12.09.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:46 pm by timfarrar
Bloomberg now has a copy of the results from the recent NTIA testing that I noted yesterday and is reporting that “LightSquared signals caused harmful interference to majority of GPS receivers tested” and “millions of fielded GPS units are not compatible” with the planned network. The presentation goes on to conclude that “No additional testing is required to confirm harmful interference exists”. This language is particularly important because the FCC Public Notice in September requesting this further testing stated that:
This Public Notice is issued pursuant to the provision of LightSquared Subsidiary LLC’s (LightSquared) conditional Ancillary Terrestrial Component (ATC) authorization that LightSquared may not commence ATC operations until the Commission, in consultation with the National Telecommunications and Information Administration (NTIA), finds that Global Positioning System (GPS) interference concerns have been satisfactorily resolved. Following extensive comments received as a result of the technical working group process required by the International Bureau’s Order and Authorization dated January 26, 2011, the Federal Communications Commission, in consultation with NTIA, has determined that additional targeted testing is needed to ensure that any potential commercial terrestrial services offered by LightSquared will not cause harmful interference to GPS operations.
In other words, assuming this conclusion is endorsed by the NTIA at its meeting next week, the FCC would be perfectly within its rights to deem that no further testing is required to confirm that the conditions of the January 2011 waiver cannot be met and it must be revoked. Not only that, but LightSquared committed in January that “this process must be completed to the FCC’s satisfaction before LightSquared commences offering commercial service pursuant to approval of our requested modification with regard to our L-band MSS frequencies”, so it appears the FCC could potentially prevent LightSquared from offering any terrestrial commercial service at all. Though I suspect LightSquared will try to argue that this commitment is only applicable to service under the waiver, it will be hard to win that point when it was very clear from LightSquared’s discussions with the FCC and White House in January what was intended.
The FCC therefore is now confronted with a tricky decision: does it simply wait for LightSquared to run out of money, so it can try and avoid the inevitable legal action, or does it allow testing to continue, and risk the wrath of Congress (and Sen. Grassley in particular) for appearing to be supportive of LightSquared.
Coming after the SEC issued a Wells Notice to Harbinger Capital this morning, and Harbinger subsequently suspended redemptions from its funds, this news could hardly have come at a worse time.
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12.07.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 11:49 am by timfarrar
Today LightSquared has been making a big deal about how its “independent tests” have shown that “LightSquared is well on its way to demonstrating that GPS interference issues have been resolved”. This is in line with LightSquared’s statement to the FCC on November 15, that “any determination that the federal precision and timing coexistence issue has been resolved would have to be based on objective and independent test results and not the subjective views of the federal agencies involved”. However, now LightSquared appears to have lost its backing from both the White House and the FCC (and the views of the federal agencies are pretty clear), LightSquared cannot seriously expect the FCC to change the currently defined PNT testing process, and so I think that the only place LightSquared will be trying to argue that point is in the court of public opinion, followed sooner or later by a court of law.
LightSquared also appears to be renewing the tired arguments about how its integrated satellite network can provide coverage everywhere, even quoting the Commissioner of Randolph County, GA who suggested that “this powerful new high-speed network will finally allow them to access broadband wherever they might live or work or travel”. However, LightSquared has never intended to provide terrestrial service in Randolph County, GA, as shown in this chart of planned terrestrial coverage that LightSquared presented at a conference in October 2010.
Even if its deal with Sprint comes to fruition (which now seems unlikely to say the least), LightSquared won’t provide terrestrial coverage there, because Sprint has no towers in Randolph County either.
Thus any potential LightSquared customers in Randolph County will have to rely on satellite coverage. I wonder if they realize that they will get at most 200-300kbps downlink speeds and 10-20kbps uplink speeds from a LightSquared handset? And that they will have to stand outside in an open area and make sure they know which direction the satellite is in? Even more problematically, the total data capacity for all the handsets using the SkyTerra-1 satellite anywhere in the US is roughly equivalent to the capacity of a single LTE base station. And remember that LightSquared’s wholesale partners get 500kbytes of satellite data for every Gbyte of terrestrial capacity that they buy, so they will only be allocating 1Mbyte of satellite data per month for each customer on a standard 2Gbyte terrestrial data plan (if they even sell service to customers who live outside terrestrial coverage).
