Many epitaphs are being written today, and perhaps even a few pitches for book deals, bringing back memories of my comments to Bethany McLean for her Vanity Fair article two years ago. However, some apparently think the LightSquared saga has a few more chapters to be written, after Chairman Genachowski’s comments yesterday that “he expects LightSquared Inc. to eventually win approval for using its airwaves”. Since I actually asked him the question that prompted this statement (at the Jefferies conference) about what lessons he took from the LightSquared debacle (a characterization he disputed), I thought it would be useful to set the comment in context.
It was prefaced by the statement that Genachowski believed all satellite and broadcast spectrum was underused and should be reallocated for flexible terrestrial mobile broadband use, to meet the “obvious” spectrum crisis, and because of this “crisis” the L-band spectrum was “too valuable to be left unused”. Of course, he didn’t state any timeframe for action, and acknowledged that it was not possible to use the L-band spectrum without new receiver standards or similar changes to protect GPS (which will take years).
Recent actions, such as tomorrow’s NPRM on Qualcomm’s plan to use Ku-band satellite spectrum for Air-To-Ground communications and the effort to allocate C-band spectrum for small cells certainly bear out Genachowski’s lack of regard for satellite services, and so its not surprising that Globalstar has been urging him in recent days to move forward with an NPRM on its TLPS plan “prior to the Chairman’s expected departure later this month”.
In contrast, observers I’ve spoken with expect his successor, Tom Wheeler, to have a keen appreciation of the challenges associated with reallocation of spectrum, by virtue of his chairmanship of the FCC’s Technological Advisory Committee (whose February 2013 white paper on harm claim thresholds notably didn’t even mention attempting to solve the LightSquared/GPS conflict). I’m also told that given the battle that will take place with the DoD over gaining access to the 1755-80MHz spectrum for an auction next year, it is highly unlikely to be worth extending this fight to cover LightSquared/GPS as well.
So why was Sound Point, which is widely believed to be backed by Charlie Ergen, buying up LightSquared’s debt and preferred shares last month? After 3 days of meetings with dozens of investors in New York this week, I’ve been refining my view of Ergen’s plan for Sprint, Clearwire, LightSquared etc and will shortly be issuing the next update to last week’s report on DISH’s wireless ambitions. On the LightSquared front, what has emerged is that Sound Point has now acquired the majority of LightSquared’s Term Loan debt, and there appears to be reasonably wide consensus that both Ergen and Carlos Slim are backing Sound Point. I’ve also concluded that the near term focus is likely to be on the leverage that gaining control of LightSquared would give Slim to get a Mexican broadcast license, as part of a settlement with the Mexican government to resolve the dispute over spectrum allocation for MEXSAT. That could provide a windfall for Slim (and DISH Mexico) that is worth far more than the $600M-$700M that Sound Point has paid for what is likely to be a controlling stake in a reorganized LightSquared.
In those circumstances, there would be little point in Sound Point offering to buy out the rest of the term loan holders, and instead a debt for equity conversion of the LP Term Loan seems much more plausible. That would leave the remaining Term Loan holders with illiquid equity in an entity with only a very long term possibility of owning valuable spectrum (assuming that any further payments to Inmarsat can be deferred indefinitely until terrestrial usage rights can be established in the L-band) and perhaps some optionality based on future litigation. That might come as a big shock to those who believe that the only outcome is that the Term Loan will get taken out at par plus accrued interest, because of how important LightSquared’s spectrum assets are to Ergen!
Softbank has been downplaying the prospects of an increase in its bid for Clearwire, and my guess is that it will be prepared to let Sprint’s current bid be rejected in the May 21 vote, because its hard to see Clearwire’s shareholders approving a deal with Sprint with only a modest bump in the price (say to match DISH’s $3.30 offer). Then the question is whether Sprint (and SoftBank) would allow Clearwire to sell DISH the 40MHz of 2.5GHz spectrum that DISH has been seeking (with the likelihood that Ergen might then withdraw his bid for Sprint)?
Tonight an analyst report from Macquarie is speculating that DISH will instead team up with American Movil and bid for LightSquared, as an alternative to Clearwire (whose spectrum could then be sold to Verizon). While a partnership between Ergen and Slim is plausible (and indeed is something I’ve been writing about for the last year), using LightSquared’s spectrum as an alternative to Clearwire makes little sense (even if Verizon was able to buy all of Clearwire’s spectrum, which of course it can’t because the BRS spectrum is counted in the spectrum screen). Strangely, Macquarie thinks DISH could get 20MHz of uplink and 10MHz of downlink spectrum from LightSquared, but the 1675-80MHz spectrum won’t be allocated until 2017, and even if it were available, only 10MHz of downlink spectrum would be insufficient for DISH’s plans.
Our report on DISH sorts through the options for DISH, and discusses the reality of what can be done with LightSquared’s spectrum. We also consider the relative advantages of DISH and SoftBank’s plans for Clearwire’s spectrum. In particular, we consider one question that appears to have escaped all of the analysts looking at this situation: what is the value of DISH’s 14M potential cellsites?
