10.13.10
Posted in Financials, LightSquared, Operators, Spectrum at 8:40 pm by timfarrar
So news has finally broken that Clearwire is selling 40MHz of its spectrum, as we surmised back in May. However, the valuation range cited is relatively wide ($2.5B to $5B) representing $0.20 to $0.40 per MHzPOP, and Verizon (which was said to be one “potential buyer” of the spectrum along with AT&T, T-Mobile, Time Warner Cable and Sprint Nextel) has now denied it is bidding. It also hardly seems plausible that AT&T would be bidding for spectrum it was forced by the FCC to relinquish just a few years ago. As a result, the release of this information seems like it could well be an attempt to encourage bidding if the auction is not going too briskly, with “potential buyers” rather than actual bidders being listed to create an appearance of higher demand.
If the end result is towards the lower end of the quoted range, then that would clearly be a negative sign for spectrum valuations – falling far short of the $0.50 per MHzPOP valuation suggested by Clearwire and some analysts back in May and coming close to the $0.17 per MHzPOP paid by Clearwire when it acquired spectrum from AT&T/BellSouth in February 2007. If that’s the case, then it would imply that the value of this spectrum has hardly changed in the last three years, despite the supposed “spectrum crisis” that has been widely discussed.
Of course, the headline price for Clearwire’s spectrum is not the only factor that needs to be taken into account when considering this as a valuation benchmark for other spectrum bands. In particular, around 60% of Clearwire’s spectrum (in the EBS part of the band) was acquired under lease agreements, and though some of these are partly prepaid, others will require substantial future payments (totaling $5B over the next 30 years). Thus if Clearwire sells mostly owned spectrum for close to $0.20 per MHzPOP, then the implied spectrum valuation for other bands would be rather lower than if it sold a mix of leased and owned spectrum.
Nevertheless, a low valuation benchmark might well make fundraising more challenging for ATC spectrum holders. LightSquared noted in its presentation at Satcon today that it acquired its spectrum for the “low cost” of $0.20 per MHzPOP, and while one can argue that the propagation characteristics of LightSquared’s lower frequency L-band spectrum make it more valuable than Clearwire’s 2.5GHz spectrum band, mobile operators who are seeking spectrum simply for fill-in 4G coverage in densely populated markets may not necessarily see it that way. LightSquared also has ATC-specific risks to consider, related to the aggressive buildout commitments it made to the FCC back in March and the need for rebanding in the L-band (with the associated substantial payments to Inmarsat). As a result it remains to be seen whether the investments that Harbinger has made to acquire LightSquared’s spectrum will still be seen as a low cost at the end of the Clearwire auction.
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10.09.10
Posted in Financials, LightSquared, Operators, Regulatory at 12:52 pm by timfarrar
“We see them come.
We see them go.
Some are fast.
And some are slow.
Some are high.
And some are low.
Not one of them is like another.
Don’t ask us why.
Go ask your mother.”
Though Dr Seuss did a pretty good job of summarizing the MSS industry, he may not have had the answer to this puzzle. In an interview this week, one of LightSquared’s senior executives referred repeatedly to the “one satellite” LightSquared intends to launch “in the next couple of months”. This is strange because LightSquared was granted a waiver by the FCC back in 2007, enabling it to use two in-orbit satellites for mutual backup rather than relying on a ground spare satellite as would otherwise be required by the ATC gating criteria. The second satellite was apparently needed to satisfy “United States and Canadian interests in the launch of next-generation L band MSS satellites”, and to provide 3dB of extra link margin by use of diversity.
If LightSquared decides not to launch the second satellite, then it would still meet the ground spare requirement in the ATC gating criteria, while saving tens of millions of dollars in insurance and launch costs. However, if it proves successful in its recent request to the FCC to eliminate the ground spare requirement, then presumably not only would LightSquared save on the cost of launching and insuring the second satellite, but could also raise some additional money if it could find a buyer for that satellite.
Given the rapid pace of developments, it looks like a lot of these issues will be clarified over the next few months, most notably who LightSquared’s partners will be, and it will be interesting to see what Phil Falcone pulls out of his hat next. With apologies to Dr Seuss, let’s hope for his sake its not Voom (especially given that when Cablevision finally gave up on the satellite business, it sold the assets to Echostar).
