, just when Sprint delayed its proxy filing so as to negotiate with Clearwire.
UPDATE (12/14): Reuters is now reporting that Clearwire “is also in talks about other strategic alternatives besides the Sprint offer”, apparently confirming that an alternative deal is on the table. Its hard to see what that could be other than an offer from DISH. Reuters also notes that Softbank is capping Sprint’s offer at $2.97 per share, the same as paid for Eagle River’s stake, which indicates that Softbank is certainly not willing to pay whatever it takes to buy Clearwire at this point in time.
Some have asked me what is Sprint and Softbank’s alternative to buying Clearwire. My view is that Sprint will save its money for buying PCS spectrum, where its need is far more urgent. In particular, Sprint is going to have to pay $1B+ to buy the 10MHz H block in the auction next year, and if DISH is left with no alternative other than to sell out to AT&T, Sprint would expect to pick up another 10-20MHz of PCS spectrum that AT&T would need to sell in order to get a DISH deal approved by the FCC. What is key to understanding this strategy is that Sprint wins simply by blocking DISH, regardless of what happens to Clearwire, because if DISH has no alternative other than to sell the AWS-4 block to AT&T, Sprint will be able to buy PCS spectrum from AT&T.
If Clearwire’s strategic investors don’t take Sprint’s bait then would DISH be able to pull off a deal with Clearwire? Even then would Ergen follow through and build a wireless network? My guess is that the answer very much depends on how much AT&T is prepared to pay for the AWS-4 spectrum, but its certainly not yet time to take it for granted that Sprint will end up acquiring Clearwire in the next few months.
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12.10.12
Posted in Financials, Globalstar, Operators, Regulatory, Spectrum at 2:58 pm by timfarrar
On November 13, Globalstar submitted a Petition for Rulemaking to the FCC seeking permission to use its spectrum for terrestrial services, without any of the restrictions imposed under the current ATC “gating requirements”, and shift its authorization to Part 27, as used for other standard terrestrial mobile services.
The petition envisages two parallel rulemakings, the first to consider designation of Globalstar’s downlink spectrum (Globalstar refers to this as the “upper Big LEO band”) as an AWS-5 band, permitting flexibility for any wireless service to be offered, such as TD-LTE similar to Clearwire’s planned deployment in the adjacent BRS/EBS band. Globalstar also suggested that it be permitted to offer a Terrestrial Low-Power Service (TLPS), which would effectively be a separate channel for licensed WiFi service, using both Globalstar’s upper band spectrum and the adjacent unlicensed spectrum.
This would only be one possible option under an AWS-5 designation, but what is pretty smart about the low power TLPS service (similar to WiFi use, which already overlaps with these BAS channels) is that Globalstar may not have to relocate legacy BAS users who currently operate in the 2450-2500MHz band and could be impacted by a new wide area high power network deployment (as was seen with some of Open Range’s towers, due to lack of coordination on Open Range’s part). However, it is possible that even if the FCC permitted the TLPS service to begin immediately, it might require further actions to be taken (or impose other coordination requirements) before full flexibility was granted in the 2483.5-2495MHz band.
UPDATE (12/11): I’m told that legacy BAS users do experience interference from existing WiFi channels above 2450MHz, but that to date the FCC has not taken action to address concerns about interference from unlicensed spectrum users. Whether this will have implications for quick authorization of TLPS is unclear.
The second rulemaking that Globalstar envisages would then extend the AWS-5 designation to include Globalstar’s uplink spectrum (which it refers to as the “lower Big LEO band”), thereby enabling FD-LTE across the whole of the Big LEO band, which Globalstar considers to be the “highest and best terrestrial use” of this spectrum. The reason for separating the two requests is that the lower band (uplink) spectrum is close to the GPS band, and so the FCC is likely to be cautious about permitting terrestrial services in this band after the LightSquared debacle. As a result any authorization of high power LTE usage in the lower band spectrum (even though it would be for uplink only) would require considerable testing and therefore it would take some time before any approval could be granted.
If granted permission to provide TLPS by the FCC, it appears that Globalstar would look to monetize the TLPS offering (prior to gaining authorization for a standard LTE service) by providing spectrum for a small cell buildout, most likely by a major wireless carrier, but possibly by a tower company or technology player instead. Though such a buildout could be undertaken with existing licensed spectrum (e.g. Clearwire’s 2.5GHz band), or new unlicensed or shared spectrum (such as TV white spaces or the 3550-3650MHz band that the FCC intends to auction for shared usage), Globalstar’s advantage is that WiFi capability is built into the vast majority of smartphones, and Globalstar estimates that its licensed channel would be expected to offer around three times the range and speed of similar access points in the existing uncontrolled WiFi spectrum. However, Globalstar would need to move quickly to take advantage of the installed base of WiFi-capable devices, before capabilities to use longer range unlicensed spectrum (White Spaces) or other licensed small cell bands become widely available in smartphones.