UPDATE (2/9/12): LightSquared’s satellite capabilities have now been revealed in documents produced by the FCC in response to FOIA requests. The total capacity of each LightSquared satellite is stated to be 100 gigabytes per hour (222Mbps) compared to 2800 terabytes per hour on the terrestrial network (28,000 times more, or in other words the satellite capacity for all users in North America is approximately equal to the capacity of a single base station). Furthermore, LightSquared’s intended wholesale pricing for satellite data (before it was marked up by their partners) was $10 per Mbyte, or 1600 times the price of LightSquared’s terrestrial data services.
Of course I’m sure that none of the endless parade of former politicians that LightSquared has hired has any conception of the technical issues involved, so they will presumably keep touting the company right up to the point at which the money runs out and the lawsuits start flying.
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12.02.11
Posted in Financials, Regulatory, Spectrum at 12:24 pm by timfarrar
After losing an arm and a leg on their investments in Clearwire, and being utterly unsuccessful in their repeated attempts to sell wireless services, Comcast, TWC and BrightHouse have now apparently concluded that its not worth incurring any more flesh wounds in their attempts to become competitors in the wireless market and have agreed to sell their AWS spectrum holdings to Verizon. Of course, this acknowledges that smaller players will basically find it impossible to challenge the dominance of Verizon and AT&T in the US wireless market.
This deal puts further pressure on AT&T to buy DISH, if (and when?) the proposed T-Mobile merger finally falls apart. However, it leaves TMO in a much more difficult situation, with no easy way to acquire more AWS spectrum (at least prior to a future AWS-3 auction) and no potential cable partnership. As a result, the most likely outcome in my view would be for the FCC to make any AT&T/DISH purchase conditional on providing TMO and others with wholesale access to the network if the potential AT&T/T-Mobile network sharing agreement does not come to fruition.
Clearwire is also left with one less potential purchaser for its spectrum, now that Verizon has satisfied its spectrum needs for most of the next decade (and recall that T-Mobile looked at the Clearwire spectrum last year and decided not to buy any of it). Yesterday’s announcement of a deal with Sprint kicks the can down the road a little, but actually reduces Sprint’s near term payments to Clearwire, unless Clearwire is able to raise additional equity funding. However, that might be challenging in current market conditions unless Clearwire has a new potential strategic investor lined up. The obvious candidate would be China Mobile, which has a strong interest in establishing TD-LTE in the 2.5GHz band as a widely used international 4G standard (something of strategic importance for the Chinese government, given the earlier failure to ensure widespread adoption of TD-SCDMA as a 3G standard).
Another interesting factor to consider is the price paid by Verizon for the spectrum, which some are claiming “ratchets up the price of spectrum“, because SpectrumCo is making a profit on the extraordinarily low price it paid through a smart bidding strategy in the auction. In fact at $0.69/MHzPOP the price is almost identical to that paid by Verizon for its AWS spectrum in the auction 5 years ago (the quoted price then was $0.73/MHzPOP but the number of POPs is not directly comparable because the 2006 POPs were based off the 2000 census and Verizon’s stated 259M POPs for these licenses presumably relates to the 2010 census), and very likely was used as the benchmark in negotiating the value of the current transaction. In the intervening 5 years the AWS block has been cleared and has an established chipset ecosystem, thereby become much more readily usable, but Verizon is not paying any more for this spectrum. Certainly it makes recent assertions by Brattle Group that generic “unencumbered spectrum” (such as LightSquared’s spectrum with a waiver) should have a value of roughly $1.00/MHzPOP look hugely exaggerated.
