01.19.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 9:21 pm by timfarrar
Last week I expressed the view that LightSquared’s new investors could very well prolong the fight between LightSquared and the GPS industry. However, signs are starting to emerge that the FCC might be more willing to act than I had anticipated, and rule against LightSquared, which would potentially create a Material Adverse Change (MAC) in LightSquared’s first lien debt covenants, allowing the new investors to force the company into bankruptcy, and wrest control from Harbinger. While I still believe that the end game will involve liquidation of the business (not to mention litigation against all and sundry), the current debt investors would certainly benefit if they didn’t have to wait until all of LightSquared’s money had been spent in advance of a bankruptcy filing.
What evidence is there of a shift? Firstly the FCC responded very quickly to LightSquared’s assertions that the recent testing was “bogus” with a statement that:
We are awaiting completion of recommendations from NTIA. As we have said from the outset, the FCC will not lift the prohibition on LightSquared to begin commercial operations unless harmful interference issues are resolved.
Of course that is not what the FCC has said from the outset. Last year they said the agency won’t let LightSquared activate its network “until harmful interference issues are resolved”. Though subtle, that is quite a change in position, and an acknowledgement that the interference issues might not be resolvable.
More importantly, today has seen the resignation of a second high ranking FCC official and now both Ed Lazarus and Paul de Sa, who apparently negotiated the deals with SkyTerra (in early 2010) and LightSquared (in late 2010/early 2011) are leaving the FCC at a time when Sen. Grassley is shortly expected to receive details of LightSquared’s communications with the FCC. Indeed these two officials also met with Mr. Falcone when he visited the FCC on January 4.
To misquote Oscar Wilde, to lose one official may be regarded as a misfortune, to lose both looks like carelessness. If (and I do mean if) there is something problematic to emerge from the communications between LightSquared and the FCC, then it would certainly help to defuse the ensuing political firestorm if the FCC had already acted on the recommendations of the NTIA (which I think will very likely follow those of the PNT Excom). Communications Daily is now reporting that the NTIA has received the full report from the PNT Excom and will now review it and “eventually” advise the FCC how to move on the issue. However, if high precision testing is not going to be undertaken in advance of formulating these recommendations, the FCC could be in a position to rule relatively soon.
Permalink
01.18.12
Posted in LightSquared, Operators, Regulatory, Spectrum at 12:15 pm by timfarrar
Well it seems like all LightSquared has left now is an attempt to claim that the US government is biased against it, representing a remarkable turnaround from this time last year, when most people thought that any favoritism was going in the opposite direction. However, it appears that LightSquared’s protests are going to have absolutely no effect, because all of their allegations about how the testing was not “fair and accurate” simply reflect the NTIA’s own mandates for how the testing should be conducted.
Firstly LightSquared claim that considering a 1dB interference degradation threshold was a sign that “the testing was rigged“. However, the NTIA Administrator, Lawrence Strickling, specifically set out in his memo of September 9 requiring this round of additional testing that:
We want to do what is necessary so that our recommendations to the FCC regarding cellular and personal/general navigation GPS receivers can be conclusive and final. To that end, I want to make it clear that our recommendations will be based on NTIA standard definitions and methodologies for assessing interference. We will not accept conclusions or analysis based on propagation models and other tools that depart from our standard methodologies.
Of course the “standard definition” as agreed for the June TWG report was 1dB of degradation, and it was only when LightSquared discovered that the June results were unfavorable that they came up (at the last minute) with their alternative proposal of allowing 6dB of interference degradation, which was never accepted by the NTIA.
Secondly, the Sep 9 letter requested that “that the test plan include a retest of the 10 devices that were shown by the TWG testing to be more susceptible to the lower 10 MHz scenario”. Thus it was at Mr. Strickling’s explicit request that the testing “deliberately focused on…devices that were least able to withstand potential interference”.
Finally the tests were “shrouded in secrecy” because they involved technical performance data on individual GPS devices which both the FCC and NTIA agreed to keep confidential. The same procedure was used in the first round of tests in order to avoid data being released on individually identifiable devices and it is far from clear what LightSquared is alleging was done differently this time. Indeed, with the most “susceptible” of the previously tested devices being included in the second round of tests, it would have been necessary to keep the list of tested devices confidential in order to avoid revealing which these “susceptible” devices were.
It therefore seems clear that by LightSquared’s definition Mr. Strickling himself would count as one of the “government end users [who] manipulated the latest round of tests to generate biased results”. That doesn’t seem like a recipe for success when you are asking the NTIA to “objectively re-evaluate this initial round of testing” and ignore the recommendations of the PNT Excom.