As a result, Globalstar would need both quick action from the FCC and to strike a partnership (or long term spectrum lease) in 2013 or early 2014 enabling rapid deployment of a small cell network. In that regard, the fact that the FCC has acted much more quickly to put Globalstar’s proposal on public notice (2 weeks) than the recent LightSquared petition (which took 6 weeks) suggests that the FCC may well consider Globalstar’s proposal with rather more urgency. This certainly marks a significant turnaround in Globalstar’s relationship with the FCC, which was rather difficult (to say the least) back in September 2010, when the Commission suspended Globalstar’s ATC authority.
Globalstar believes that because of the availability of an existing WiFi device ecosystem, its spectrum should be more highly valued than alternative small cell spectrum, such as that owned by Clearwire. Indeed, Globalstar apparently considers that the future possibility of using LTE within its spectrum band could make this spectrum worth even more than the $0.20 to $0.30 per MHzPOP valuation seen in recent transactions such as NextWave’s WCS spectrum.
However, that is very dependent on a major cellular operator deciding to choose Globalstar as the solution for a small cell rollout (as well as future LTE licensing), and it remains uncertain what will happen to the value of “small cell” spectrum in the next year or two, as more spectrum is brought to market (a rulemaking on the 3550-3650MHz band will be considered at the FCC Open Meeting later this week), especially if data traffic on existing LTE networks grows more slowly than expected. Some think that the value of the 3550-3650MHz band will be very low (perhaps $0.01/MHzPOP or less), as has been seen internationally, which could lead operators to decide that putting a multi-billion dollar valuation on Globalstar’s spectrum for use in a TLPS service would be totally ludicrous.
Clearly the potential value of Globalstar’s spectrum is a critical component in securing investors for the new financing that Globalstar is trying to complete in the early part of 2013, because even though duplex revenues are slowly starting to recover, growth in the SPOT business, which has carried the company for the last few years, has recently fallen short of (at least my) expectations. Globalstar needs to raise money to pay for its EUR150M contract with Thales Alenia Space (TAS) to build a further six satellites, plus the launch and insurance for these satellites. At some point Globalstar will presumably need to complete its second generation ground segment upgrade contracts with Hughes and Ericsson, and Globalstar also has to address the April 1, 2013 deadline when $71.8M of Globalstar’s 5.75% convertible notes may be redeemed for cash at the option of the holders (Globalstar stated in its 2011 10-K that it assumed these notes “will be refinanced in 2013 by issuing additional debt”).
Much of the upcoming capex program would presumably be funded by an increase in Globalstar’s COFACE loan facility (which typically would cover 85% of the costs, although it is unclear if this would relate only to work carried out by French companies). It is worth noting that the FCC licenses do not form part of the security package for the COFACE loan, which could make Globalstar’s fundraising easier, if additional funding (from non-COFACE sources) was secured against the FCC license subsidiary. However, if Globalstar does not succeed in raising the required funds, this also poses the question of whether (in the event of a bankruptcy) the existing convertible note holders could sell the spectrum licenses and receive a recovery, even if the COFACE loan is not paid off in full by a sale of the satellite assets. Such a possibility may complicate negotiations over the upcoming refinancing of the 5.75% convertible notes.
More importantly, it will be very important to see whether the FCC follows the DISH model, and simply grants Globalstar a separate terrestrial license (alongside its satellite license) which could be monetized at a later date (regardless of the ultimate fate of Globalstar’s satellite system), or if it follows the LightSquared path, where (because LightSquared is operating under an ATC waiver) the L-band MSS spectrum cannot easily be disentangled from the continued provision of satellite services. After all, past bankruptcies in the MSS sector have shown how hard it is for creditors to achieve a large recovery from billions of dollars invested in MSS satellite hardware, and at least in the case of DBSD and TerreStar (albeit in a situation with no meaningful existing satellite business, unlike Globalstar), the in-orbit satellites were seen as a potential cost associated with obtaining the spectrum licenses, rather than valuable assets in their own right.