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10.08.10
Posted in Financials, Globalstar, LightSquared, Operators, Regulatory, Spectrum at 11:30 am by timfarrar
Although we remain intrigued by the timing of yesterday’s announcement of LightSquared’s chipset and device partners, what is now clear is that next year should finally result in the actual commercial deployment of an ATC network, offering both satellite and terrestrial mobile services for the first time. (Although Open Range had deployed a couple of thousand terminals under its agreement with Globalstar prior to the FCC suspending Globalstar’s ATC license, these did not include two-way functionality, and to date no handheld terminals had been produced).
LightSquared now claims to have raised over $2B, which the company expects will see it through to “operational launch and beyond” in the second half of next year. Although it is not clear where the $2B is coming from, and whether (as yet unannounced) vendor financing will form part of that $2B or could be incremental to it, it is certainly the case that with Harbinger apparently injecting funds from a $400M UBS loan in July, converting its reported $430M of debt into equity (as part of this week’s $850M debt refinancing) and presumably investing the proceeds from the sale of half of its Inmarsat stake (for $650M) in LightSquared, the company should have enough money both to pay Inmarsat for the ongoing rebanding of the L-band, and to fund the buildout of its first markets in 2011, an outcome that looked like a distant dream less than a year ago.
Given that there are no significant remaining technical barriers to overcome in deploying their satellite network, and LightSquared has commitments to produce both chipsets and ATC devices from leading manufacturers, it will be interesting to see next year both how the LightSquared network is positioned and what the public reaction is to the service. In particular, will LightSquared’s retail partners attempt to use satellite as a key differentiator, or will they rely just on the LTE offering to compete with Verizon, Clearwire, MetroPCS and others?
In the nearer term, we will also look forward to finding out exactly who these retail partners will be, and whether any of them will make a financial investment in LightSquared itself. In that regard, it appears that T-Mobile is certainly keeping its options open with regard to LightSquared, having filed at the FCC in support of relaxing the ATC gating criteria, which currently require all devices to offer integrated satellite and terrestrial services. Leap Wireless also appears to be looking closely at the ATC opportunity, having initially proposed this relaxation of the gating criteria. Whether T-Mobile’s actions are part of its negotiating strategy with Clearwire, or whether T-Mobile and Leap really are taking a potential investment in LightSquared seriously, remains to be seen.
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10.07.10
Posted in Financials, LightSquared, Operators, Spectrum, TerreStar at 9:17 am by timfarrar
Although Harbinger/LightSquared hasn’t yet got a terrestrial network to rival those of other cellular operators, it certainly has proved more than a match for them in its PR department, garnering significant positive coverage in recent months for its buildout plans, fundraising and potential partners, despite the doubts of many commentators.
However, its also the case that LightSquared has deployed its PR efforts very strategically, most notably when it announced the deal with Nokia Siemens Networks in July, straight after a skeptical article appeared in the WSJ. This week we also saw the announcement of further funding for LightSquared immediately preceding the decision to sell half of Harbinger’s stake in Inmarsat.
As a result, we’re left wondering if today’s announcement of a chipset partnership and initial device manufacturers, which also “paints a very positive picture for where LightSquared is going”, signals that there will be some bad news coming out soon. What might that be? Well as we’ve pointed out before, decision day is rapidly approaching for TerreStar, which could well involve a bankruptcy filing or other restructuring, and would certainly be another worrying sign for the MSS-ATC sector.
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09.29.10
Posted in Financials, Handheld, Iridium, Operators, Services, TerreStar at 10:42 pm by timfarrar
When I read this review of the TerreStar Genus phone, not only did it confirm my own views about the limited prospects for the phone and the wider lack of interest in dual mode satellite phones, but it brought back quite a few memories from the late 1990s.
Most notably, likening a satellite phone to a “brick” is never a good sign (“It’s huge! It will scare people…If we had a campaign that featured our product, we’d lose“).