What I find even more surprising is that LightSquared was briefing its investors as recently as Tuesday last week that everything was “under control” with respect to interference, when their letter to Mr. Strickling on Friday Jan 13, after the PNT Excom letter was released, noted that:
LightSquared has communicated its concerns repeatedly to PNT EXCOMM, NPEF and Air Force Space Command throughout this process, both verbally and in correspondence. All of these concerns have been seemingly disregarded. As you are aware, we have also corresponded with your office to make sure you were advised as the process unfolded.
In addition, the letter states that the FAA had “unilaterally decided to suspend any further collaboration” with LightSquared. These two statements are very hard to reconcile with LightSquared’s briefing to investors that the interference issues were “under control”, which was the reason that new investors became involved with the company. As a result, these (and other) investors might now feel that its not only LightSquared’s (currently invisible) CEO who is lacking in credibility. There was certainly a rush for the exits yesterday, with prices on LightSquared’s first lien debt opening with a markdown of ~9 cents to 40-44 cents on the dollar, and then falling further to 38-42 cents during the day.
Permalink
01.13.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:53 pm by timfarrar
As I indicated in my post on Thursday last week, the PNT Excom has recommended today, in a letter sent to the NTIA Administrator, that the high precision testing be put on hold, because “there appears to be no practical solutions or mitigations that would permit the LightSquared broadband service, as proposed, to operate in the next few months or years without significantly interfering with GPS”.
This letter confirms that it will be impossible for LightSquared to move forward with its buildout plans in the foreseeable future. However, in the absence of any final decision from the FCC or NTIA, it seems unlikely that LightSquared will change its current course of pursuing approval by all possible means, for as long it has the money to do so. As a result, it may still be many months before this saga reaches a definitive conclusion.
The primary reason for my belief that this will drag on for many months is that Harbinger’s position in LightSquared’s capital structure (subordinate to at least $1.6B of debt) makes it inconceivable that Harbinger would receive any recovery in a bankruptcy situation, and the first lien lenders are unable to stop LightSquared simply continuing to spend the current cash on LightSquared’s balance sheet for as long as it lasts. The only exception would be if a Material Adverse Change (MAC) occurred under the terms of LightSquared’s first lien loan, which could allow the lenders to issue a notice of default before the money is gone. However, it is hard to imagine that a MAC could have occurred solely as a result of an advisory committee’s recommendation and even if a response was to be issued by the NTIA in the near future, it is far from clear that a triggering event would have occurred.
Nevertheless, this news does make it clear that my expectation about the ultimate outcome of a LightSquared bankruptcy (namely that no terrestrial network will ever be deployed) is rather more plausible than the assumptions made by Icahn and other new investors that they could ultimately force through an approval. They must feel pretty upset that LightSquared was assuring them as recently as Tuesday that the technical issues had been solved (despite LightSquared apparently being unable to offer any “practical solutions or mitigations” to the problems identified in the November tests) and that it was only the politics of the situation that were preventing the FCC from approving their network.
UPDATE: This presentation was also posted by NOAA on Friday, giving more details of the November 2011 testing. Apparently these tests did include some high precision devices, which were badly affected by the LS lower 10 signal, even at very low operating power levels. As a result, NOAA conclude that a new filter will be required for these devices, and that is presumably one additional reason why LightSquared’s latest “power on the ground” proposal was not deemed to be a “practical solution”.
Permalink
01.11.12
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 3:05 pm by timfarrar
Yesterday, LightSquared held an investor call to provide an update on regulatory progress, including Mr. Falcone’s meeting last week at the FCC (which failed to gain the attention of the FCC Chairman, unlike Mr. Ergen’s visit to the FCC the same day). LightSquared’s investors clearly want to know whether there is any prospect of approval being granted, and a Debtwire story on Jan 3 reported that some of the previous investors have lost confidence in a successful resolution of the issue:
Farallon Capital Management dumped its stake in LightSquared’s USD 1.6bn first lien loan last month as the telecom company and sponsor Harbinger Capital battle regulatory controversies, according to two buyside sources and a source familiar with the matter. Displaying a greater taste for potential distress, Icahn Enterprises has emerged as a recent buyer of LightSquared’s bank debt in the low 40s, the two buyside sources said.
The exit of Farallon signals the loss of one of LightSquared’s former anchor investors. The California hedge fund was one of the biggest par holders in LightSquared’s capital structure, owning more than USD 150m of the Libor+ 1,200 bps term loans the company raised to finance the build out of the its 4G long term evolution (LTE) network, the sources said.
The loans were recently quoted at 43-45 from 90-92 at the beginning of August, according to Markit.
