09.24.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:05 am by timfarrar
The FCC witnesses’ testimony at the House Energy & Commerce subcommittee hearing last Friday certainly came as a surprise to many observers, including myself, with their emphasis on blaming the GPS industry for not raising concerns at an earlier date. Predictably, that position defanged much of the criticism from Republican lawmakers, who have switched seamlessly from describing LightSquared as a product of government-backed crony capitalism to a shining example of private enterprise ruined by government regulation. However, it was of course anathema to the GPS Coalition, whose Jim Kirkland described the FCC testimony as “deeply misguided and wrong“.
I had heard earlier in September that the FCC was working on an order which apparently confirmed the February ruling, but it seems that within the last couple of weeks, LightSquared’s lobbying has paid off and the FCC intends to delay a decision (potentially until after the November election) in order to explore alternative solutions which would allow LightSquared to move forward without the widely anticipated litigation battle. Indeed the FCC testimony indicated that receiver performance issues, which had largely been sidelined after the March workshop, are now going to be the subject of a report from the FCC’s Technological Advisory Council (TAC) in “the next few weeks”, which would presumably precede the ruling on LightSquared itself.
While at first sight it may seem surprising that the FCC wants to take up the LightSquared issues once again and initiate another fight with powerful government agencies such as the DoD and FAA, what may have tipped the scales is the enthusiasm of the FCC Chairman for implementing the recommendations of the recent PCAST report on the sharing of government-held spectrum with commercial wireless operators. That alone portends a battle over spectrum with the DoD, but with the White House standing alongside the FCC (as it did in the early stages of the LightSquared waiver effort), the FCC presumably feels confident that some progress can be made.
LightSquared spent the spring and early summer casting around for various solutions to its GPS interference issues in the form of a direct “spectrum swap”, but with little success. However, since publication of the PCAST report, LightSquared appears to have reformulated its proposal as a deal under which it would become the “poster child” for sharing government spectrum as recommended by PCAST, in exchange for accelerated action by the FCC to implement receiver standards within the L-band. LightSquared would then build its terrestrial network initially using shared spectrum, and subsequently move into the lower L-band spectrum in a few years time. The practicality of all this is still to be seen, not least in terms of the timeline for any use of the L-band. However, the proposal appears to be attracting serious consideration within the FCC, and the forthcoming TAC report on receiver standards should provide some guidance as to the likely way forward. Thus the scene appears to be set for a resumption of last year’s battle, and those in the GPS industry who thought the LightSquared issue had been resolved, will need to steel themselves for yet another bitter fight.
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09.14.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:06 pm by timfarrar
As I noted last week, it appears that the FCC ruling on LightSquared is expected to be released very soon, and two more developments have now provided support for this assessment. Firstly, today’s bankruptcy court hearing on exclusivity and executive bonuses was postponed until October 1 at the request of LightSquared’s debtholders. It would be logical to conclude that this postponement came because the debtholders expect an FCC ruling to emerge before the end of this month, after which time they will be in a much stronger position to argue that LightSquared’s existing management (and Harbinger) should not retain control of the bankruptcy process.
After an FCC ruling (presuming it is negative), it would be clear that a little progress could be achieved during a 5 month extension of exclusivity as LightSquared requests, because the ruling would trigger litigation which would undoubtedly last for many years. Instead the debtholders want to “force Mr. Falcone to put his money where his mouth is” and either hand over the company to them (via an auction where they could credit bid their holdings), or pay off the debtholders at par in order to retain Harbinger’s ownership of the company.
Secondly, news has emerged today that the House Energy & Commerce committee plans to hold a hearing on LightSquared next Friday, September 21, which can be expected to focus on criticizing the FCC’s role in rushing through the LightSquared waiver. As a result, it seems highly likely that the FCC will now move to release their LightSquared order next Thursday evening in order to deflect this criticism and show that their process “worked”.