UPDATE: If this really is “the end of broadband competition” as some believe, then its pretty obvious what the FCC does next, simply mandate wholesale access to Verizon and AT&T’s networks (as conditions on the purchase of SpectrumCo and DISH respectively). That enables two high capacity national LTE networks to be built and allows cable companies (on the Verizon network) and TMO (on the AT&T network), as well as smaller players, to compete for wireless customers, but leaves wholesale business plans like Clearwire and LightSquared out in the cold. Sprint gets stuck with a second rate LTE network using the spectrum (SMR, G-block, BRS/EBS) that no-one else wants.
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11.25.11
Posted in Financials, Regulatory, Spectrum at 8:34 am by timfarrar
After AT&T’s notice to the FCC that it is withdrawing its T-Mobile merger application, attention is now turning to AT&T’s alternatives for acquiring more spectrum. The FCC’s approval of the Qualcomm spectrum purchase puts the focus squarely on DISH’s 700MHz E block holdings, which would bring the Qualcomm spectrum up to a national 12MHz unpaired block. However, AT&T also needs a separate clean block of paired spectrum to implement its planned Carrier Aggregation Technology (as part of an LTE Advanced network). The original intention was to use AT&T’s AWS-1 spectrum holdings for this purpose, but AT&T would be required to give up the majority of its AWS-1 holdings (1.5B MHzPOPs out of ~2.5B MHzPOPs) as part of the break fee for the TMO merger agreement. As a result, AT&T will also now have to look for another clean block of spectrum away from the 700MHz band to enable deployment of the Qualcomm spectrum. Though this could in theory be done in the 850MHz band, it may be hard for AT&T to put together enough clean contiguous spectrum (2x10MHz?) for a near term LTE Advanced deployment, especially if the FCC’s conditions on the Qualcomm purchase mandate a rapid buildout of the spectrum.
In this context I think a much bigger deal with DISH is the only logical outcome, and that will mean either a companion purchase of DISH’s 2GHz spectrum holdings (DBSD/TerreStar) or even a takeover of DISH itself (which could complement AT&T’s U-verse service and satisfy Randall Stephenson’s ambitions to complete a major deal). Though getting FCC approval for an ATC waiver would have to be finessed (probably by offering the government some compensation for the step-up in value), this would allow the DBSD and TerreStar spectrum to be brought into use more quickly. Indeed, by designating the AT&T/TMO merger (as DISH requested), approving the Qualcomm spectrum transaction, and apparently supporting “the efficient use of spectrum without decreasing competition“, the FCC seems to be implying that this would be its preferred course of action for AT&T to take.
The outcome for a jilted TMO would certainly be more challenging, but when the Justice Department has stated explicitly in its antitrust arguments that reducing the number of national wireless operators from 4 to 3 is unacceptable, a sale to Sprint also seems to be off the table. Of course that would be a good reason for AT&T to pursue the February court case to a conclusion, because a ruling against AT&T on these grounds would also prevent a future Sprint/TMO or Verizon/Sprint merger. Instead, a spinoff and float of TMOUSA, potentially with the cable companies injecting their AWS-1 spectrum in exchange for an equity stake in what would then be a listed company, could give TMOUSA a much stronger position with roughly 50MHz of AWS-1 spectrum (used for HSPA+ in the near term) and roaming rights onto AT&T’s network.
That would leave Sprint as the Thanksgiving turkey, with no good spectrum options other than to do some form of deal with Clearwire. Ironically, with Sprint having agreed with DISH just a few weeks ago to withdraw its objections to the use of the DBSD/TerreStar spectrum, it may be hard pressed to credibly object to a deal between DISH and AT&T. Unfortunately for Sprint, it also seems that Clearwire may have increased the amount of funding it is asking Sprint to provide in the near term (as an advance against an extended capacity purchase agreement), because it is proving harder than expected for Clearwire to raise money from others (e.g. vendor financing). Whether that will be acceptable to Sprint, in an environment where it faces severe cash pressures to execute its Network Vision strategy, is unclear. It will therefore be very interesting to see what happens next Friday, when Clearwire’s interest payment is due.
