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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07.15.10
Posted in Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 10:15 am by timfarrar
At today’s FCC Commission meeting, the Commission began its proceeding “to spur mobile broadband investment in MSS bands”, which will take the form of a Notice of Proposed Rulemaking (NPRM) and a companion Notice of Inquiry (NOI). The NPRM and NOI have now been published along with a press release and accompanying statements from all five of the Commissioners.
The NPRM is focused on two issues: First, it proposes to add co-primary fixed and mobile allocations to the 2 GHz band. Second, it proposes to expand existing secondary market policies and rules to address transactions involving the use of MSS bands for terrestrial services. However, given that the Commission notes that the Globalstar-Open Range lease was already evaluated under this standard, this second issue is more of a streamlining matter than a substantive change in policy.
The NOI “requests comment on further steps the Commission can take to increase the value, utilization, innovation, and investment in MSS spectrum. It builds upon the proposals in the NPRM and addresses, in part, the recommendations of the National Broadband Plan for increasing terrestrial deployment in the MSS bands. The NOI inquires about ways to create opportunities for more expansive and efficient use of the 2 GHz band for stand-alone terrestrial uses. It also asks, if the value of the spectrum increases, what actions the Commission should take to further the overall public interest.
The NOI further requests comment on other ways to promote innovation and investment throughout all three of the MSS bands while also ensuring market-wide mobile satellite capability to serve important needs like disaster response and recovery efforts, rural access for consumers and businesses across America, and various government uses.”
Most of the NOI is focused on the 2GHz band, as I suggested last month, and suggests that either incentive auctions or a voluntary relinquishment of part of the spectrum would be means of providing appropriate compensation for the step up in value for the remaining spectrum. Of course, if part of the spectrum was relinquished, and the license for the remaining spectrum was still based on the MSS rules, it would quite possibly be necessary to continue to operate an MSS satellite. Such an outcome would almost certainly require a merger of DBSD and TerreStar (and disposal of two of their three satellites – 2 in-orbit and 1 ground spare), in order to reduce their satellite operating costs.
What the NOI doesn’t do is make specific proposals about relaxing the ATC rules in the Big LEO and L-bands, although it asks whether there are “any other actions that the Commission could take that would increase terrestrial use of the MSS bands”. To me, the tenor of the NPRM and NOI suggests that the FCC feels it has given ground to Harbinger (in approving the SkyTerra transaction and ATC modifications) and Globalstar (with what will presumably be a near term approval of its ATC waiver requests, for which the deadline is now August 2). Now the FCC needs to sort out the 2GHz band and it appears to be adopting a somewhat harder line than some might have hoped.
In his statement, Commissioner Copps highlights his belief that “charging fees for the ancillary terrestrial use in the MSS bands could provide incentives to ensure that the spectrum resource is used more efficiently and intensively”. However, whether this position will be shared more widely by the other Commissioners is still to be seen.
This must be a disappointment to those who had hoped for a relaxation of the ATC gating requirements without any significant givebacks in exchange. In particular, it may be hard for the FCC to agree to such a relaxation if a hard line is taken over incentive auctions or other compensation for the “step-up in value” in the 2GHz band.
With this proceeding going forward at the same time as MSS-ATC proponents are trying to secure partners and further investment (and in some cases are in bankruptcy or on the verge of it), it is going to be very interesting to see how the regulatory and financing activities affect one another over the next few months.
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07.13.10
Posted in Globalstar, Handheld, Inmarsat, Iridium, Operators, Services, TerreStar, Thuraya at 2:37 pm by timfarrar
Inmarsat has now launched its ISatPhone Pro, which I was lucky enough to try out the other week. Although the phone itself is not particularly attractive, the call performance was better than I expected – voice quality was good (with the other party easily recognizable), and the ability to ‘walk and talk’ was far superior to my experience with the TerreStar Genus phone. Latency was also somewhat better than on the Genus phone. The main limitation was that the phone only registers on the Inmarsat satellite when the antenna is extended and pointed in the direction of the satellite, which means there is a delay of 1-2 minutes before a call can be made, and calls will rarely, if ever, be received on the phone (assuming the user doesn’t want to carry it around with the antenna extended).
Though Inmarsat’s phone is not expected to perform well at high latitudes (particularly in Alaska), it should generally be a good alternative for those MSS voice users who aren’t worried about carrying such a large device. The phone itself has been priced very aggressively, with pricing currently around $599 and in some cases close to $500.