Of course, its hard to imagine the FCC order doing anything other than confirming their February proposal to withdraw LightSquared’s waiver and ATC authorization (indeed people like Gen. Shelton are already taking that for granted), but if comments from House Republicans focus on blaming the FCC for LightSquared’s losses, then that could be helpful to LightSquared’s PR campaign for a spectrum swap or other compensation. Nevertheless, if the result of the November Presidential election is an Obama win, then after the political backlash caused by the developments of the last two years, it seems unlikely that any such settlement would be forthcoming. So I guess Mr. Falcone will be voting Republican this time around.
UPDATE (9/20): The FCC testimony for tomorrow’s hearing appears to place the entire blame for the LightSquared debacle on the GPS industry, creating a whole new range of possibilities for how the hearing might develop. If the Committee joins the FCC in this blame game, then that would increase the likelihood that the FCC might offer LightSquared access to some alternative spectrum for a limited period on favorable terms, while receiver standards efforts move ahead in the L-band. However, that approach would also remove any potential legal liability from the FCC, and it is highly implausible that LightSquared would be able to sue the GPS industry for damages for not raising concerns at an earlier date.
As a result, LightSquared’s fate now seems more likely to become entangled in a political rather than a legal process. The FCC also seems determined to delay any ruling further and if the ruling is delayed until after the November election then that would also open up the possibility of throwing LightSquared a bone while limiting the political fallout. However, it still remains far from clear whether there is any spectrum block available that could offer LightSquared sufficient spectrum to pursue additional fundraising and buildout a network, or even allow LightSquared to sell its assets and repay the $2B+ of outstanding debts.
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09.05.12
Posted in Financials, Globalstar, ICO/DBSD, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 9:55 am by timfarrar
It looks like the next month or so may be filled with interesting developments in the US spectrum market. Last week, it was reported that the FCC is preparing to launch of review of its “spectrum screen” at the September Commission meeting. Of course if the FCC suggests a preference for distinguishing between low frequency (sub 1GHz) and higher frequency spectrum, in response to concerns that AT&T and Verizon have been accumulating too much of the most valuable spectrum, then that might not only put a damper on the prospects for broadcast TV incentive auctions (recall that AT&T and Verizon contributed over 85% of the 700MHz auction proceeds back in 2008), but could be taken as a clear signal that the FCC would approve of AT&T buying DISH for its higher frequency spectrum.
In that context, it seems increasingly likely that the release of a LightSquared ruling (almost certainly confirming the FCC’s February proposal to withdraw LightSquared’s ATC license) will also come this month, along with approval of DISH’s terrestrial network in the 2GHz MSS band. This week DISH has been continuing its campaign to avoid its uplink allocation being shifted up by 5MHz to 2005-2025MHz, which is an option being considered very seriously by the Commission, as it would satisfy Sprint’s desire to access the H-block (which Sprint probably considered to be a done deal last November when it settled with DBSD and TerreStar), and mitigate both windfall and timeline concerns. However, it is notable that the Public Interest organizations who have been most vocal in raising the windfall issue actually oppose a relocation of the uplink due to the delay it would could in the standardization process.
Intriguingly, if we do see a ruling (at least partly) in DISH’s favor in the next month or two, it may make it even more difficult for Clearwire to pull off any potential spectrum sale. Then we may be faced with exactly the same situation in December as at the end of last year, namely does Clearwire pay the large interest payment due in December, or use the threat of a bankruptcy filing as leverage to raise more money from Sprint and others to fund it through next year.
LightSquared is also wheeling out the big guns in its lobbying campaign right now, with former FCC Chairman Kevin Martin lobbying the Commission on LightSquared’s behalf last week, and the company is once again ramping up attempts to get its side of the story across. This may raise a few eyebrows, given that Martin was key to approving ATC back in 2005 and then requiring Inmarsat to cooperate with LightSquared via their Dec 2007 agreement. However, it seems unlikely to change many minds at the Commission, especially in advance of the November election. Apparently the best that LightSquared could hope for is for the initial decision to be taken by the full Commission, rather than by the International Bureau on delegated authority, which would give LightSquared an earlier opportunity to challenge the decision in court (because an IB decision must first be appealed to the full Commission before any legal action is initiated).