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11.10.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 10:07 am by timfarrar
So apparently yesterday’s PNT Advisory Board meeting was “a watershed moment” for LightSquared, because “the GPS interference issue can be solved” and “the entire debate has turned from whether there is a solution to who pays for it”. Of course, that’s a massive oversimplification of reality, because as the introductory presentation to the meeting set forth, there are vast amounts of testing still to perform. In particular, the latest PNT newsletter has confirmed that LightSquared’s proposed solution for precision devices will not be tested until at least “early 2012″.
However, what no-one seems to have picked up on is that in LightSquared’s semi-annual progress report, filed with the FCC on October 31, the company confirmed that it is ignoring the FCC mandated timeline (from the January 2011 waiver) to make devices available by September 30, 2011 and now has postponed the anticipated availability of “embedded modules, USB data modems and other devices” from BandRich and AnyData until “late 2012″. While LightSquared still expects Qualcomm to make chipsets available in “late 2011″ that could “facilitate access to LightSquared’s network” there is no associated commitment to actually make devices. Though Sharp and Airtouch “have agreed” to develop a range of devices, there is apparently no timeline for this to take place (indeed Sharp has stated publicly that it “would need a minimum purchase order before it would build such devices”). Basically, therefore it appears there will now be no devices capable of accessing LightSquared’s network for at least a year or more, making LightSquared’s continued assertions that it will launch service in the “second half of 2012″ even more laughable than they already were.
More importantly, if testing of LightSquared devices is also a pre-requisite for FCC approval, as the PNT Advisory Board apparently desires, then it now seems that this will not be possible for many months to come. Of course, this gives the FCC yet another excuse to hold off from making any ruling on the LightSquared issue, even to ban terrestrial deployment in the upper 10MHz band which everyone knows can never be used, because that will simply provide LightSquared with the excuse it is looking for to initiate litigation over the supposed expropriation of “part of LightSquared’s spectrum – worth billions of dollars”.
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11.04.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 1:04 pm by timfarrar
In addition to Sprint’s announcement today that it plans to offer new debt in a private transaction, Sprint has more quietly been rounding up additional money from both LightSquared and DISH. In Sprint’s most recent 10-Q, filed yesterday, the company notes that “In September, the [spectrum hosting] arrangement was amended to change the September 30, 2011 contingency date for LightSquared’s performance to December 16, 2011. The December 31, 2011 contingency date remained unchanged. This amendment also provided for an additional prepayment of $20 million, which was received in October 2011.” Today, Sprint has told the FCC that “DISH and Sprint have today reached an agreement to settle all of these [reimbursement] disputes among Sprint, DISH, and their subsidiaries and affiliates in a mutually satisfactory manner” and will presumably therefore be paid a significant proportion of its $220M claim against DBSD and TerreStar ($110M per company) for BAS relocation expenses.
UPDATE (11/7): DISH has now revealed that it will pay Sprint a total of $114M, though it is not yet clear if Sprint will retain any additional claims in the bankruptcy cases of DBSD and/or TerreStar Networks.
However, the two disclosures appear to have rather different consequences for LightSquared and DISH. In the case of LightSquared, this represents another $20M of expenditure over and above the amount assumed in my analysis earlier this week. More importantly, Sprint has set a precedent under which it will now presumably expect to be paid even more money when LightSquared is unable to meet the revised deadline of December 16 and the second deadline of December 31 (and of course it is certain that the FCC will not be able to rule by then, because LightSquared’s proposed filter for precision GPS equipment is not being tested by the government this month, as LightSquared has now admitted).