Also the suggestion that AT&T hasn’t identified the market correctly if it thinks people will use this as their “everyday mobile device”, along with criticism of the “hefty series of price tags” (“What it looks like now is a multibillion-dollar science project. There are fundamental problems: The handset is big, the service is expensive, and the customers haven’t really been identified“)
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09.28.10
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 10:36 am by timfarrar
Back in August, it looked very much like TerreStar was poised to file for bankruptcy, using a large DIP facility of $200M+ to fund the company for the next several years while it attempted to build a satellite roaming business. Harbinger indicated at the time that it believed a bankrupt TerreStar’s spectrum was worth $1.5B to $2B. This suggests that (as we speculated) the plan may well have been to cram-up the ~$1B of first lien debt that is outstanding at TerreStar Networks. However, it appears that Blackstone was unsuccessful in finding takers for that financing, and so the question arises as to what is now their Plan B for TerreStar.
In TerreStar’s 2010Q2 10-Q, filed in early August, the company stated that “there is substantial doubt that the available cash balance, investments and available borrowing capacity as of June 30, 2010 will be sufficient to satisfy the projected funding needs for third quarter of 2010″ and yet we are now at the end of the third quarter and there has been no bankruptcy filing. AT&T also announced the commercial release of the Genus phone last week. Some have therefore suggested that this means TerreStar is likely to avoid bankruptcy, because AT&T would not have gone to market with the phone immediately prior to a bankruptcy filing.
Of course, if TerreStar had actually secured further investments, these would have to have been disclosed in an 8-K filing, but it is certainly clear the company has managed to make its cash resources last longer than it previously expected. One possibility is that AT&T paid upfront for the Genus phones it is selling, which would have provided some cash for TerreStar without the need for a public filing. It would also explain why AT&T is keen to move ahead with the commercial launch if it now owns several tens of thousands of Genus phones.
UPDATE: According to documents filed in the TerreStar bankruptcy proceeding, Echostar and Harbinger allowed TerreStar to draw a further $10M from the Purchase Money Credit Facility, and agreed to waive any claims of potential default. However, given that the bankruptcy documents show only a few hundred thousand dollars of expected receipts for TerreStar from phone sales by the end of the year, it still appears possible that either AT&T may have paid upfront for the phones it expects to sell, or (perhaps more likely) Elektrobit has been left holding the bag, given the substantial losses it expects to book on its TerreStar receivables.
However, TerreStar obviously also needs to raise further funds to cover its ongoing operating expenses. It has a window of time until August 2011 when no cash interest is due on TerreStar Networks’ first lien debt, and so it appears plausible that raising say $50M+ at TerreStar Corporation (presumably against the security of the 1.4GHz spectrum) would be (barely) sufficient to see the company through to next August, when the outcome of the FCC’s MSS NPRM/NOI should be clearer.
This might well still require a bankruptcy filing by TerreStar Corporation (depending on what happens with the outstanding $408M of Preferred Stock, since the company has certain obligations to redeem the Preferred Stock if it has more than $10M in available funds), but we assume that Blackstone might conceivably look to keep the TerreStar Networks subsidiary out of bankruptcy (assuming this is permitted by the cross-default provisions on the first lien debt) and thereby enable TerreStar Corporation to retain its shareholding in TerreStar Networks.
Then, if it turned out that the FCC’s NPRM allowed the 2GHz satellite spectrum to be monetized for more than the value of the outstanding first lien debt (something we regard as unlikely), the proceeds could potentially flow to the owners of TerreStar Corporation (although it is implausible that an auction could occur by August 2011 so there would certainly still be significant arguments about the value of this spectrum). In addition, this outcome would ensure that TerreStar’s 2GHz spectrum is not on the market as an alternative to LightSquared, while Harbinger seeks to secure partners for its LTE network buildout over the next 9 months.
UPDATE: From the TerreStar bankruptcy filings, it does not appear that the approach we speculated about would have been feasible, presumably at least in part because it was not possible to raise money against the security of the 1.4GHz spectrum, and in the last few weeks the alternative plan to accepting a deal with Echostar was to try and prime the first lien debt which Echostar controlled at TerreStar Networks. However, in the end TerreStar has had to take a $75M DIP from Echostar and agree to the restructuring plan which Echostar proposed.