However, the most surprising development is the airtime pricing that Inmarsat has set. Postpaid wholesale pricing has been set very low, leading to retail offers of $150 per year with 60 free minutes of calls. Even more extraordinary is the prepaid pricing, where a user can buy a 25 minute card, valid for 2 years, for only $20.
In my view the fact that Inmarsat has selected a uniform 2 year expiry date on its prepaid cards is a huge mistake, which I can only assume is due to the limitations of Inmarsat’s prepaid billing system (note also that prepaid service is currently not available in the US, due to patent litigation over the prepaid platform that Inmarsat uses). Iridium has previously indicated that about half of handheld MSS users are “glovebox”-type customers, who only use the phone for emergencies (and rarely use any minutes). To date such users have been paying at least $30 per month for satellite phone service (apart from occasional dual mode roamers on Thuraya), but now they will be able to get service for less than $1 per month. Inmarsat has thus completely undermined the economics of a significant part of the handheld MSS market, making it impossible for its service providers to justify targeting these customers (especially as SPs are busy competing away the margins which Inmarsat expected would be available on its handsets). In addition to leaving large amounts of money on the table, this action may also create added costs for Inmarsat, as these users are the least likely to be familiar with the limitations of satellite communications and thus may well end up consuming disproportionate levels of customer support resources.
Inmarsat may well have had a reason to act in such a destructive manner a few months ago, when it thought it might have the opportunity to prevent Iridium gaining funding in the public markets to pay for its NEXT contract. However, now that Iridium can rely on more money than expected from COFACE, such a calculation looks less sensible.
Despite having an attractive proposition for low end users, Inmarsat may still prove less successful than it hopes amongst higher volume users. In particular, these users will gain less of an advantage from the low occasional use tariffs, and may be somewhat reluctant to churn after making a substantial investment in buying an Iridium or Globalstar handset in recent years. Inmarsat has stated that it believes the average lifetime of a satellite handset is around three years, but in reality Iridium and Globalstar handsets are used for up to 8 years (and there is a thriving market for secondhand phones). As a result, churn in the handheld MSS market is much lower than Inmarsat apparently expects (even for Globalstar users, who have had to cope with a lack of two-way service in recent years), which will make it difficult to persuade large numbers of existing users to switch over rapidly to Inmarsat’s new service. On the other hand, competition from Inmarsat will potentially force Globalstar to offer rather more aggressive pricing as it tries to rebuild its subscriber base in 2011 and 2012.
In the end therefore, Inmarsat may end up being able to trumpet a fairly large number of handheld subscribers (potentially up to 150K by 2014), but many of these will be less desirable customers and ARPUs may be rather lower than expected. Thus the overall impact for the handheld MSS market of Inmarsat’s new service (even when combined with Globalstar’s two-way relaunch in 2011) may remain subdued, and at best we expect wholesale revenue growth of no more than 10% p.a. in the next five years. Indeed a more pessimistic view, assuming significant erosion of ARPUs at the low end of the handheld market could put wholesale revenue growth at less than 5% p.a. over this period.
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06.28.10
Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 1:32 pm by timfarrar
The President has now announced his support for the proposal set out in the FCC’s National Broadband Plan (NBP) to free up 500MHz of spectrum for wireless broadband over the next decade. However, even though “Our nation’s ability to lead the world in innovation and technology is threatened by the lack of sufficient spectrum for wireless broadband applications and services” according to the FCC, it doesn’t necessarily mean that spectrum will prove to be a good investment over the next few years. (In this analysis, we’re looking at the opportunity for financial investors, as opposed to cellular operators – just like in the housing market, if you intend to use your spectrum, then that’s a different proposition from planning to flip it to someone else).
Indeed it is highly desirable from the FCC’s point of view that spectrum should become cheaper rather than more expensive, because that will enable more competition in the wireless market and result in lower prices for consumers. In the absence of lower prices for spectrum, it is likely that some cellular operators will be shut out entirely from 4G, or will be forced to merge with competitors in order to combine their spectrum holdings – not the outcome that the FCC wants to see. The FCC also doesn’t want to reward speculators – it would much prefer spectrum to be put to use, rather than see financial investors lock it up with a view to profiting from higher prices in the future. Although some might argue that the FCC also needs to raise money from auctions (not least to fund the buildout of public safety networks), it is far from clear that such motivations will weigh heavily in the FCC’s decisions (even if some members of Congress disagree). Certainly the concept of maximizing the proceeds of future auctions was not emphasized in the NBP.