I also now suspect that Boeing’s vendor financing loan may simply have been extended (perhaps by 12 months?), from its original December 2010 repayment deadline, and a new deadline is likely to occur relatively soon, because Boeing will need some certainty about whether the SkyTerra-2 satellite will be available for its MEXSAT project. If Boeing does insist on repayment (of what would now be $130M+) within the next few months, then (faced with the unpalatable alternative that LightSquared forfeits the ground spare satellite and potentially jeopardizes its ATC license) LightSquared could well run out of money before its next first lien interest payment in April. Specifically, my estimate on Monday was that LightSquared would have about $170M in cash at the end of Q1 2012, which would not be sufficient to cover a payment of $130M+ to Boeing, plus the $20M already paid to Sprint and the additional payments that are now likely in respect of the December deadlines. Even without making any repayment to Boeing, if LightSquared needs to pay Sprint an extra $20M for each additional 3 month deadline extension, then it would have barely enough money to make the interest payment due on April 1, 2012.
In the case of DISH, it appears that the news of a Sprint settlement is more positive, as it removes one of the main roadblocks to the FCC approving a transfer of control of the DBSD and TerreStar assets to DISH. However, DISH’s requested ATC waiver has come under more pressure, with AT&T now joining the CTIA in pressing for the waiver issue to be considered in a full rulemaking proceeding. Interestingly, both AT&T and the CTIA raise the question of a windfall, with the CTIA explicitly noting (footnote 21) that:
While DISH argues that it took into account the possibility of future flexibility for the spectrum during the bankruptcy process, certainly other parties were not factoring that into the process. Moreover, 40 MHz of nationwide, terrestrial broadband spectrum would not be valued at $2.8 billion. When looking at past valuations for such spectrum assets, a valuation of 3 to 4 times this would be more realistic if terrestrial rights were guaranteed.
Of course, that statement once again highlights the issue of LightSquared’s own $10B windfall problem which the GPS industry are now making so much of, and makes it harder for the FCC to grant DISH a waiver without some way to recover value for the Treasury. As a result, it is plausible that (with the transfer of control and ATC waiver being processed by the FCC in separate dockets) a ruling on the transfer of control could come ahead of any waiver decision.
UPDATE (11/14): A November 9 ex parte filing from DISH appears to confirm that the FCC is concerned about the “windfall” issue and might separate the transfer of control ruling from the waiver requests.
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10.31.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:18 am by timfarrar
Back in September I tried to analyze LightSquared’s cashflows, in order to predict when it might run out of money. A Debtwire article published in the FT earlier this month gives some useful data which has enabled me to refine that analysis. In particular, it states that after paying Sprint its $290M and raising $265M as an unsecured term loan, at the end of the second quarter of 2011 LightSquared had about $614M in cash.
That amount is very close to my estimate, with one exception, namely that it appears LightSquared did not repay Boeing’s vendor financing loan of ~$120M in December 2010. That loan was secured against the SkyTerra-2 (formerly MSV-2) satellite, which LightSquared told the FCC in October 2010 would be launched in the first half of 2011 (to meet the deadline in LightSquared’s Canadian license to place the satellite in orbit of April 23, 2011). Of course that didn’t happen, and I assume that LightSquared cancelled the launch to save money.
However, as I noted last December, Boeing’s contract to build the MEXSAT system involves the construction of two copies of the LightSquared satellite, and it would therefore make sense for Boeing to re-use the SkyTerra-2 satellite for its MEXSAT contract. It therefore seems that Boeing has either kept the vendor financing in place (under the assumption it will pick up the SkyTerra-2 satellite in bankruptcy) or has already reached some agreement with LightSquared to purchase the SkyTerra-2 satellite in exchange for forgiving the vendor financing loan. Either way, it seems that LightSquared’s creditors may now have one less asset to monetize in bankruptcy.