After LightSquared’s attempts to insert consideration of its own situation into the DISH proceeding, it would seem natural for both rulings to emerge at about the same time. The FCC will also need to indicate in the DISH ruling how it plans to take forward any similar flexibility proceedings in other MSS bands, notably the Big LEO band, where Globalstar has emphasized that “Greater flexibility for mobile broadband in Big LEO spectrum [is] necessary to enhance financial viability of Globalstar and its mission-critical MSS offerings” (emphasis mine). With Globalstar looking to raise substantial financing (perhaps as much as US$250M to $300M if Globalstar aims to fund both the remaining satellites and the ground segment buildout) by the end of the year in order to move forward with the final phase of its second generation constellation buildout, it is plausible to conclude that a positive signal from the FCC in this regard within the next month or two may be a pre-requisite for completion of that financing (which would presumably involve a combination of additional Export Credit Agency funding and further investment from Thermo).
Finally, and separately, TerreStar Corporation appears to have basically resolved its bankruptcy, and the existing preferred shareholders will convert their holdings to equity and keep control of the company. It is interesting to note that the valuation put on the 8MHz of national 1.4GHz spectrum in the event of a liquidation was only $80M to $100M (or $0.03-$0.04/MHzPOP) for an M2M smart grid type network (which is gratifyingly close to my estimate of $60M to $100M two years ago at the beginning of this process). It is hoped that FCC waivers can be secured, which would make the spectrum more valuable and usable for LTE, but that is a long term process, and there is no guarantee that it will be attractive to manufacturers to include this small, isolated band in future LTE chipsets. As a result, although there is a proforma offer for sale of the spectrum, it is inconceivable that any bid would be higher than the $400M+ that the existing preferred holders could credit bid in any auction. Of course its also another example of how just assuming spectrum is always a valuable asset, without consideration of the limitations applicable to that spectrum, is a quick way to lose a lot of money.
So going back to my title above, the next few months should reveal a lot more about who’s going to show that they’re an “All Star” and who will prove to have “the shape of an L on [their] forehead”. However, one thing seems pretty clear: when the FCC announces its decisions, not everyone is going to be a winner.
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08.29.12
Posted in Aeronautical, Financials at 10:48 am by timfarrar
It seems that most if not all commentators have ignored Gogo’s Aug 14 S-1 amendment containing the company’s results for the first half of 2012, instead picking up on Gogo’s Aug 28 press release that Gogo has been approved to operate in Canada (which in fact according to Gogo’s SEC filing was actually approved back in mid July).
That’s a shame because the six month results are pretty fascinating: they show that in Q2 of 2012 Gogo’s take rate and (more significantly) the average revenue per passenger carried both fell compared to Q1. If the revenue per passenger carried does not grow after the price increases Gogo implemented during the second quarter of 2012, then this raises the question of whether we may already be close to the point at which Gogo’s average revenue per plane cannot be increased much further. In addition, Gogo’s average revenue per session fell from the previous year, despite the price rises. Gogo’s filing attributed the decline in revenue per session to more (lower revenue) sponsored sessions compared to the same period in 2011. However, this simply highlights that a major contributor to Gogo’s (rather modest) increase in take rates over the last year has been the growing use of sponsorships, which are counted as part of the “take rate” even when passengers do not pay anything to use the service.
The chart above shows how Gogo’s take rate has developed by quarter since its launch, and how much it has been driven by promotional activity, with take rates at an all time high during the Google promotion in Q4 2010, and falling quite sharply when there was very little promotional activity in Q2 2011. Q1 2012 saw another boost to take rates, again coinciding with high levels of sponsorship revenues.