If you’ve been wondering what I’ve been up to for the last couple of weeks (like Phil), I’m pleased to announce that I’ve been hard at work on a new report, released today, on DISH’s bid for Sprint, which discusses DISH’s plans, alternatives and the most likely outcomes from the battle with SoftBank. You can also read some of my thoughts in a GigaOm article (though its not very accurately titled – that wasn’t my choice) or listen to my interview on CNBC last week.
If you are interested in getting a copy of the report, and discussing my conclusions, then an order form and report summary can be found here or please email me for more details. If you’d like to meet in person, then do get in touch: I’ll be in New York next week from May 7-9, on a panel session discussing “Wifi – Friend or Foe of the Mobile Network?” at the Jefferies TMT conference (May 8th) and then at CTIA in Las Vegas from May 21-22, speaking at a Tower and Small Cell Summit panel on “Spectrum Acquisitions and Their Impact on Cell Towers” (May 21st).
UPDATE: A few early comments on the report:
“It was excellent; a really deep analysis. I cannot fault your conclusions and I actually learnt a lot from reading it.” Wireless company CEO
“Read your report this morning. It’s very good…I think your ideas are dead on” National tech reporter
The FCC’s proposed FY2014 budget, released on Wednesday, now appears to have sounded the death knell for LightSquared’s September 2012 spectrum swap proposal, that it should be granted access to the 1675-80MHz band, in exchange for giving up “rights” to deploy a terrestrial network in the 1545-55MHz downlink part of the L-band. Instead, the budget proposes that NOAA’s radiosondes should be relocated (presumably to the 400-406MHz band which is also used by weather balloons) and that the 1675-80MHz should then be repurposed using “either auction or fee authority” in 2017 to raise $230M.
This news seems to confirm what happened at the February 20 meeting between the FCC and LightSquared’s lawyers, is that the FCC told Latham & Watkins that they were going to propose reallocation of the 1675-80MHz spectrum for commercial use, but would deny the requested spectrum “swap”, so LightSquared would have to bid in an auction just like anyone else. Although the FCC has not yet issued a ruling (perhaps to avoid tarnishing Chairman Genachowski’s recent speeches about his legacy), release of an order may now be quite close, given the public disclosure of the FCC’s intentions in this week’s budget document.
In a statement to Communications Daily (who first reported this issue), LightSquared continued its usual practice of pretending that all is well, asserting that “What happened today is certainly consistent with our filings” because there would be costs associated with any “sharing agreement”. However, even if LightSquared did pay $230M for the spectrum (and I find it hard to conceive that the FCC would simply award the spectrum to LightSquared if other operators want to bid on it at auction), the 2017 allocation date is obviously far too late for LightSquared to proceed with its fantasy of an LTE network buildout.
UPDATE 3 (4/13): LightSquared’s ex parte for an April 3 meeting with Commissioner Pai indicates a different (and more telling) story, going back to LightSquared’s generic appeals from 12 months ago about the “compelling need to find spectrum-based, technical, legal, or other solutions to the current issues” and abandoning the 1675-80MHz proposed “swap”. Notably, this ex parte was not even filed in IB Docket 12-340, relating to LightSquared’s September 2012 request to modify its ATC Authorization, which would have been required if the 1675-80MHz “swap” was part of this discusssion. Instead LightSquared is now apparently going back to its demand for “regulatory approvals” to move forward with its original L-band plan and threatening legal action if that is not forthcoming.
Given the Mexican coordination issues, the implausibility of LightSquared gaining any more spectrum for free, and the potential costs for continuing LightSquared’s Cooperation Agreement with Inmarsat after March 2014, its fascinating to see how much excitement has built in the distressed debt community in the wake of the WSJ’s report last week that Sound Point had been buying up LightSquared’s debt and preferred stock. That is despite the fact that several large holders in the Ad Hoc Secured Group (not just Fortress) have now exited their positions.
I’m told that a target valuation of 130 cents on the dollar for LightSquared’s LP Term Loan debt is now being floated by some people, based on an assumption that Ergen would convert the secured debt to equity. Even if one believes that Ergen will get involved (as opposed to using LightSquared as a bluff to secure a deal with T-Mobile, MetroPCS, CLWR or Sprint), then that seems excessive, given that buying out the TL debt at par plus accrued interest would only give a valuation of 115 cents on the dollar at present, and any bankruptcy auction will presumably look a lot like TerreStar, where DISH bid just enough to buy out the secured debt (including Echostar’s holdings) at par, just as DISH would presumably buy out Sound Point and other holders for cash at par in a LightSquared auction.
After all, DISH has $10B in cash, and potentially not much to spend it on right now. Any DISH deal with T-Mobile would most likely have come before the recent price adjustment to TMO’s MetroPCS bid (not least because it would have made it more difficult for Paulson and PSAM to hold out for alternative suitors), and a counterbid for MetroPCS is harder now that MetroPCS’s stock price has risen. Similarly, a potential deal with Clearwire seems to be slipping away, as it takes more money from Sprint, despite the efforts of Crest to block Sprint’s bid.