From a historical perspective, despite this apparent crisis, spectrum prices in the US (on a per MHzPOP basis) are actually far lower than a decade ago. This is entirely logical: if it now takes 50MHz+ of spectrum to support $30 of monthly data services, whereas ten years ago operators required only 20MHz of spectrum to provide $50 of monthly voice services, then cellular operators simply can’t produce the same ROI from each MHz of spectrum as they did in the past.
Just the objective of freeing up 500MHz of spectrum (almost doubling the amount currently available for terrestrial cellular service) alone is likely to put a damper on spectrum prices. In recent months, we have also seen the FCC moving rapidly to finalize rules to enable use of 25MHz of WCS spectrum, and formulate policies to ensure that 90MHz of MSS-ATC spectrum is put to use. In addition, the FCC may also decide to limit the amount of additional spectrum that AT&T and Verizon (who accounted for the vast majority of spending during the 700MHz auction in 2008) can acquire in the future.
In my view, all of these developments point to lower spectrum prices in the next few years. In the short term, prices will be depressed further by the glut of spectrum owners seeking to monetize their holdings at the moment: Harbinger, Clearwire, NextWave and other MSS operators, to name just a few. This comes at a time when there is a relative lack of buyers, with most analysts hard pressed to name anyone other than T-Mobile that is an obvious partner for these companies. Investors who acquired undervalued spectrum assets a few years ago (particularly if that was prior to recent rule changes) may be OK, but new investors will need to be more cautious about the price they pay for these assets.
In summary, even if there is considerable long term demand for spectrum, it is a fallacy to equate this with increasing prices. In that regard, spectrum is like oil: you know there will be more demand in the future, but that tells you nothing about how the price will move in the next year or two. The short term price (and indeed the price in auctions) is determined by the balance of demand and supply today. That alone is a negative sign for investors in spectrum assets. However, when the FCC (unlike OPEC) would also prefer to see lower prices for spectrum, then it certainly looks like a risky bet to assume that prices will go higher anytime soon.
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06.24.10
Posted in Broadband, Financials, Inmarsat, Maritime, Operators, VSAT at 5:12 pm by timfarrar
In recent discussions we’ve heard rumors that Inmarsat may soon make a bid to take over Thrane & Thrane, its biggest equipment supplier. Inmarsat has certainly been in acquisition mode over the last year, taking over Stratos and Segovia and investing in SkyWave. Nevertheless, such a move would still be quite a shock for many in the MSS industry.
However, it would be a logical accompaniment to Inmarsat’s Ka-band strategy: Inmarsat would be able to reduce the price of L-band equipment (particularly FleetBroadband terminals) and thereby help to fend off the threat from Ku-band VSAT for the next few years until its new Ka-band satellites are in orbit. Thrane could also play an important role in development of mobile Ka-band terminals, which are clearly the biggest technical risk in Inmarsat’s entire Ka-band plan.
Though the threat from Ku-band has been hyped up recently, most notably in Comsys’s recent maritime VSAT report, our view continues to be that L-band has a very sustainable market position, outside the highest spending ships. To date, Ku-band VSATs have achieved only limited penetration within Inmarsat’s core maritime commercial transportation market (which incidentally is much smaller than 100,000 ships), and most of these ships spend far too little to ever contemplate a move to VSAT.
By reducing the cost of L-band equipment, in concert with its aggressive moves on airtime pricing over the last year, Inmarsat has a very viable opportunity to hold off Ku-band VSAT incursion. Even the recent concerns about shortfalls in Inmarsat’s maritime revenue growth during the first quarter of 2010 appear to stem much more from the price reductions that Inmarsat and its distributors have used to remain competitive on high spending vessels, rather than any substantial loss of market share to VSAT in the commercial transportation business. Indeed many maritime VSAT service providers had a very disappointing year in 2009, and quite a number of them are now up for sale, in what we would view as an attempt to exploit the perception of rapid future market growth before they actually need to fulfill these expectations.
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06.21.10
Posted in Globalstar, ICO/DBSD, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 2:36 pm by timfarrar
On Friday, the FCC’s Spectrum Task Force announced a “plan to increase value, utilization, and investment in mobile satellite service (MSS) bands”, beginning with a Notice of Proposed Rule Making (NPRM) which they hope to approve at the Commission meeting scheduled for July 15.