Taking this incremental $120M in cash into account, I have updated my financial projections, and these are given below. LightSquared has stated that it is funded through Q1 of 2012, and that it can “extend the runway of cash” if it has to. This appears to be a reference to deferring the next significant payment to Sprint, which I understand is due at the end of Q1. Sprint may or may not choose to extend the payment schedule with LightSquared, though Sprint’s actions would likely be dependent on what best positions it to retain the $290M already paid by LightSquared in a bankruptcy. However, as shown in the analysis below, even if no more payments are made to Sprint, LightSquared would still run out of money by the summer of 2012.
Interestingly the DebtWire article claims (incorrectly in my opinion) that LightSquared’s “liquidity is sufficient through 2012″ and more astonishingly that “current trading levels [for the first lien debt at 50 cents on the dollar] imply investors are taking a conservative approach and only valuing the more dependable 20 MHz, valued at USD 0.13-USD 0.14 megahertz per population (MHz/POP)”. Of course, this is far from a conservative approach when comparing the valuation with TerreStar and DBSD, because LightSquared must make lease payments of $115M per year to Inmarsat for access to the L-band spectrum, equivalent to an additional 30 to 40 cents per MHzPOP (depending on the appropriate discount rate), when attributed solely to the “more dependable 20 MHz”. Put another way, if LightSquared has to keep paying for the Inmarsat lease, and can only make use of 20MHz of its L-band spectrum (even if that were usable in the near term, which it will not be), then if DBSD and TerreStar were the appropriate benchmark (20 to 25 cents per MHzPOP) the LightSquared spectrum would be worthless.
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10.26.11
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum at 11:03 am by timfarrar
Last week we saw various filings from wireless companies and the CTIA on DISH’s transfer application/ATC waiver request for DBSD and TerreStar, which mostly just served to highlight the interests of the different wireless operators. MetroPCS asked the FCC to force DISH to provide a detailed business plan before considering the transfer application (in other words to do a deal with them rather than wait for a decision on the AT&T/TMO merger). Sprint asked the FCC to condition the transfer on reimbursement of Sprint’s relocation expenses, and to impose the same buildout conditions on DISH as the FCC imposed on LightSquared in exchange for the waiver (thereby potentially forcing DISH to pay Sprint to host their buildout). Meanwhile the CTIA asked the FCC to defer any decision on a waiver until a more general rulemaking proceeding has been completed (thus allowing the wireless operators to find out what will happen to the AWS-3 spectrum and whether the 1755-1780MHz block will be available for pairing). Ironically the CTIA cited potential interference with the G-block PCS spectrum as a reason for delay, when Sprint (who owns this spectrum) didn’t even mention it in their submission.
DISH’s formal response is due tomorrow (Oct 27), but an ex parte submission and an interview with Charlie Ergen both highlight that DISH is going to make sure that the FCC is under more pressure to conclude this proceeding (and finally take the first step towards its goal of making more spectrum available) than DISH is. Indeed DISH would clearly prefer to wait until a decision is reached on the AT&T/TMO merger, because if the proposed merger is blocked then more potential partnerships would open up. In my view, the most likely partnership would then be with AT&T, which has come close to a deal to buy DISH in the past, and would be able to use both DISH’s 2GHz MSS-ATC spectrum and its 700MHz E-block spectrum (in conjunction with the MediaFLO spectrum that AT&T plans to buy from Qualcomm).
However, the FCC still has to avoid giving DISH a similar spectrum windfall to LightSquared and if DISH is to avoid having to give up part of the spectrum for reauction, it will have to come up with some creative way to reimburse the Treasury financially for any windfall (e.g. offering to pay the difference between what it paid for DBSD and TerreStar and the amount the adjacent J-block 2020-25/2175-80MHz spectrum sells for in any future auction).
Today, it seems that Sprint has rowed back somewhat on its implied threat on October 7 to force Clearwire into bankruptcy, announcing a “non-binding memorandum of understanding to work together” on ensuring that the two companies’ LTE networks will be interoperable. While this is only a limited first step towards Sprint providing concrete backing to Clearwire in 2013 and beyond, it appears designed to allow Clearwire to go out and attempt both to raise new funding and to secure other partnerships ahead of the early December deadline for Clearwire’s next interest payment on its debt. In the short term the most plausible new partnership would be with MetroPCS, which recently said it is “uniquely positioned” to do something with Clearwire, though it is unclear how much of a financial commitment this would actually involve on MetroPCS’s part.