What would be the form of a DISH deal with TMO? The four possibilities are:
a) a joint venture (like Clearwire) which wholesales capacity to DISH, TMO and potentially other players
b) a hosting agreement (like Sprint and LightSquared) with TMO taking payment in the form of capacity
c) an investment by DISH in T-Mobile (like Softbank and Sprint) through the contribution of cash and spectrum in exchange for a majority equity stake
d) a full merger of DISH and T-Mobile.
Of these, I think the first can be ruled out, for the same reasons that Clearwire has had so many problems: TMO would take most of the capacity, so would have too much influence, and it would have an incentive to only use the JV capacity after exhausting its own resources. The second can also potentially be ruled out, simply because the deal would have to be more advantageous to DISH than the LightSquared-Sprint agreement: TMO would cover most of the costs and take payment in capacity, not cash, and then DISH wouldn’t need $10B in cash. The fourth option is probably also less appealing (as DISH has hinted previously), because DT might insist that Ergen gives up the dual class share structure which gives him tight control over DISH, and the synergies between DISH’s satellite TV business and T-Mobile’s wireless business are far less compelling than a merger between DISH and AT&T (with its fixed line and U-verse business) would have been. If DISH stays as a separate company then a merger with DirecTV also remains a possibility, perhaps with DISH’s T-Mobile stake being spun off to Ergen if DirecTV buys out DISH.
So the third option sounds like the most plausible, and the question is whether Ergen can purchase a majority stake in a merged T-Mobile/MetroPCS in exchange for $10B in cash and potentially $8B to $10B in contributed spectrum value. This becomes a harder task after the MetroPCS merger goes through and the merged company has a larger enterprise value (estimated at $28B-$30B by BTIG). However, depending on the remaining debt load after DISH’s investment, it still seems like a reasonable objective. Having a public market valuation for T-Mobile also makes DT’s decision about what share of the company DISH would receive a lot more transparent.
Of course, this new development also makes it rather more reasonable to regard a potential DISH bid for LightSquared as another bluff by Ergen, or at the very least a far less attractive fallback option (and if you think a deal might still be done with LightSquared as well as T-Mobile, note that DT is currently embroiled in its own LightSquared-like ATC scandal in India, with some of the original SkyTerra investors). It also confirms that DISH has moved on from its interest in Clearwire, and will most likely just look to cash in its sizeable profits (of up to $300M) on Clearwire’s debt when the Sprint merger eventually goes through.
UPDATE 2 (4/12): Clearwire has filed a proxy statement this evening, noting that it was approached by Party J, a strategic (i.e. non-financial) buyer, earlier this week with an offer to buy 5B MHzPOPs “in large markets” for $1.0B-$1.5B minus the NPV of the associated lease payments. Given the NPV of Clearwire’s lease payments is $1.8B of which I’d guess at least two-thirds is in large markets, and 5B MHz POPs would be around half of the leased spectrum in these markets (assuming this is the top 100M POPs in the US), that would mean a deduction of $600M or more, leaving a net price of ~$400M-$900M.
Walt Piecyk at BTIG thinks that Party J might be Ergen once again and I tend to agree (perhaps this approach is through Echostar?). It would fit with the move on LightSquared last week as another effort to establish a potential backup to T-Mobile, by persuading Clearwire stakeholders to hold out for more money and reject the Sprint bid. Clearwire seems to be hinting that it will file for bankruptcy on June 1 if the Sprint bid is rejected and that would also provide Ergen with far more options in the event that he can’t pull off a deal with T-Mobile, because of his substantial holdings of Clearwire debt. However, given the difficult relationship between Sprint and DISH and the numerous challenges associated with LightSquared, both look far less attractive options than a deal with DT for DISH to invest in T-Mobile.
No I’m not talking about Intelsat’s current IPO! Although some might raise questions about the company’s debt levels, its also pretty clear that Intelsat’s mobility strategy and its high throughput Epic satellites are the envy of its FSS competitors. What I’m actually referring to is Row44, which went public at the end of January through a merger with Global Eagle, which had raised $190M in a blank check IPO. The end of year results from Row44 and Global Eagle have gone completed unreported, but were filed with the SEC last month, and highlighted just what a disastrous business Row44 really is.
In particular, as installations of the Southwest fleet neared completion, Row44′s revenues in Q4 dropped by 27% compared to Q3 (from $20.1M to $14.8M). Moreover, Row44 only generated total Internet connectivity revenues of $11.4M in 2012 while spending $19.6M on buying bandwidth from Hughes, and produced no revenues from its much ballyhooed content and portal services (despite spending $1.9M on video licensing fees).