Although the announcement itself referred to the whole 90MHz of MSS spectrum identified in the National Broadband Plan (NBP) as suitable for terrestrial broadband, the focus of the discussion at Friday’s press conference appeared to be around the 2GHz (S-band) spectrum. Indeed the FCC highlighted that this spectrum, which is held by DBSD and TerreStar, is “right in the neighborhood of both the AWS spectrum and the PCS spectrum”. In particular, the FCC indicated that it would propose changing the table of allocation for the 2GHz spectrum, to allow primary terrestrial use (without ATC), and then enable secondary leasing for all three MSS spectrum bands. These rules would enable secondary leasing to begin “relatively soon”, if the FCC agreed to the proposal of the Spectrum Task Force.
According to Communications Daily, this proposal might include “charges”, presumably as “consideration for the step-up in the value of the affected spectrum” (as proposed in the NBP), but would avoid some of the delays associated with an incentive auction (which was one of the other options suggested in the NBP). Of course spectrum leasing for purely terrestrial use (as would then be possible in the 2GHz band) would be rather more straightforward than leasing under the current set of ATC restrictions, but the level of any FCC “charges” (and perhaps other conditions on terrestrial buildout or provision of satellite services) would dictate how much value could be realized by the existing spectrum holders.
What is particularly interesting is that this NPRM is being issued so quickly, when the Credit Suisse research conference call three weeks ago indicated that it was not expected until September. In addition, the NBP suggested that an S-band (2GHz) Order would not be expected until 2011 (as opposed to 2010 for the L-band and Big LEO bands), at least partly because decisions might be impacted by the outcome of the adjacent AWS-3 band proceeding.
Perhaps the reason for this change in timing is hinted at by the first line in the FCC’s announcement: the need to “increase…investment in MSS bands”. Certainly both Echostar and TerreStar were well prepared with immediate comments on the announcement (with Echostar also noting that the proposed change would “help spur investment”), and TerreStar desperately needs new investment in the very near future. It looks like the outcome of the FCC meeting in July (which according to Friday’s press conference is “still in flux”) might therefore prove critical to TerreStar’s future.
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06.02.10
Posted in Aeronautical, Broadband, Financials, Globalstar, Handheld, Inmarsat, Iridium, Maritime, Operators, Services, VSAT at 2:57 pm by timfarrar
So Iridium has finally announced the contract to build its NEXT satellites, which was won by Thales Alenia Space (TAS) with the support of a stunning $1.8B loan package which will be 95% guaranteed by COFACE, the French Export Credit Agency (ECA). By the sound of it, Lockheed had been confident of winning the contract, but the US Ex-Im Bank simply couldn’t match the level of support offered by COFACE.
Even Iridium appears surprised by the $1.8B Promise of Guarantee, given the suggestions in their March 2010 results call that the company would need to raise additional unsecured or subordinated debt in the public market. We had expected Iridium might need to raise $300M or more in backstop financing, based on Iridium’s April 2010 investor presentation which stated that the company was “seeking support for a[n ECA] facility of approximately $1.5B”. COFACE’s additional support therefore clearly appears to have tipped the balance in favor of TAS, because it removes the risk that Iridium would have faced in trying to tap the public markets at this point in time.
We now expect Globalstar to point out that Iridium has received an even more favorable financing package than Globalstar did last year (when Thermo was required to provide additional backstop funding as a condition of the $586M COFACE-backed facility) and potentially to seek a $200M+ extension of its current facility. This would provide funding so Globalstar could exercise its option to purchase the last 24 second generation satellites, allowing them to add more satellites to their constellation before NEXT becomes operational (and before radiation problems are expected to start impacting their 8 first generation spares in about 2015). Such a facility could also give Globalstar more firepower to market its new second generation services in 2011 and 2012, without the risk of eating into the contingent equity and debt service reserve accounts previously established by Thermo.
The next stage in this war of the Export Credit Agencies may then come in the shape of Inmarsat’s upcoming Ka-band constellation, which we expect to involve 3 or 4 dedicated Ka-band satellites (costing at least $200M each including launch and insurance), providing oceanic coverage to complement and extend its existing FleetBroadband and SwiftBroadband services. With Inmarsat’s new satellites expected to be deployed between 2013 and 2015, an order could well come as soon as this summer, when Inmarsat announces its investor guidance for the next five years. More details of Inmarsat’s plans and our expectations for their future Ka-band revenues were given in the March 2010 report, available to subscribers to our MSS information service.