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09.14.10
Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 9:54 pm by timfarrar
The FCC today released its ruling denying Globalstar’s request for a postponement of the deadlines in its ATC license, which required launch of its second generation satellites by July 1, 2010 and provision of two-way service to its ATC terminals by July 1, 2011. The FCC has granted Open Range a temporary waiver, which basically gives it 60 days to make other spectrum arrangements or its network will be shut down.
This ruling comes as quite a shock to most observers, because it was assumed that the FCC was contemplating providing more flexibility to MSS-ATC licensees after release of its recent NPRM/NOI. However, as we argued at the time, the contents of the NPRM/NOI were actually something of a disappointment to those expecting such liberalization, because the emphasis was on reallocation of the 2GHz spectrum for terrestrial use, with incentive auctions or other mechanisms used to ensure that the government receives “appropriate compensation for the step up in value” that would occur if the existing ATC restrictions were removed in that band. In that context, as we suggested, it would be hard for the FCC to provide further flexibility to ATC licensees in other bands (i.e. LightSquared and Globalstar) with no offsetting “compensation”. Nevertheless, we had still expected that Globalstar might be granted its requested waivers, because LightSquared had achieved the ATC license modifications it desired back in March.
However, now that the FCC has taken a hard line with Globalstar, it raises the question not only of what Open Range will do next for spectrum, but whether any future inability to meet license conditions will place other ATC licenses (and the associated spectrum assets) at risk. Notably, observers will presumably begin to wonder what will result from the proceeding relating to the reimbursement claimed by Sprint from DBSD and TerreStar for clearing the 2GHz spectrum band (estimated by Sprint at $100M+ per operator), compliance with the outcome of which was a condition of TerreStar’s ATC license grant back in January. Though DBSD has sought to avoid these costs through its bankruptcy filing, it is less certain that TerreStar would be able to do likewise. TerreStar has also recently requested certain waivers of the ATC base station and terminal requirements from the FCC. In addition, it is quite possible that there may be requests by Harbinger to extend the very aggressive terrestrial deployment deadlines associated with the LightSquared network at some point in the future, and in the near term, LightSquared recently delayed the launch of its first next generation satellite to December 2010, which will also require a waiver from the FCC, and questions are sure to be raised about whether this delay was solely attributable to technical problems.
With comments due in response to the July 2010 NPRM/NOI tomorrow, it is likely that a lot of last minute redrafting of submissions is going on tonight, so it will be interesting to see whether any of these issues are raised either by the satellite companies themselves, or by terrestrial wireless interests encouraging the FCC to continue to take a hard line on ATC.
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08.31.10
Posted in Financials, LightSquared, Operators, Regulatory, TerreStar at 10:50 am by timfarrar
In early August, LightSquared announced an agreement with Airspan Networks, under which Airspan will “exclusively market LightSquared’s 1.4 GHz wireless spectrum” to the utilities industry as “a comprehensive solution for Smart Grid and Smart Utility applications”.
The spectrum will be managed by Airspan and used in conjunction with “Airspan’s proven, reliable and robust broadband and next generation 4G products”. Notably, Airspan’s products appear to be WiMAX-based, so it appears that any buildout by Airspan in the 1.4GHz band will now be totally decoupled from LightSquared’s nationwide LTE-based ATC network deployment, and will instead depend on the individual contracts that Airspan is able to secure with “utilities in their distinct geographic markets”.
Financial details of how this exclusive agreement will work have not been released, although Harbinger/LightSquared has committed to pay TerreStar $2M per month to lease the spectrum, with an option to buy the spectrum for up to $250M. However, it seems unlikely that Airspan would have the resources to take over these lease payments, as according to SEC filings, Airspan’s revenues declined to $70M in 2008, with an annual loss of $50M, before the company was delisted.
This means that any utility that would contemplate a deal with Airspan faces considerable uncertainty about whether it can rely on the spectrum being available for the long term (given that the lifetime of any Smart Grid solution would be a decade or more). Not only is TerreStar (the ultimate owner of the spectrum) in financial difficulties, but the prospects for LightSquared are also hard to determine. In addition, Airspan has clearly been experiencing financial challenges, given its history of losses and declining revenues, and the future of its WiMAX technology is therefore somewhat uncertain. One contact of ours, who has been looking to acquire spectrum for wireless backhaul, suggested that these complexities would make it very hard to consider partnering with Airspan at this point in time.