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12.03.12
Posted in Aeronautical, Financials, Services at 4:45 pm by timfarrar
The latest Global Eagle investor presentation, which was filed with the SEC on November 27, makes for some pretty entertaining reading, much like the script for one of those Hollywood disaster movies that Row 44′s new owners may be fond of. Of course it requires some pretty convoluted logic to argue that Row 44, which is selling equipment at cost and losing money on every megabyte of data carried across its network, is worth $250M.
That’s especially true when the company fully intends to continue to sell equipment at cost and intends connectivity to be a “lower margin” service. In addition, despite a new contract with Southwest, which is expected to lead to a near 50% increase in connectivity revenue per passenger by 2014, the connectivity service is projected to produce less than $5M of gross margin (not EBITDA) that year. Instead, Row 44 and Global Eagle “believe the next frontier for growth will be providing quality entertainment, vast entertainment, first through the airlines into a projected multi-billion-dollar marketplace in the air” and so are projecting that Row 44 will make $49M of gross margin in 2014 from “TV/IPTV/VOD” and portal services.
What’s wrong with this picture? At its simplest, Row 44 is projecting that the take rate for connectivity on Southwest will grow to 6.5% (not outrageous, but perhaps ambitious given recent trends for Gogo and the predominantly leisure orientation of Southwest’s customer base) and the take rate for the “TV/IPTV/VOD” service will be 5.75% in 2014. Recall that passengers are paying $5 for internet connectivity on Southwest, which is the same as Row44′s assumed $5 per passenger fee for TV/IPTV/VOD. That’s all well and good if this was seatback IFE, available (and very visible) to all passengers with attractive early window content (very few people pay for live TV onboard planes in the US today), but remember that the only way to get access to the “TV/IPTV/VOD” service is through an Internet-enabled portable device.
Why on earth would almost as many passengers decide to pay (the same amount) for access to just the walled garden “TV/IPTV/VOD” service as pay for access to the rest of the Internet (where they might expect to have access to any content they choose – unless Row 44 decides to cripple the Internet service, which of course will lead to its own problems)? Will Row 44 have some incredibly compelling early-window content? Well studio executives apparently “Lol’d” when asked about whether they would allow early window content to be streamed over wireless IFE networks. And remember that while you might happily access email and social media on your iPhone, its far more difficult to watch long form video on a phone for an hour or two, so in reality even less devices may be suitable for watching the content services than for accessing the Internet.
Row 44 also intends to generate $19M ($0.15 per passenger carried) from its portal business by 2014, even though it has “only nominal revenue from the portal business today”. As another point of comparison, Row44 expects to make more than half of its passenger revenue from the video and portal services by 2014, when today Gogo only generates 2% of its Commercial Aviation revenue from “Gogo Vision, Gogo Signature Services and other service revenue” (i.e. video and portal services combined, plus other services such as VOIP for flight crews).
Fundamentally, I simply can’t understand why on earth Global Eagle think that this business is a good investment (though lack of understanding might be one reason). The history of inflight connectivity is littered with failures, and even Gogo, the market leader, is facing challenges in getting a return on its investment, let alone completing a successful IPO. In every respect, Row 44 is a worse business than Gogo: it has substantial ongoing bandwidth costs, far more expensive equipment, and (in Southwest) probably the least attractive airline in the US from the point of view of demand (few business travelers, short flights and no power outlets). I can only conclude that, as in the picture above, Global Eagle is suffering from the Icarus Syndrome, and flying too close to the sun for its own good.
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11.17.12
Posted in DISH, Financials, ICO/DBSD, Operators, Regulatory, Spectrum, TerreStar at 11:52 am by timfarrar
Over the last 36 hours there has been a constant stream of stories about DISH Network’s negotiations with various players to launch its proposed wireless network, in what appears to be a last ditch attempt to deflect the FCC from its declared intention to impose strict interference conditions on DISH’s spectrum in order to make the H block auctionable.
First we saw reports of DISH’s “exploratory stage” talks with Google, which unsurprisingly led to massive speculation about Google’s desire to get into the wireless business, largely omitting any mention of Google’s previous (financially disastrous) investment in Clearwire, which was motivated solely by a desire to create more competition and cheaper wireless service and had nothing whatsoever to do with enabling Google to become a wireless operator.
Now we’ve seen reports about DISH’s unsuccessful bid over the summer for MetroPCS, as revealed in MetroPCS’s preliminary proxy statement filed last night. We also saw DISH highlighting that 3GPP standardization work has been completed, with the implication that DISH could move forward very quickly if the FCC approved the network without new interference conditions.