In 2013, Row44′s satellite connectivity commitment to Hughes will go up to a minimum of $28M (and more likely well over $30M, because of additional commitments made in early 2013 to add coverage in Russia, and additional trans-Pacific coverage planned later this year). Row44 has also changed its deal with Southwest, so it now only receives fees for passengers using connectivity (between $5 and $6 per user, while Southwest charges $8 for the service), rather than Southwest paying for every boarded passenger under the original agreement, and as part of the new contract, Row44 is adding more capacity, apparently to counter passenger complaints about “slow or restricted services”.
At an investor conference on March 13, Global Eagle’s CFO suggested that paid take rates for other providers “range from high single digits to high teens” and that inferences could be drawn from that for Row44′s take rates on Southwest. Of course that is completely untrue: take rates for Gogo are around 5%, and Global Eagle itself said back in November that the targeted take rate on Southwest was 6.5% in 2014, so its hardly likely that the take rate is higher than that today. I therefore have to wonder if Global Eagle’s CFO actually understands this business at all.
Indeed, the company seems to have a hard time predicting the outlook for its business even in the very short term: this March 13 presentation indicated that the 2012 adjusted EBITDA from Row44 and AIA respectively was -$26M and +$18M respectively, whereas on November 27, 2012, with just one month left in the year, Global Eagle forecast that the full year adjusted EBITDA results for Row44 and AIA would be -$25M and +$22.3M respectively.
If we look forward to 2013, then it seems certain that Row44′s revenues will decline sharply, because of the slowdown in equipment installations (from $61M of equipment revenues in 2012 to ~$35M in 2013, and potentially to only $20M in 2014, based on Row44′s current business plan). More importantly, the company is set to make another significant loss on provision of connectivity services: I estimate $20M-$25M in revenues, depending on the take rates that Southwest achieves, compared to connectivity costs of well over $30M and more likely close to $40M (just in payments to Hughes, ignoring Row44′s own operational costs). In addition, content revenue is still minimal (Global Eagle described the product as “brand new” in mid March), with a very limited selection available, and by my estimate content and portal revenues will be no more than ~$5M this year.
In the longer term, Row44′s new deal with Southwest has locked the airline into a deeply unfavorable competitive position vis-a-vis JetBlue, who intend to offer Internet access for free. Southwest can’t possibly do the same, if they have to pay Row44 at least $5 for every passenger who uses the service, despite the two airlines competing very actively on other passenger amenities (like free checked bags). Moreover, if Row44 is ever to break even, it may have to cut back on the amount of capacity it buys from Hughes (rather than boosting capacity as Southwest currently plans), making Southwest’s Internet service even less attractive compared to JetBlue, which uses much cheaper Ka-band capacity.
In recent days, we’ve seen yet another report predicting rapid growth for in-flight connectivity deployment and revenues. However, none of these reports have got to grips with the issue of what services can be profitable for providers but still affordable for the airlines. Of course, if there’s one lesson to be learned from the Connexion-by-Boeing debacle, its that you can’t just assume companies will be able to continue providing service at an enormous loss indefinitely. After scraping through 2012, raising money at effective interest rates of up to 421%, Row44 has escaped for the time being by capturing Global Eagle’s cash balance. Perhaps unsurprisingly, given its management’s apparently tenuous connection to reality, Global Eagle now intends to “use its balance sheet” to pursue consolidation of the in-flight connectivity business, which might provide some relief from Row44′s current unsustainable business model, but on the other hand may simply drag down other companies in the sector.
We’ll be publishing our own detailed report on the in-flight connectivity business next month, which takes a very different approach to the analyses we’ve seen so far: instead of simply projecting how many planes might be fitted out with each technology, we’ll look at both the revenue and cost base of the various IFC providers, and discuss which of them may be able to find a sustainable long term business model.
That’s an interesting question after the WSJ reported yesterday that Sound Point had now acquired over $600M of LightSquared’s $1.7B LP secured debt. Speculation has been rampant once again that Ergen is behind this move, which involved buying all of Fortress’s $161M of LP secured debt (as the WSJ noted – indeed if Sound Point now owns over $600M of secured debt, then it must have bought around $100M of secured debt elsewhere in recent weeks, as Providence only owned $7.4M of this debt), but I was told also Fortress’s $87M and Providence’s $38M of LP Preferred Units. The secured debt was apparently bought at par, and the preferred units at 95 cents on the dollar, and assuming the Preferred units turn out to be the fulcrum security, this $125M will give the owner over 80% of the $164.6M that is outstanding in the LP Preferred class, and potential control over LightSquared’s bankruptcy reorganization plan.
Most people appear to believe that Ergen is behind Sound Point’s investment, despite the doubts that were expressed by people close to the situation last May. The fact that the deal was apparently struck immediately after the end of Q1 (and therefore any public company, such as DISH, would not have to reveal a substantial stake until the second quarter 10-Q in August) might support that possibility: although DISH could not hold the LightSquared LP debt itself due to limitations in the debt agreements (and therefore Sound Point would be the vehicle for this investment), Ergen might well decide to acquire the preferred stock through DISH, to give him a direct voice in proposing a bankruptcy reorganization plan after July 15.