Though there is clearly some underlying growth in the take rate, during the remainder of 2012 this is likely to be diluted by the increasing number of Gogo installations on regional jets (where usage is much lower than on longer flights) and the (more marginal?) deterrent effect of recent price increases. As a result, I now expect that barring some large scale sponsorship, Gogo take rates for 2012 as a whole are unlikely to exceed 6%, and if we only count paid usage by passengers, then the true take rate may remain below 5%.
That’s pretty scary given the $1B valuation supposedly being mooted for Gogo’s IPO and the $200M valuation put on Row44 in its recent fundraising transactions. Its also interesting that Gogo’s bankers insisted that their recent $135M loan should be secured against Gogo’s profitable Business Aviation subsidiary, with cashflows from that operation potentially devoted to pre-payments on the loan, so that their loan recovery would not depend solely on the success or otherwise of Gogo’s commercial aviation business.
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07.12.12
Posted in Financials, LightSquared, Operators at 3:33 am by timfarrar
LightSquared’s recent filing of the Employment Contract with Sanjiv Ahuja, its former CEO, makes for interesting reading, especially for those impacted by the LightSquared bankruptcy. According to the terms of the agreement, Mr Ahuja was entitled to a base salary of $2M per year plus a target bonus of 150% of his base salary. In addition he was to receive restricted stock with an initial fair market valuation of $135M. All of his domestic travel was to take place by private jet (which must have been useful because NetJets was paid $227K in the 90 days prior to LightSquared’s bankruptcy filing, and NetJets was billing around $100K per month prior to Mr Ahuja leaving in February 2012), including short haul international travel, and “in his reasonable good faith judgment” Mr Ahuja could also “require the use of private planes for long-haul international travel, as appropriate”. Remarkably, however, Mr Ahuja was only expected to devote 50% of his working time to the company.
Now that a proposed settlement has been reached over termination of his employment, Mr Ahuja will be able to retain the 8.83M shares of stock he would have been granted (apparently he did not take the restricted stock he was entitled to at the time, because of the large tax liability that would have been incurred: perhaps he thought that the price would go down rather than up!). Indeed, though the 8.83M shares apparently had a “fair market valuation” of $135M (presumably reflecting the restrictions applicable to the grant), LightSquared Inc. had sold 3.39M shares of common stock to SK Telecom for $60M, giving an market valuation of $17.71 per share, for a total value at that time of $156.4M. Indeed, if Harbinger’s supposed prior contribution of $2.9B of assets to LightSquared (in exchange for 91.88M shares) had been taken at face value, then Mr Ahuja’s shares could theoretically have been worth as much as $31.50 each, for a total of $278M. And if LightSquared’s spectrum had been worth $12B, after the waiver grant, as LightSquared’s consultant told the FCC, then (after deducting LightSquared’s debt) Mr. Ahuja’s stock would have been worth $90-$100+ per share, or at least $800M!
Of course, one has to wonder what on earth Mr Falcone thought he was buying for this sort of money, because it certainly didn’t seem to be a realistic judgment about LightSquared’s prospects of resolving its GPS issues. However, perhaps what was really important was that LightSquared’s debt investors believed Mr Ahuja’s assurances that there wasn’t any need to worry about GPS, when he was persuading them to invest an additional $586M in the company in February 2011. I’m sure Mr Ahuja therefore appreciates the indemnification he is receiving under the proposed settlement agreement “to the fullest extent permissible under LightSquared’s organizational documents and the Employment Agreement…from and against any and all claims and demands related to actions or omissions of the Executive during the time the Executive was as a director, officer or employee of LightSquared.”