As a result, it is unclear how much if any revenues will flow from the LightSquared-Airspan agreement, and the valuation that can be attributed to the 8MHz of 1.4GHz spectrum (and will need to be assessed if TerreStar files for bankruptcy) is similarly difficult to establish. In this context, the history of the 1.4GHz spectrum is quite interesting. It was originally auctioned by the FCC in Auction 69 in Feb/Mar 2007 for a total of $123.6M, with half the spectrum acquired by Echostar (through Port LLC) and half the spectrum acquired by CCTV Wireless (backed by Columbia Capital). In spring 2008, TerreStar purchased Echostar’s share of the 1.4GHz spectrum in exchange for 30M shares of common stock (valued then at ~$140M), while Harbinger bought the remaining 1.4GHz spectrum from CCTV Wireless for $212.5M, before contributing the spectrum to TerreStar in exchange for non-voting Junior Preferred Shares convertible into 30M share of common stock. Jefferies provided a fairness opinion at that time, and TerreStar suggested that the spectrum could be used in combination with its satellite spectrum “to service projected demand in the machine-to-machine market” and that it contemplated using the 1.4GHz spectrum “to enter the emerging femtocell market by alleviating spectrum interference issues”.
Subsequently in September 2009, Harbinger agreed to lease the 1.4GHz spectrum from TerreStar for an initial amount of $1M per month, increasing to $2M per month in June 2010. Harbinger could purchase the spectrum initially for $150M, later increasing to $250M, with credit for 50% of lease payments and with 40% of the purchase price paid in TerreStar debt or preferred stock. The agreement also contemplated pairing the 1.4GHz spectrum with other spectrum (the details of which were not specified in the publicly filed version of the agreement), although it is not clear that permission was ever sought from the FCC for such a change.
Presumably such a change would have made the spectrum more useful for LightSquared’s LTE network, but the agreement with Airspan appears to indicate that LightSquared now no longer plans to use the 1.4GHz spectrum itself. This leaves LightSquared with 5MHz of terrestrial-only spectrum between 1670 and 1675MHz, plus rights to use up to 46MHz of L-band satellite spectrum through agreements with Inmarsat. LightSquared has also stated its intention to offer terrestrial-only devices using its terrestrial spectrum. While this could simply refer to Airspan’s network in the 1.4GHz spectrum, it seems more reasonable to assume that this comment was intended to refer to the 1670-75MHz spectrum. Will LightSquared therefore be deploying a 5MHz TDD LTE channel in this band to complement the 5x5MHz FDD LTE channels being used in the L-band satellite spectrum?
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08.23.10
Posted in Financials, Handheld, ICO/DBSD, LightSquared, Operators, Regulatory, Services, Spectrum, TerreStar at 12:09 pm by timfarrar
That’s the big question facing TerreStar and its investors, as the company moves towards a bankruptcy filing which we assume will come in the next week or so. TerreStar Networks has a very substantial amount of debt secured against its in-orbit satellite and 2GHz spectrum assets, with $857M of 15% Secured Notes and $109M of 6.5% Exchangeable Notes outstanding at June 30, 2010 according to TerreStar’s latest 10-Q.
TerreStar stated in the 10-Q that it had “commenced restructuring discussions with certain holders of our 15% Secured Notes and 6.5% Exchangeable Notes”. However, if these discussions are not successful, and TerreStar and its advisers want to argue that the satellite spectrum is worth considerably more than the outstanding first lien debt, then it is possible that they could try to keep this debt in place and raise DIP funding based on TerreStar’s other assets, such as its 1.4GHz spectrum and the ground spare satellite (which is encumbered by a separate $73M Purchase Money Credit Facility).
The result would likely be a dispute in bankruptcy court over whether it is better to halt TerreStar’s plans to launch commercial service, and sell off its satellite and spectrum assets in the near future (e.g. if the current FCC proceeding permits incentive auctions for the 2GHz MSS spectrum), or to keep the company afloat and moving forward with the launch of the Genus phone, which was recently postponed until September. Of course the second option would require considerably more funding to be made available, and it is extremely questionable whether a feasible business plan could be developed to justify commercial launch of the Genus phone. In our profile of TerreStar, published back in January 2010, we estimated that the handheld Genus phone could generate perhaps $25M in wholesale service revenues by 2014, but after trying out the phone in March, we scaled back our expectations.