However, it remains an intriguing question as to whether Carlos Slim has any involvement, given the challenging Mexican coordination issues facing LightSquared, which the company has reluctantly acknowledged by hiring a Mexican law firm this week to “ provide legal services with respect to LightSquared’s activities and/or negotiations in Mexico and with Mexican authorities”. After all, it hardly seems likely that Ergen would want to take on the major challenge of making LightSquared’s spectrum usable, without some sort of arrangement in Mexico, if a large part of the spectrum could soon be lost to the MEXSAT system.
Incidentally, further confirmation of LightSquared’s difficult February 20 meeting with the FCC has also emerged in the $271K invoice and February billing records submitted by Latham & Watkins a couple of weeks ago: there was no preparation for this meeting until the day of the meeting itself (implying that the lawyers were summoned by the FCC, rather than arranging the meeting on their own initiative), and the meeting was billed as related to ATC licensing, not to 1675-80MHz sharing issues (which was how LightSquared’s ex parte filing characterized the discussion). More importantly an associate was then immediately tasked to “research and analyze FCC opinions and orders related to the dismissal and withdrawal of applications at the request of applicants”, implying that LightSquared was so concerned about the possibility of an imminent rejection by the FCC that it contemplated pulling its September 2012 application. The lawyers then switched immediately to focus on “draft[ing] legislation” and “talking points regarding license mod advocacy” for LightSquared’s government relations team to push at “[Capitol] Hill meetings”. They also appeared to drop the analysis they had been working on with an “economist”, in favor of exploring the hiring of a new “consultant”, presumably to reflect their new emphasis on trying to go around the FCC.
Given all these issues, another possibility is that a further investment in LightSquared is a relatively cheap signal to T-Mobile that Ergen still has alternative ways forward to make his spectrum assets more valuable, even if the possibility of a deal with Clearwire seems to be fading. After all, as I wrote a couple of weeks ago, T-Mobile could secure a deal with DISH as a way to make it clear to MetroPCS shareholders that staying independent is not a good alternative to the T-Mobile merger. It certainly seemed that a DISH-TMO deal of some sort could be close at that point, but T-Mobile’s event the following week focused instead on its new no-contract pricing plans and initial LTE network launch.
However, after the recommendations by two proxy advisory firms that MetroPCS shareholders should reject the merger, T-Mobile is now considering whether to change the terms of the deal, and one way to do that might be to bring DISH into the picture. Certainly T-Mobile’s partnership offer to DISH ought now to be more attractive than it was a couple of weeks ago, but if it is still unacceptable to Ergen, I could envisage DISH making a bid for MetroPCS before the April 12 merger vote, using the $2.3B it raised this week. In that context, any takeover of LightSquared certainly ought to be seen as a fallback option for DISH, which need not even be considered until the situation with T-Mobile and MetroPCS has been resolved one way or another.
For the last week, since DirecTV’s bid for GVT fell through, rumors have been circulating about a potential merger between DirecTV and DISH. However, to me that seems rather implausible in the near term: while a merger might well be feasible from a regulatory perspective, there would almost certainly be months of jockeying for position in Brazil and elsewhere, before it became clear which of the two companies would be in the stronger position to dictate the terms of a merger.
Instead, if DISH isn’t to be left holding its spectrum assets for many years (with no potential buyer on the horizon, after AT&T and Verizon both declared they would not be buying any more spectrum outside of FCC auctions in the next few years), DISH now has to focus on trying to bring its spectrum plans to fruition in the immediate future. This means seeking either to block the Sprint-Clearwire deal (to gain leverage for a network sharing agreement with Sprint) or to do the same in the T-Mobile-MetroPCS deal, which is now set to close in the next few weeks, unless MetroPCS shareholders vote it down.
I suggested last month that if Clearwire drew down the funding line from Sprint at the end of February, then DISH might “potentially move on MetroPCS immediately thereafter”. While no public offer has emerged, in recent days DISH has sounded noticeably less enthusiastic about its prospects of blocking the Sprint-Clearwire merger (and note that DISH is likely to make a $250M-$300M profit on its investment in Clearwire simply by allowing Sprint’s deal to go through). It therefore seems to me that if DISH does emerge with a deal in the near future (which perhaps might have prompted the 5% rise in DISH’s stock price on Wednesday), then the only plausible possibility is that T-Mobile got worried that its MetroPCS merger would be voted down, and negotiated a network sharing deal behind the scenes with Charlie Ergen.
That would be a great move for T-Mobile, at one stroke removing both potential alternative merger partners for MetroPCS (by taking DISH off the table and ensuring that Sprint is tied up with its Clearwire merger) and also cementing its position as the wireless operator best able to offer large, low cost data packages for the foreseeable future. Of course it would also be disastrous for those hedge funds betting that they can force T-Mobile and Sprint to increase the financial consideration being offered for MetroPCS and Clearwire respectively.