Yesterday Sprint also indicated that it plans to deploy a 2x10MHz LTE Advanced network in its 800MHz iDEN spectrum, which is the subject of today’s MoU on interoperability. By using this additional spectrum for LTE (rather than CDMA as had been previously stated), Sprint would be able to deliver LTE across a mix of low (800), medium (1900) and higher (2500) frequency spectrum bands depending on the population density in a given area, with the Clearwire network providing supplementary capacity in the densest urban areas. If other wireless operators adopt a similar model, then Clearwire could become a wholesaler to multiple major carriers (e.g. Verizon as a supplement to its LTE deployment which is currently at 700MHz and will later extend to AWS), as would be needed if Clearwire is to build a wholesale business on the back of covering at most 100M-150M POPs. Nevertheless, it will take a minimum of several years before a company like Verizon or AT&T would realistically need that additional capacity and so Clearwire still has a lot of work to do (and a lot more money to raise, now that its WiMAX cashflows are likely to diminish) to pull off its transition to a multi-network wholesale provider of urban capacity, not least in creating an ecosystem around TD-LTE in the 2.5GHz band.
However, at least Clearwire appears to have a plausible plan for how to move forward, unlike LightSquared, which has now basically been written off by MetroPCS and (after today’s announcement) implicitly by Sprint as well. On that basis, it looks like Harbinger’s write-down of its LightSquared investment at the end of September will end up being only the first of several such actions. Its also very hard to see how investors in LightSquared’s first lien debt believe that they will be able to realize even 50 cents on the dollar in bankruptcy, when the most likely outcome is that there will be no purchasers for LightSquared’s spectrum at any price, because the regulatory risks will not be resolved and the ongoing Inmarsat lease obligation potentially outweighes the residual value of LightSquared’s spectrum assets.
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10.11.11
Posted in Financials, Regulatory, Spectrum at 2:14 pm by timfarrar
In October last year I wrote about the supposed spectrum “crisis” and how the FCC’s Spectrum Summit likely marked the point at which the spectrum bubble began to unwind. A year later, many of those predictions appear to be coming true, with most people now writing off LightSquared (and ridiculing Sprint for selecting them as their “preferred” provider of additional capacity).
Indeed I’ve been surprised how investors’ focus is now much more on Clearwire and DISH, whose spectrum holdings are perceived to have some long term value, and its almost become received wisdom that LightSquared’s spectrum holdings may not provide any recovery in bankruptcy, because the FCC is unlikely to grant approval for terrestrial use of the L-band spectrum (at least ahead of the election, and even then, at best, with a long transition period to update or replace precision devices).
Clearwire’s bonds are also trading at levels that assume they will have to file for bankruptcy, and that their spectrum assets will be sold at a significant discount. I was told that the $2.95B of senior secured notes were trading as low as 50 cents on the dollar, with the $500M second lien at around 30 cents and the $730M of exchangeable notes at around 20 cents, which would put the implied value of Clearwire at $1.5B-$1.8B, despite holding more than 40B MHzPOPs of spectrum.
UPDATE: Prices for Clearwire’s first lien debt are now in the mid-70s, putting a value on the company of closer to $2.5B. While the first billion dollars or so of spectrum sales in a liquidation seems fairly assured, the second billion would be less straightfoward and a third billion even more challenging. Clearwire also faces a large upcoming interest payment in December which will likely represent a key decision point for how it should move forward.
Of course, about 60% of Clearwire’s spectrum is leased, and so may not be in much demand from potential purchasers, while the 17.5B MHzPOPs of owned spectrum is not all contiguous. More importantly, the majority of Clearwire’s owned spectrum comes within the FCC’s spectrum screen, and so it is hard to see why a carrier like Verizon would choose to buy Clearwire’s spectrum and thereby potentially impair its ability to acquire more lower frequency spectrum like SpectrumCo’s AWS-1 block in the future.