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06.18.12
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 7:52 pm by timfarrar
Earlier today AT&T announced details of its new proposal with SiriusXM to resolve disagreements over how to deploy mobile broadband in the WCS band. AT&T is the largest holder of WCS spectrum, with about 4B MHzPOPs of spectrum, and NextWave is the second biggest holder. However, there is a difference in usability within the WCS spectrum between the C&D blocks (unpaired 5MHz blocks) that are immediately adjacent to the 2320-2345MHz satellite radio (DARS) band (and so have a much higher risk of causing interference with satellite radio receivers) and the A&B blocks (each a paired 2x5MHz channel) which are further away from the DARS band.
AT&T and Sirius’s proposal would sharpen this difference by prohibiting mobile use of the C&D blocks, while further liberalizing use of the A&B blocks. As a result, AT&T would then have between 10MHz and 20MHz of usable A&B block spectrum over roughly half the country. The result of this proposal would likely make NextWave’s life more difficult (because nearly half of its WCS holdings are in the C&D blocks), thereby potentially giving AT&T a chance to pick up additional A&B block WCS spectrum.
However, what is particularly intriguing about the details of AT&T’s submission is the proposal that it should be allowed more flexibility to deploy FDD technologies such as LTE, with downlinks in both halves of the WCS A and B blocks. In other words, AT&T would gain yet more downlink spectrum, in addition to the Qualcomm 700MHz spectrum that it acquired last year “to allow support of asymmetrical data bandwidth allocation”. Of course, the obvious unanswered question is where would the uplink spectrum to be paired (under the proposed FDD configuration) with both the Qualcomm and WCS A&B block spectrum come from?
What AT&T needs is a clean block of paired spectrum for an LTE Advanced deployment so that the Qualcomm and WCS spectrum can be used as carrier-aggregated downlinks. When it proposed the Qualcomm transaction, the scenario that AT&T advanced was to use the AWS band to serve this purpose, but of course that is now off the table with the collapse of the T-Mobile takeover. As I’ve noted before, the Qualcomm transaction alone therefore provides a pretty compelling reason for AT&T to be interested in buying DISH.
However, another fascinating possibility is that perhaps Moelis’s assertion last week that LightSquared’s spectrum would still be worth a considerable amount of money if used on an unpaired basis (i.e. as uplink only spectrum) might be grounded in something more than wishful thinking. Indeed Moelis cites the potential for at least some of LightSquared’s spectrum (the 1670-75MHz block leased from Crown Castle) to be paired with other spectrum blocks through carrier aggregation “similar to AT&T’s planned usage of Qualcomm’s 700MHz spectrum” and I’m told that this possibility has been explored with AT&T in recent months.
Of course, GPS interference concerns in LightSquared’s satellite band would still need to be resolved, and LightSquared would still need to pay for leasing spectrum from Inmarsat (according to Moelis’s figures the lease payment if the full L-band band is usable has now been increased to $145M p.a. from April 2014 under the revised agreement struck with Inmarsat in April). Even then, uplink spectrum is generally worth much less than downlink spectrum, both because there is a need for additional downlink spectrum due to traffic asymmetries and, as LightSquared found out to its cost, interference concerns can be more problematic in downlink spectrum.
As a result this severely undercuts Moelis’s argument that LightSquared should be able to attribute the same valuation to its spectrum whether it is used for uplinks or downlinks (not to mention the use of comparisons based on recent sales within the well established and widely deployed AWS-1 band). However, this possibility does at least raise the question of whether AT&T’s acquisition plans (which are intended to give it enough spectrum for the next five years) include options other than buying both DISH and Verizon’s 700MHz B block spectrum.
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05.24.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 3:12 pm by timfarrar
In my last post, I noted the skepticism of some observers about whether Charlie Ergen was really behind Sound Point buying $350M of LightSquared’s first lien debt, despite one potentially logical technical solution that could combine LightSquared’s spectrum (as uplinks) with the TerreStar and DBSD spectrum (if that was all converted to downlinks). Indeed LightSquared itself proposed to the FCC last week that the 2GHz spectrum could be used for its downlinks as one of the options for a spectrum swap and suggested in its comments in the DISH AWS-4 proceeding that the FCC should redesignate DISH’s 2GHz uplinks as downlink spectrum.