However, it seems clear that the FCC is having none of it, with officials briefing that they are close to a decision, which is expected to confirm that the H block will be auctioned for high power use and therefore the lower part of DISH’s uplink band will face significant powwer restrictions. In other words, the FCC is placing a higher priority on ensuring Sprint has sufficient LTE spectrum (i.e. can extend its 5x5MHz G block LTE network to a 10x10MHz network) and moving forward with an auction of the H block to raise $1B+ than they are on trusting DISH to become a new entrant in the wireless market.
In light of the Sprint-Softbank and TMobile-MetroPCS deals, the FCC has achieved its goal of having four viable players in the US wireless market, and so presumably does not see as much need to encourage a new entrant. Indeed I would expect the FCC would be relatively content to see the DISH spectrum go to AT&T, if it could then “encourage” AT&T to sell some of its PCS spectrum to Sprint (along the lines of Verizon’s AWS spectrum deal with TMobile). We might even see a similar “swap” in the PCS band between TMobile and Sprint (with Sprint getting more of the spectrum and paying some cash to TMobile) as an alternative to a potential rival Sprint bid for MetroPCS. After all, TMobile has far more spectrum per subscriber than any of the other three major players (if Clearwire’s holdings are excluded).
Does DISH have many other options left to build out a new network of its own, as opposed to selling the spectrum to AT&T and pursuing a merger with DirecTV? There still appears to be uncertainty about the status of a potential deal with Clearwire, though DISH’s 10-Q confirmed (as I suggested previously) that it has raised its stake in Clearwire’s debt by $400M during the third quarter to a total investment of $745M (note that Clearwire is not named in the 10-Q, but the amount invested is too large for the investment to be in LightSquared, given other declared holdings).
DISH has undoubtedly talked to almost everyone in the wireless industry, but apparently these talks are currently only at the exploratory stage, which is quite surprising given how much time has elapsed. Of course what the MetroPCS proxy statement reveals is that everyone else has been talking as well, and as set out below, the proxy provides some very interesting nuggets about what’s happened over the last 18 months, once you decode the references to Companies A through H.
Company A: DBSD. MetroPCS determined that DBSD’s spectrum was more attractive than TerreStar’s spectrum and MetroPCS made a binding offer for the spectrum in March 2011, but lost out to DISH.
Company B: TerreStar. MetroPCS ultimately decided not to pursue TerreStar, leaving Harbinger out in the cold in June 2011, but then negotiated unsuccessfully with DISH during the summer of 2011 over a potential sale of spectrum, joint venture or contribution of the spectrum in exchange for equity in MetroPCS.
Company C: DISH subsequential expressed interest in buying MetroPCS, starting in March 2012 when it became clear DISH would not receive its hoped-for ATC waiver, and ultimately made a bid of $11 per share in August 2012, which was rejected by MetroPCS because it was less than the value offered by TMobile. DISH then indicated that it was unwilling to pay a higher price.
Company D: Clearwire. MetroPCS offered to buy spectrum from Clearwire in late 2011 (and earlier had even considered buying the whole company), but was unable to agree on terms. These discussions were revived in June 2012 when Clearwire again suggested a sale of spectrum and a “substantial investor” (Sprint or perhaps DISH???) proposed splitting the company between themselves and MetroPCS. Those “occasional” discussions continued up until the TMobile deal was announced.
Company E: Leap. Leap offered to sell “excess” spectrum to MetroPCS in the first half of 2011, but as early as June 2011 had decided to sell the spectrum to another wireless company (Verizon). This implies both that Verizon sat on the Leap deal until it had completed its negotiations with SpectrumCo in December 2011, and that the transfer of the Chicago 700MHz A block spectrum to Leap was presumably only included so the deal could be portrayed to the FCC as a “swap”. (Of course Leap’s presumed follow-up deal of a sale to US Cellular has now been derailed by US Cellular’s exit from the Chicago market and sale of its spectrum to Sprint). In May 2012, Leap asked MetroPCS to consider a combination of the two companies, but MetroPCS decided such discussions would not be productive. Then in July 2012, Deutsche Telekom also raised the prospect of combining Leap with TMobile and MetroPCS, as part of a single transaction, but MetroPCS declined, presumably because of the added complications it would entail.
Company F: AT&T. As was widely reported at the time, MetroPCS was in discusssions with AT&T in 2011 about potential asset sales as a condition of the TMobile acquisition. However, this did not come to fruition because the acquisition was blocked by the DoJ and FCC. Later, in August 2012, MetroPCS discussed approaching AT&T, but the consensus opinion was that AT&T would not be interested in buying MetroPCS.