What would such a deal look like? I would guess very much like DISH’s desired deal with Sprint, namely that T-Mobile hosts the DISH spectrum on its LTE network, while taking most if not all of the financial consideration in the form of capacity, providing DISH with a roaming deal plus up to half of the AWS-4 capacity to launch its own wireless services. A deal like that, with no spectrum actually changing hands, would provide no basis for further FCC review of the T-Mobile/MetroPCS transaction, so the perfect time to announce it would be in the next couple of days (now all approvals have been received), giving MetroPCS investors time to contemplate their fate ahead of the April 12 vote.
According to Wikipedia, “In financial circles, the Mexican standoff is typically used to connote a situation where one side wants something, a concession of some sort, and is offering nothing of value”. That’s presumably how the FCC feels about LightSquared’s request for a so-called spectrum “swap”, as I noted last month when the FCC’s General Counsel summoned LightSquared’s lawyers to tell them that there was no way LightSquared would get access to the 1675-80MHz band for free. LightSquared’s lawyers were forced to promise that the company would at least pay for relocation of NOAA’s radiosondes “consistent with the Commission’s emerging technology” doctrine.
The FCC must therefore have been even more annoyed when LightSquared followed up this meeting with a request for an STA to conduct four months of tests to examine radiosonde relocation, and essentially stated that NOAA should pay for the relocation itself. In particular LightSquared asserted that “continued use of this [1675-80MHz] band by radiosondes may not be compatible with the expected operation of the new GOES-R satellite system that is expected to be deployed in the next few years” and so “the modification of current radiosonde operations in and around the 1675-1680 MHz band…is required by the “downshift” of a portion of the GOES-R satellite downlink channels”. Given that NOAA has spent five years studying this “downshift” to free up the 1695-1710MHz band for auction (in that case to raise money for the government) and has never indicated that relocation of radiosondes out of the 1675-80MHz band is required by this downshift, that is quite a remarkable assertion for LightSquared to make, and is all but guaranteed to alienate NOAA as well.
As a result, a cynic might conclude that LightSquared’s attempt to obtain a four month testing window is intended to delay any negative ruling from the FCC until after LightSquared tries to convince the bankruptcy court that they are well positioned to secure the spectrum they need, and persuade the judge to allow them to cram down the LightSquared LP debtholders, on the grounds that Harbinger’s equity is supposedly still “in the money”. Indeed, the FCC may well be tempted to consent to LightSquared’s request, in order to push out any litigation beyond the end of Chairman Genachowski’s term in office.
However, there is yet another, potentially even more serious, Mexican issue looming on the horizon (which will quite possibly emerge before mid July), namely the MEXSAT-1 satellite that Boeing is constructing, which is scheduled for launch at the end of 2013 or early in 2014. As I noted in December 2010, when the MEXSAT order was placed, after the MEXSAT launch, LightSquared will no longer have “any authority to share spectrum with [Mexico's planned next generation] system in the absence of coordination”.
I’m informed that as part of this new coordination agreement, the Mexican government will now demand the right to use one third of all L-band spectrum in North America for the MEXSAT-1 and 2 satellites, based on Mexico’s huge $1B investment in this system. This amount (~22MHz in total) is of course far more than Mexico’s current allocation for its older satellites. However, LightSquared’s Cooperation Agreement with Inmarsat guarantees that Inmarsat will be held harmless from any future reallocation of spectrum to Mexico, and thus all of the additional spectrum demanded by the Mexicans would have to come out of LightSquared’s allocation. That quite possibly explains why Inmarsat wanted to keep the Cooperation Agreement in place last April, while suspending further payments by LightSquared for two years, because now Inmarsat won’t have to give up any spectrum at all to Mexico. It might also indicate why Carlos Slim was rumored to be interested in LightSquared, although given recent developments, Slim might now have bigger issues to worry about in Mexico.
UPDATE (3/21): Here is a description of the MEXSAT system, confirming that it will need at least 15.4MHz of L-band spectrum (2.2MHz per beam, 7 color re-use) to operate as designed.
LightSquared could potentially reject the Mexican request, which would result in a return to the status quo under the original Mexico City L-band coordination agreement from the late 1990s. However, then the L-band would be broken up into small chunks, with the Mexican spectrum (which is largely in the lower L-band where LightSquared wants to operate terrestrially) preventing LightSquared from gaining any contiguous 5MHz blocks of spectrum that could be used for an LTE network deployment. In adddition, LightSquared would have no right to generate any interference whatsoever into the Mexican system from its terrestrial operations.
In other words LightSquared’s L-band MSS spectrum assets now run the risk of either becoming either completely worthless or at the very least being significantly reduced, perhaps to as little as 10-15MHz in total (excluding the spectrum leased from Inmarsat). This of course makes it far less plausible that DISH would be willing to countenance using LightSquared’s spectrum (for uplinks) in conjunction with its own AWS-4 spectrum (for downlinks), as LightSquared’s debtholders hope. After all, harking back to another long ago post of mine, it seems DISH has a pretty good understanding about “which of DBSD/TerreStar, Clearwire and LightSquared” turned out to be “the good, the bad and the ugly”.