However, it now appears that many of the debtholders (and perhaps even Harbinger/LightSquared) seem to have concluded that it is not Charlie Ergen backing Sound Point, but the funding for the purchase of Carl Icahn’s stake instead came from yet another billionaire, Carlos Slim of Telmex and America Movil. Of course, Ergen and Slim are allies in DISH Mexico (Telmex provides billing services and sells the DISH Mexico service) and its been suggested to me that Ergen may have proposed Slim should use Sound Point, so that people would inevitably jump wrongly to the conclusion that Ergen was behind the LightSquared investment.
America Movil has recently announced that it is acquiring Simple Mobile, a unit of T-Mobile USA, as well as bidding for an increased stake in KPN of the Netherlands, and it is plausible to conclude that it might ultimately want to go beyond its current MVNO strategy in the US, by investing in a facilities-based network. In that context the two logical candidates at this point in time would be T-Mobile USA (whose parent Deutsche Telekom is still open to a “merger or asset sharing deal”) and DISH. Its therefore interesting to note that T-Mobile is suddenly now trying to derail DISH’s plans in the AWS-4 proceeding.
Acquisition of a LightSquared stake might provide Slim with another bargaining chip in any negotiations to invest in a US carrier, especially if he could wait patiently for LightSquared’s regulatory issues to be resolved, because he doesn’t necessarily need his own facilities based network immediately. However, he might also be able to bring a lot of pressure to bear on LightSquared, because as I pointed out back in December 2010, the decision of the Mexican government to build and launch the MEXSAT L-band satellites gives them an effective veto right over LightSquared’s ability to use much of its L-band spectrum.
All in all, its fascinating to watch quite how many billionaires seem to be attracted to LightSquared like moths to a lightbulb. Some, like Carl Icahn and Andrew Beal, have already left the scene, while one has lost his billions trying to make something of it. Meanwhile, the rest of us can only wait to see if this rumor turns out to be true, and if so what plan Slim might have in mind.
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05.10.12
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 6:50 pm by timfarrar
What a bizarre day in the world of LightSquared, where it appears nothing is ever as it seems! First of all, a comment yesterday on my last blog post gave some hints as to a completely different way to think about why Charlie Ergen might be interested in acquiring LightSquared’s spectrum, despite the current roadblock imposed by GPS interference concerns. Specifically, why couldn’t LightSquared’s L-band MSS spectrum be repurposed as uplink-only spectrum and then paired with the DISH 2GHz spectrum, which could all be converted to downlinks (a proposal already made in the FCC’s 2GHz NOI)? Then Ergen would have access to a total of up to 80MHz of spectrum which could be authorized for terrestrial use (four 10MHz uplink blocks in the L-band and two 20MHz downlink blocks in the 2GHz band).
As I pointed out in my reply to that comment, there are certainly some GPS interference concerns expressed by the NTIA over handsets operating in the portion of the L-band uplink closest to GPS (1627.5-1637.5MHz) and presumably these concerns would be considerably greater for uplink use of the 1545-1555MHz block because it is even closer to GPS. It would also be very hard to develop handset filters which could comply with the onerous ATC out of band emissions limits above 1559MHz (something that is easier to address for downlink use on a tower, where physical size and power requirements are less of a constraint), presenting further issues for uplink use of the 1545-1555MHz block. However, even if these two bands were dropped from the initial deployment plan and only three of the four bands were used eventually, DISH could still benefit hugely from having access to 40MHz of downlink spectrum instead of 20MHz. Indeed DISH might even be able to sell off or lease some of this spectrum to another operator and still build a network.
This guesswork seemed to be supported by LightSquared’s April 25 letter to the FCC, asking for the L-band to be addressed within the 2GHz NOI, so that “cross-band” solutions could be considered. The counter-argument is that any such change would obviously delay the process of authorizing and then building out DISH’s network considerably (most likely by 1-2 years), and therefore might not be acceptable to either DISH or to the FCC Chairman (assuming he is focused on maximizing the speed with which the 2GHz spectrum is brought into terrestrial use).