However, other than Sprint, virtually the only obvious alternative buyer for Clearwire’s spectrum is MetroPCS, which would probably not want to buy more than 2-4B MHzPOPs of spectrum (i.e. 20-40MHz across its existing 100M POP footprint) and would therefore potentially spend no more than about $1B in total. This puts the pressure on Clearwire to adopt the @Home strategy, which would mean filing for bankruptcy well before Sprint has a credible alternative network in place and threatening to cut off Sprint’s customers unless Sprint pays them a great deal more for capacity in the near term. Sprint would then either have to make a much better offer for Clearwire’s spectrum, or pay for transition services until it could transfer the EVO 4G customers to its own LTE network (allowing Clearwire to make money for its debtholders both from offering service to Sprint and from later selling at least part of its spectrum holdings to another player like MetroPCS).
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10.07.11
Posted in Financials, LightSquared, Operators, Spectrum at 4:27 pm by timfarrar
So Sprint’s management team did a great job of living up to Dan Hesse’s introductory admonition in their Network Vision Strategy Update today, when they failed completely to explain either their near term cash requirements (other than to suggest they will be out raising capital “opportunistically”) and how this will be impacted by the iPhone, or how they are going to deploy a competitive LTE network with only 2x5MHz of PCS G-block spectrum (which they admit will run out of capacity by the time the network deployment is complete in 2014). Unsurprisingly, the audience applauded when this plan was described as “ridiculous” by one questioner.
In their presentation, Sprint management took every opportunity to tout their intention to use hosted spectrum from LightSquared over the wholesale access currently available on Clearwire’s network, because of the “better economics” this provides for Sprint shareholders. When pressed on whether they would provide further support to Clearwire, Sprint basically confirmed the hypothesis advanced by Pardus Capital earlier this year, that Sprint intends to drive Clearwire into bankruptcy, in the expectation that Sprint will be able to acquire Clearwire’s spectrum on the cheap. Sprint also refused to address the question of LightSquared’s GPS interference issues, suggesting in one slide that LightSquared was the primary source for incremental capacity beyond the PCS G-block and yet later insisting that LightSquared was “all upside” and they were not assuming that they would get any more money from them.
Of course, other than to indicate that it would not be providing funding to LightSquared (which is hardly surprising since Sprint currently does not have enough money to fund its own network buildout), Sprint had no answer to one perceptive questioner, who asked what would happen if LightSquared failed to raise enough money to pay for the hosting agreement, and highlighted that it is hard to see why anyone would want to invest in LightSquared when they can see what has happened (and by implication what Sprint has done) to Clearwire investors. Indeed one might very well conclude that if LightSquared does get approval from the FCC to move ahead, Sprint expects to do the same to LightSquared and pick up its assets in bankruptcy. Of course, at this point in time such plotting is virtually irrelevant, because LightSquared’s spectrum is not likely to be usable for years to come, if ever.
After this debacle, it is hardly surprising that both Sprint and Clearwire’s stock prices have fallen sharply, and expectations of a Clearwire bankruptcy have heightened significantly. However, though Sprint’s CEO pointedly remarked that “no bankruptcy case involving a wireless company has resulted in a disruption of service”, that has not been true for (fixed) wireless broadband companies such as Teligent and Winstar.
This situation also brings to mind the @Home bankruptcy in the fall of 2001 (my first introduction to US bankruptcy cases), where @Home threatened to turn off its cable modem network, thereby forcing its cable partners to pay a significant premium for “transition services” while they built out their own networks (indeed AT&T’s customers were actually disconnected because no agreement was reached). In addition, AT&T was subsequently sued for its involvement in driving @Home out of business, and settled that suit for $340M in 2005.
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