It may also be difficult to argue that TerreStar’s in-orbit satellite and spectrum is worth significantly in excess of the $966M of outstanding Secured and Exchangeable Notes, when a judge found in the DBSD bankruptcy case last fall that DBSD (with a satellite in orbit and having chosen its 20MHz of spectrum ahead of TerreStar) should be valued at $492M to $692M.
It is far from clear that either DBSD or TerreStar are better positioned than they were last year to secure a strategic partner (such as a wireless operator) who is prepared to fund the rollout of a multi-billion dollar terrestrial ATC network. Indeed, given the recent decision of Harbinger to go it alone with a wholesale approach for LightSquared, major wireless operators have to date proved unwilling to invest on the basis of the ATC model and associated satellite spectrum (despite five years of trying on the part of SkyTerra, ICO/DBSD and TerreStar).
The FCC’s recent NPRM could potentially enable the 2GHz MSS operators to monetize their spectrum via an incentive auction or similar mechanism once the proceeding is completed in 2011, which does represent a change from last year, but the FCC has also emphasized that it will need to receive compensation for the step-up in value accruing from removal of the current ATC rules in the 2GHz MSS band. If the proceeds of an incentive auction were shared 50/50 between the current spectrum holders and the government, as appears plausible, then (taking into account the delay before an auction could take place, most likely in 2012, and the need for additional funding in the interim) such an auction would need to raise close to $0.50 per MHzPOP in order to repay the Secured and Exchangeable Notes.
Although such a valuation is similar to those mooted by Clearwire and Credit Suisse in recent months, the FCC’s interests are not necessarily supportive of increasing spectrum valuations, and the balance between potential buyers and sellers of spectrum is significantly different to that back in 2006, when the AWS auction raised an average of $0.54 per MHzPOP.
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07.17.10
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 7:17 am by timfarrar
The FCC’s NPRM/NOI issued on Thursday clearly indicates that we are approaching the point where the 2GHz band will be redesignated for terrestrial-only use, with the ATC rules abandoned, and some form of compensation paid (to the government) for the step-up in value accruing to the current 2GHz spectrum holders. It also looks quite possible that any attempts to offer MSS services in those bands could be discontinued, despite the $1.5B spent to date on satellites by DBSD and TerreStar. Ironically, this comes at a time when the only real barriers to ATC deployment are economic and financial, rather than technical.
Even more significantly, the Wall St Journal is reporting that Harbinger is now seeking a $400M debt investment “to keep the [SkyTerra MSS-ATC] project moving forward” and “pay off debt coming due in the months ahead and other expenses related to the wireless plan”. This is a dramatic turnaround from the $1B to $2B of equity and bank financing that Harbinger was reported to be seeking back in April.
SkyTerra has numerous expenses coming due in the months ahead, according to its 2009 10-K, including $120M of vendor notes payable to Boeing, for which the principal is “due in full in December 2010″. Other items listed include the senior secured discount notes (cash pay from October 2010), and various other amounts related to next generation network construction, satellite launch services, and the “chipset, device and satellite base station subsystem” (which totalled an expected $150M during 2010, though could presumably be cut back). According to SkyTerra’s 2009Q4 results presentation in March 2010, the company also estimated it will need to pay $70M for insuring the SkyTerra-1 satellite launch (which is currently scheduled for August 17).
Given these expenses, $400M of new debt wouldn’t provide much money to pay for any large scale terrestrial network deployment. More to the point, will Harbinger be able to continue to fund TerreStar, which has been costing about $10M per month to keep afloat, in addition to SkyTerra (note that SkyTerra’s existing funds were used for the most recent injection of $40M into TerreStar via a “Satellite Minutes Agreement”)? I’m sure we will see the answers to that question very soon, given that Harbinger’s current 90 day exclusivity agreement with TerreStar (signed on May 6) expires on August 4.
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