The competition to build Inmarsat’s new satellites appears once again to be shaping up as a US vs European battle with TAS, SS/L and Astrium all bidding for the contract. Will ECA financing once again prove to be a key factor in the decision, even though Inmarsat has much less need for a guarantee than Iridium and Globalstar? Certainly Inmarsat has not been reluctant to seek cheap government-backed funding when it is available, as seen in its recent European Investment Bank loan to fund the Alphasat project.
In summary, its clear that ECA financing is now going to play a very substantial role in supporting the MSS industry. As a result, the prospects for a long awaited consolidation of the sector appear to be diminishing. That is certainly good news for end users of MSS, as well as service providers and distributors, who will be able to take advantage of an increasing range of competitive alternatives. This is particularly true in the maritime and aeronautical markets, where Iridium is really the only potential MSS competitor for Inmarsat. Indeed Iridium’s ability to serve these markets gives it a much more sustainable long term position than some other systems, because most maritime and aeronautical opportunities are much less likely to be undermined by the buildout of terrestrial wireless systems.
Nevertheless, it also seems hard to justify the $8B+ of capital investment that has been committed by Iridium, Globalstar and all of the other players (Iridium NEXT, Globalstar 2, Inmarsat 4, Orbcomm, ICO/DBSD, SkyTerra and TerreStar) in an industry sector which only generated $1.1B in wholesale service revenues in 2009, and though growing healthily, doesn’t appear poised to breakout from the 8% annual growth rate seen in recent years. Unless new sources of value appear (spectrum monetization being the obvious option for several players) it appears unlikely that all of the MSS operators will be as successful as they and their investors hope.
Indeed the main story of the next decade is likely to be the competition between Iridium and Globalstar, as they both strive to be the second biggest player in an MSS market that will continue to be dominated by Inmarsat, while other providers may fall by the wayside. If Iridium can grow from its current 19% share of wholesale service revenues to about a 25% market share, or Globalstar can grow from its current 5% share to 15% or more (based on its lower cost satellite system), then that should be sufficient to achieve an attractive return on capital for either company. However, with Inmarsat holding a more than 60% market share today, it appears unlikely that both Iridium and Globalstar could achieve this level of success simultaneously.
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05.25.10
Posted in Financials, LightSquared, Operators, Spectrum, TerreStar at 4:08 pm by timfarrar
As Harbinger tries to secure partners for its proposed 4G LTE network, it now looks like Craig McCaw and Clearwire could potentially end up playing spoiler.
A research note from Credit Suisse, published on Monday highlighted the potential value of MSS spectrum and suggested it could be worth as much as $0.50 per MHzPOP. It also noted that the spectrum value of Clearwire “is likely underappreciated”. No substantive justification is given for the $0.50 per MHzPOP valuation suggested in the research note, other than the fact that this is close to the median value in the 2006 AWS spectrum auctions, and there are a number of elementary mistakes in the analysis of TerreStar (most notably that no mention is made of the more than $400M of Convertible Preferred Stock which must be repaid before any value from the 1.4GHz spectrum is realized by the equity holders). The fact that the FCC “will expect a portion of the
step up in value for both [2GHz] MSS and broadcast spectrum” is also only mentioned in passing, despite the fact that this will have a huge impact on the realizable value if the spectrum is ultimately included in an incentive auction. Despite this, the research certainly seems to have stimulated some increased interest in MSS-ATC spectrum, as evidenced by the jump in the price of TerreStar’s stock on Monday, and could be seen as potentially helping Harbinger in its quest to attract investors for its 4G network.
However, perhaps coincidentally, last Friday, Business Week published an article highlighting Clearwire’s spectrum value (which it puts at “$20B or more” or $0.50/MHzPOP). In my view, this article clearly indicates that Clearwire is now open to offers for purchase of some of its spectrum. In that case, wireless operators who are looking for spectrum in the short or medium term, such as T-Mobile, would certainly have a viable alternative to MSS-ATC spectrum if they are looking to build out a 4G network. Given that there are only a few potential purchasers of wireless spectrum at the moment (and the it now looks like the FCC doesn’t want AT&T and Verizon to buy any more spectrum in forthcoming auctions), the fact that Clearwire and Harbinger may end up competing to attract one of this limited number of partners won’t do anything to push up the price that can be secured for their spectrum in the near term.
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