ADDENDUM (3/23): Apart from its spectrum, LightSquared’s other assets mainly consist of its two new satellites, SkyTerra-1 (in orbit) and SkyTerra-2 (still on the ground). Many assumed that the SkyTerra-2 could be sold to Boeing, for use in the MEXSAT program (since MEXSAT-1 and 2 are very similar to SkyTerra-1 and 2). However, I’m told that it is now far too late for that, as the MEXSAT-2 build is already well underway, and so it is likely to be even more difficult to raise money from the sale of LightSquared’s satellites.
Another option for LightSquared has always been its supposed litigation claims against the FCC. I understand that LightSquared believes it has some communications in its posession which would make this case a “slam dunk”, and so it expects to succeed in extracting concessions from the FCC, including the purported spectrum “swap”. However, note that the Mexican coordination is formally a government to government agreement (with the FCC at least in theory responsible for negotiating on behalf of LightSquared). Thus, I wonder how much leverage LightSquared currently has with the FCC, when a negative outcome (or simply no progress) from the coordination negotiations would likely ruin LightSquared’s prospects of deploying a terrestrial network in the L-band. In particular, LightSquared’s ATC licenses from the FCC could then potentially become useless, even without further action on the GPS-related issues, based on LightSquared’s acceptance of the FCC’s (separate) March 2010 Mexico re-use approvals. This might even provide a convenient way for the FCC to park the GPS issues, while completely avoiding any liability to LightSquared.
The question on everyone’s mind after DISH’s results call on Wednesday is of course “when will Charlie Ergen find a partner” to fulfill his wireless ambitions. Ergen was pretty clear that if DISH’s offer to buy spectrum from Clearwire succeeds then Sprint would be backed so far into a corner that it would be forced to partner with DISH (on Ergen’s terms). Conversely, if Sprint won its takeover bid for Clearwire then there is no way that DISH would accept Sprint’s terms for a partnership. The difference between DISH and Sprint’s positions appears to be that Sprint wants a LightSquared-like deal: a large cash payment for the network buildout, and Sprint having the option (but not the obligation) to buy capacity, whereas DISH wants Sprint to take its payment for a network sharing agreement solely in capacity, not in cash.
As an aside, its interesting to note that the relationship between Ergen and Hesse is obviously pretty poor: Sprint’s proxy for the Softbank deal notes that it was Keith Cowan who dealt with Ergen (Company Z) last summer, not Hesse. As a result, if Sprint did lose Clearwire’s spectrum to DISH, I wouldn’t be at all suprised to see the blame placed on Hesse, resulting in him leaving Sprint, and Masayoshi Son and Charlie Ergen could then work out a partnership between themselves.
If DISH’s bid for Clearwire fails, then DISH will at least have made an impressive profit on the deal: according to DISH’s 10-K, its holdings of Clearwire debt are now worth $951M, compared to an adjusted cost as of September 2012 of $745M. That is a profit of over $200M excluding the interest payment made in December 2012, which would have been at least another $50M (assuming the June interest payment is already included in the adjusted cost basis).
However, and more importantly, what is Ergen’s backup plan, if he simply takes his profits in Clearwire? If DISH wants to achieve a partnership this year, then the only realistic offer is to mount a counterbid for MetroPCS. Recall that DISH offered $11 per share for MetroPCS last summer (in parallel with DISH’s bid to buy spectrum from Clearwire) which was rejected as undervaluing the company. Given MetroPCS is now trading at only $10 per share, what does DISH have to lose by making a similar offer? At the very least that would force T-Mobile to the bargaining table, and DISH might be persuaded to withdraw its offer if T-Mobile offered an attractive network sharing deal. Indeed, if Clearwire’s special committee makes a decision next week to draw on the Sprint funding, I would expect DISH to potentially move on MetroPCS immediately thereafter.
If DISH doesn’t succeed with that gambit, then the timeline for a deal moves back at least until the end of this year or sometime next. LightSquared’s exclusivity in its bankruptcy case has been extended to July 15, but alternative offers can be made after that time, with a view to a resolution of the case before the end of this year. As I’ve noted before, if DISH takes a slightly longer time horizon, then a bid for LightSquared, and conversion of the 2GHz spectrum to downlink use would be an obvious value-enhancing maneuver. In addition, it would put DISH in a much better position to challenge Sprint in the auction for the H-block spectrum, which Sprint has admitted it needs to buy.
Finally, DISH’s ultimate fallback option may be to try and sell the spectrum to another company. However, AT&T appears well set for the next several years, having apparently decided not to pursue DISH when Ergen’s waiver request was denied by the FCC last spring. Verizon has also ruled itself out as a buyer and T-Mobile will be tied up integrating MetroPCS for some time (and after that acquisition will own more spectrum per subscriber than either AT&T or Verizon).