However, later in the day, news emerged that Harbinger and the debtholders have agreed on a change to the First Lien Debt Agreement, adding DISH specifically to the list of Disqualified Parties who are not allowed to purchase the debt (this section previously just referred generically to strategic purchasers). That would suggest Harbinger are not interested in some form of accommodation with DISH along the lines of the above “cross-band” spectrum pairing.
Even more bizarrely, I have had people insisting to me that it is definitely not DISH who is the purchaser, and Ergen is not formally denying an interest simply because he wants the LightSquared debtholders to be even more confused about his intentions, while he moves ahead with his plans in the 2GHz band. It was indicated to me that various people have already been spreading misinformation, for example when the WSJ was told that Falcone had agreed to step down (which I’m told he hadn’t), and when the New York Post was told that Falcone had not been presented with an economic proposal by the debtholders (which I’m told he had). According to this version of events, the New York Post story that “Ergen bought the debt” is similarly misleading and may even have been encouraged by Falcone and his advisors in order to persuade investors that there is strategic value in the spectrum. Of course that version of the story might just be wrong as well.
At this point what we do know is that Sound Point has a deep pocketed backer who is trying to acquire a significant amount of the LightSquared debt. If it’s not Ergen, then it is very hard to understand who would have a strategic interest in the spectrum at anything close to the price they are paying. We don’t know the intentions of the buyer, but it seems that they are probably not friendly towards Harbinger and would presumably therefore seek to force LightSquared into bankruptcy on Monday when the waiver expires. Whether they will gain support from other debtholders in doing that remains unclear, but it does seem that Falcone’s threat of a voluntary bankruptcy may not be give him as much power to dictate the outcome of this week’s negotiations as first thought. Most people certainly seem to think that another extension of the negotiations beyond next Monday is fairly unlikely and a resolution one way or another will be reached by then.
As a result we seem set for another few days of briefing and counter-briefing, in a situation where almost no-one knows who is telling the truth and who is bluffing. With $1.6B of debt and billions more in equity at stake, it really is going to be a game of high stakes poker this weekend.
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05.08.12
Posted in Financials, LightSquared, Operators, Spectrum, TerreStar at 1:39 pm by timfarrar
Last year most attention was focused on the October 2010 bankruptcy of TerreStar Networks, which owned the 2GHz satellite assets that Charlie Ergen purchased last June for $1.4B. Much less attention was paid to its parent, TerreStar Corporation, which filed for bankruptcy in February 2011 and owned the 8MHz of spectrum in the 1.4GHz band that was leased to LightSquared in September 2009.
The reorganization plan for TerreStar Corp contemplated that this lease (under which TerreStar receives $2M per month) would remain in place, and the company would be handed over to its preferred shareholders, led by Highland Capital, Solus and Harbinger. However, this plan now seems to be on the verge of unraveling after Harbinger dumped its Series B preferred shares (which had a face value of more than $100M) earlier this year (keeping only the worthless subordinated Series E shares), presumably so Harbinger could repay its $400M UBS loan at the end of January.
These shares were picked up West Face, but Harbinger then promptly stopped making the monthly payments on the 1.4GHz lease, with TerreStar Corp’s March 2012 results now showing $2M of accounts receivable due from LightSquared, whereas in previous months this revenue has been booked as it is received.
Now TerreStar Corp has been forced to postpone the confirmation hearing (originally set for April 11) and hire counsel to help figure out what options remain for the 1.4GHz spectrum. Most observers appear to agree that the Harbinger lease was above the market value for this spectrum, and Harbinger appears to have been unable to find anyone interested in taking over the lease when it attempted to monetize the spectrum in January this year. It remains unclear what recourse TerreStar Corp might have to sue LightSquared to recover the lease payments, given that LightSquared Inc, which controls the lease and is the parent of LightSquared LP (where most/all of the cash is held) appears to have few resources of its own.