Company G: Sprint approached MetroPCS about a potential acquisition in September 2011, and this led to the abortive bid in February 2012, which was vetoed by the Sprint board. Even after this time discussions continued with Sprint, and Sprint indicated in August and September 2012 that it was still interested in an acquisition of MetroPCS.
Company H: Verizon. MetroPCS held discussions with Verizon in the spring of 2012 about potentially buying some of the AWS and 700MHz spectrum that Verizon would need to divest to get approval of the SpectrumCo transaction. However, Verizon was not particularly interested in selling the AWS spectrum to MetroPCS (and entered into a deal with TMobile instead).
What all this appears to show is that DISH has looked at a number of transactions which involve further investment in the sector, but the main reason these have not come to fruition is that DISH is trying to pay as little as possible for any acquired assets. Alternatively, if DISH was to be a seller, then it was looking for too rich a price (at least for MetroPCS). In this context, it is likely that only Clearwire would be prepared to do a deal to sell assets to DISH on such terms, as I’ve speculated previously. It also seems pretty clear that the potential network sharing deal mentioned in the WSJ article about the discussions with Google would most likely be with Clearwire rather than Sprint, because the benchmark terms set by Sprint’s deal with LightSquared would be unattractive to DISH. As a result, it seems we are back to where we started – could DISH still pull off a deal with Clearwire (and does it want to in the current circumstances?), or will DISH end up selling its spectrum to AT&T and pursuing a merger with DirecTV instead?
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10.24.12
Posted in DISH, Financials, Operators, Regulatory, Spectrum at 11:41 am by timfarrar
Is Charlie Ergen giving up on his wireless plans? An interview with Bloomberg published this morning seemed to signal a change of stance, particularly the explicit suggestion that Ergen would be open to simply selling his spectrum to AT&T, when his (coded) message for the last year has been that AT&T would need to buy the whole of DISH (at a huge premium).
Not only has the Softbank deal enabled Sprint to escape from the box DISH had been trying to put it in, but by buying McCaw’s stake in Clearwire, and indicating to other strategic investors on the board that further equity purchases are up for negotiation, Sprint looks to have headed off Ergen’s planned deal to purchase assets from Clearwire.
Despite this, perhaps Ergen could still do a deal with other partners like Carlos Slim or DirecTV, but it is harder to see the rationale for investing in building a fifth competitive operator than it was a month ago, when Sprint (and perhaps even T-Mobile) were perceived to be in a much weaker competitive (and financial) position. In addition, we may be seeing AT&T attempt to warn off Carlos Slim from a deal with Ergen, in the form of mutterings about foreign ownership of other wireless operators.
So it looks like Ergen may now turn his attention towards a potential merger deal with DirecTV. In the short term that means putting pressure on DirecTV to come to the table, most obviously by competing with them in Brazil. Indeed, Echostar told the FCC at the end of September that it planned to move the Quetzsat satellite to the 61.5W slot, freeing up AMC-15 to be relocated to 45W in order to provide service into Brazil “as soon as January 2013“.
Wireless and broadband could also be a key part of this deal, via an alignment of both satellite TV operators with AT&T, similar to the Verizon-cable TV partnership, and that would be cemented by the sale of DISH’s spectrum to AT&T. Nevertheless, I would expect the sale to come ahead of an agreement with DirecTV, simply because being left out of a DISH-AT&T alliance would put even more pressure on DirecTV. As I noted last December, this alignment would cement AT&T and Verizon’s market leadership. However, given that the FCC backed off mandating wholesale access as a condition of approving the Verizon/SpectrumCo deal, the only plausible way to promote competition to these two players may then be to allow Sprint and T-Mobile to merge.
Of course putting a price on DISH’s spectrum is hard, but I suspect that the most appropriate comparison for the AWS-4 spectrum is the WCS band which AT&T purchased recently, because neither band is usable immediately (unlike AWS). AT&T paid NextWave more than expected for WCS, but this was offset by the fact that AT&T already owned a substantial part of the band, for which it had paid very little. I would therefore expect an AWS-4 sale to be at a fairly similar price to that AT&T paid NextWave for the usable parts of the WCS spectrum: somewhere in the range of ~$0.30-$0.40/MHzPOP (depending on how much value is attributed to the C/D blocks and AWS holdings), i.e. of order $3.75B-$5.0B plus perhaps another $1B for DISH’s 700MHz E block spectrum.
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