As a result, the timeline for that sale (at least if Ergen is to get an attractive price) may be pretty long, probably beyond the resolution of the broadcast incentive auction (scheduled for 2014) and perhaps even extending until after the 2016 Presidential election, if AT&T and Verizon are to be regarded as serious bidders, given the desire of the FCC to let Sprint and T-Mobile catch-up with their bigger rivals. That is even more likely to be the case if the recent slowdown in the growth of wireless data traffic prompts a reassessment of operators’ future spectrum needs and finally buries the supposed “spectrum crunch”.
As Inmarsat approaches its end of year results presentation, scheduled for March 7, the company’s stock price has been surging in the expectation of continued strong progress in the maritime market, which is likely to lead to full year wholesale MSS revenue growth for 2012 (excluding LightSquared payments) somewhat above Inmarsat’s 0%-2% target. This has been driven primarily by Inmarsat’s 2012 price rises, which have been so successful that Inmarsat announced further price rises of around 10% for E&E services last month.
I estimate that these new price rises could boost wholesale maritime revenues by a further $10M (roughly 3%) in 2013, on top of the pull-through from the mid year price rises in 2012, and as a result, it is plausible to imagine that Inmarsat’s wholesale MSS maritime revenues might rise by as much as 10% in 2013. Thus, unless there are severe cutbacks in government usage this year, overall revenue growth for 2013 may again come in quite a bit above the 0%-2% target. Our updated profile of Inmarsat provides full details of our forecasts by product, and will be released shortly.
That revenue upside perhaps explains why Inmarsat has become notably more aggressive in recent weeks, for example telling its sales team that commission will no longer be paid for selling Iridium products and services (historically Stratos has sold over $10M of Iridium equipment each year). In addition, the IS-27 launch failure appears to have given Inmarsat more confidence that potential partners will need GX for maritime and aeronautical services, rather than continuing to rely on Ku-band services in what may now become a capacity-constrained North Atlantic Ocean Region over the next couple of years.
One intriguing issue to watch in terms of Inmarsat’s relationships with its distributors is the ongoing dispute in Russia, where I’m told Morsviazsputnik has refused to pay for Inmarsat capacity for a substantial period of time (note that Inmarsat’s trade receivables have been increasing by about $10M per quarter during 2012, excluding LightSquared payments), unless all Inmarsat-equipped vessels going into Russian waters use a Russian SIM. This dispute has apparently extended to the Russians modifying their call routing gateway (which sends all traffic within 200 miles of Russian territory to an intercept point in Russia) to give them the ability to cut off the communications on foreign vessels. I’m told that in response Inmarsat has considered terminating the routing of traffic to the Russian intercept point, which would of course escalate the dispute even further and make it even more difficult to recover the withheld revenues.
Beyond this year, Inmarsat is guiding that its 8%-12% revenue growth in 2014-16 will be backend loaded, and so growth in 2014 will not need to increase sharply (which would be difficult prior to achieving global GX coverage). Indeed, a combination of continued price rises on L-band services and a release of some of the cash previously received from LightSquared (and never spent on installing filters) could help to meet expectations in the next few years, even if GX does not live up to Inmarsat’s projected $500M in wholesale revenue by 2019.
With respect to GX, I have been cautious about the $500M target because I have always assumed that maritime would account for the largest share of the GX business and it is very hard to see how Inmarsat could hope to generate $200M-$300M of wholesale maritime GX revenues by 2019, when Inmarsat itself estimates that only $145M was spent on maritime FSS space segment capacity in 2010.
However, I understand that Inmarsat is now suggesting that the GX government business will generate more revenue than the maritime market. Of course that is much harder to prove or disprove, especially as Inmarsat gave very little insight in the October 2012 investor day into whether the government business is expected to rely mainly on the dedicated HCO beams in military Ka-band frequencies or on the standard wide area coverage beams which only use civil Ka-band frequencies.
An additional GX question that may soon be answered is the potential for a fourth backup satellite to be ordered. Inmarsat certainly has ample justification for placing a near term order, given its reliance on Proton launchers for all three GX satellites, and the run of problems that Russian rockets have had in recent months. Although Inmarsat would presumably portray an order as a sign of increased confidence in the market for GX, this would also add up to $200M of additional capex to the $1.2B GX program, even if no commitment was made to a fourth satellite launch at this stage.
Given Inmarsat’s more assertive stance in the market, it will now be particularly interesting to see whether Inmarsat can persuade distributors to share its positive view of the overall GX opportunity, and make revenue commitments similar to the $500M that Intelsat has achieved from Caprock, MTN and Panasonic for its EPIC system. Time will tell, but at least so far, my assertion last October that we had reached a turning point in MSS history has come only partly true: while it certainly appears that the next few years will bring regular price rises, an improvement in Inmarsat’s relationships with its distributors still seems like a distant prospect.