So now the question is what happens next for TerreStar Corporation? Will the 1.4GHz spectrum be offered for open sale? Do Solus, Highland and West Face really want to own this spectrum? How will a valuation (and a potential cramdown of Elektrobit, which is an unsecured creditor of TerreStar Corp) be agreed without the lease? Whatever happens, this certainly looks like yet another mess that Falcone has got his one time partners at Solus into.
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05.07.12
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 5:47 pm by timfarrar
Since news emerged yesterday that Carl Icahn had sold his $250M of LightSquared’s first lien debt at around 60 cents on the dollar there has been feverish speculation about whether someone else is backing Sound Point Capital, the small investment firm that bought the debt. Today that led to the price of LightSquared’s debt being bid up to almost 70 cents on the dollar, as investors wonder if a strategic player is interested in the company.
Attention has focused on Charlie Ergen, because of his record of doing the same with DBSD and TerreStar last year, with the Reuters article which broke news of the sale indicating that Ergen was previously an investment banking client of Sound Point’s principal. Notably, in both cases Ergen acquired debt of the companies before bankruptcy and then bought the assets out of bankruptcy, with the debt investors ultimately getting paid back at par. Ergen was even asked on today’s DISH results call if he was “interested” in LightSquared’s spectrum, but deflected the question by responding that DISH has all the spectrum they “need”.
Icahn was not regarded as a spectrum expert, and it was with some justification that Harbinger argued 10 days ago that “they doubt Icahn would get better results from DC”. In contrast, Ergen has an intimate knowledge of the regulatory issues and currently appears to be far more in the FCC’s good books than Falcone (exemplified by Ergen’s ability to secure a meeting with the FCC Chairman on January 4, when Falcone was relegated to only meeting with officials on the same day). Indeed LightSquared’s investors would very likely welcome the involvement of Ergen with open arms, and would certainly trust Ergen far more than Falcone to negotiate a way out of their current dilemma, despite Falcone’s claims in his comments to an earlier blog post of mine that:
Everyone knows Ergen is not going to build out a network. No one trusts him, including the FCC. They are not going to put their eggs in that basket because they know he will make them look foolish. It is inevitable. This guy, as smart as he is, will never build the network. He is using it as bait so one of the big guys step up and attempt to pay him for a dwindling subscriber base. Dish and Ergen are on the downward slope of a steep hill and he knows that, hence his aggressive acquisition tactics over the last 12 months…. stay tuned….
Of course we don’t yet know who, if anyone, is behind the purchase of Icahn’s holdings. Even if it is Ergen, then he could have a range of motivations, ranging from a defensive move to ensure LightSquared doesn’t disrupt the current FCC proceeding to authorize terrestrial use of the DBSD/TerreStar 2GHz spectrum, to a desire to help the FCC out of a hole, all the way to seeing a long term opportunity to make the L-band spectrum useful for terrestrial service. Indeed several of these factors could be in play simultaneously.
UPDATE: The New York Post is now reporting that Ergen was the buyer and he picked up another $100M of debt last week in addition to Icahn’s $250M holding.
However, one important consideration to bear in mind when drawing parallels with DBSD and TerreStar is that in those cases the spectrum was owned free and clear (whereas LightSquared has an expensive lease contract with Inmarsat, albeit one that is currently on hold) and (in the absence of a spectrum swap) the GPS interference problems in the L-band mean it will be many years before even a portion of the band (likely at most 20MHz) is usable. Both those factors will significantly depress the value of LightSquared’s spectrum relative to DBSD and TerreStar (where Ergen paid $1.4B-$1.5B for 20MHz of spectrum from each company) and make it much harder to justify paying anything close to the $1.6B par value of LightSquared’s debt simply to acquire LightSquared’s spectrum assets.
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