However, I understand that the new investors, including Icahn, haven’t stopped believing that they will be able to overcome the opposition of the GPS community, and ultimately gain approval on the back of (what was described to me as) their greater “sophistication” and financial resources compared to Harbinger. Indeed, part of Mr. Falcone’s objective in his FCC meeting may have been to suggest that the FCC would have to deal with less cooperative owners of the assets in the future, if they delay approval and allow LightSquared to fall into bankruptcy.
Its suprising that anyone could believe that they will succeed where Harbinger has failed, especially as the NTIA now appears determined to spin out the testing process for as long as possible (and almost certainly to beyond the November 2012 election). In addition, it would be easy for the FCC to initiate a (multi-year) rulemaking proceeding on receiver standards for GPS receivers, if they want to kick this issue even further into the long grass. Nevertheless, the implications are that LightSquared’s debt investors are likely to allow the company to keep pushing for approval, rather than trying to force it into bankruptcy more quickly in order to liquidate the assets before all the cash is gone. That would suggest a bankruptcy filing later in the second quarter rather than in the next couple of months.
Ultimately, I think this will look a lot like the Iridium bankruptcy in 1999, where investors thought there was something worth billions of dollars that could be rescued with a bit more money and better execution, and spent nine fruitless months before they finally conceded that $5B of investment needed to be completely written off. The fundamental reason why I think their efforts will fail is that the continuing lease payments to Inmarsat ($115M per year) very likely outweigh the value of 20MHz of L-band spectrum, which at best might be usable terrestrially in 5-10 years time (if approval was even granted).
At this point there is no way that Inmarsat is going to compromise on these lease payments, because the whole LightSquared affair (which Inmarsat enabled through the 2007 Cooperation Agreement) has deeply upset the DoD, which accounts for ~20% of Inmarsat’s total revenues (and probably an even higher proportion of the Global Xpress business plan). Indeed, some within Inmarsat might feel they would give back the money paid to date, if only the whole LightSquared mess could be made to go away. Inmarsat already appears to be telling the DoD that it was not their fault, because they were ordered by the FCC (under a Republican administration) to enter into the Cooperation Agreement, against their better judgment. In that context, Inmarsat’s protests in January 2005 that approval of the ATC plans proposed by LightSquared (then MSV) would lead to substantial degradation of MSS services due to overload interference, now appear very prophetic.
As a result, I expect the end game (which is now unlikely to be reached before 2013) to involve a combination of trying to recover the money paid to Sprint and not spent on deployment, selling the ground spare to Boeing, and agreeing to sell Inmarsat the in-orbit satellite and spectrum assets in exchange for a return of a sizeable proportion of the ~$500M paid to date. Whether that will be sufficient to provide downside protection to buyers of LightSquared’s first lien debt (totalling ~$1.6B) “in the low 40s” remains to be seen.
Permalink
01.05.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:49 pm by timfarrar
Over the last couple of weeks a steady drumbeat of negative reports have emerged about LightSquared, including that it is “running out of cash“, that the National Defense Authorization Act (NDAA) has “stack[ed the] deck against LightSquared” and now that Sprint has put its investment in the partnership with LightSquared “on hold”. Indeed the FCC Chairman reportedly even joked at a December dinner that “LightSquared has two tables…A quick note from the Hilton staff – those of you sitting at the upper table will need to vacate the table, and those of you at the lower table are still too loud.”
However, I’m told that even more damaging information is likely to emerge shortly, indicating that the NTIA’s planned testing of the compatibility of high precision GPS devices with LightSquared’s network has been put on hold. This testing was supposed to take place in the near future (perhaps as soon as this month, although a more realistic timetable was spring 2012). It was reported in December that LightSquared had not yet provided the filters for this testing program and it is unclear whether this is a contributing factor in the decision, or if the NTIA has simply decided that it is not worth expending resources on the testing until the issues revealed in December about the interference with general purpose navigation devices and an aviation terrain avoidance system have been addressed. It seems that the full details should be forthcoming once the NTIA sends its formal report and recommendations from the December 14 meeting to the FCC.
UPDATE (1/6): When FierceWireless asked the NTIA about this blog post, their spokesperson indicated that “federal testing has not yet begun on high-precision devices. We won’t speculate further on timing other than the fact that it would be appropriate for the high-precision testing to take place after the analysis of the location-based/navigation device testing is complete.” This certainly appears to be a change in stance from the September 9 letter from the NTIA to the FCC, which stated “At that time [when LightSquared presents its filtering solution for testing and evaluation], the federal agencies will need to develop and execute a plan to test and analyze LightSquared’s proposed mitigation”, because LightSquared certainly believes it has already “presented” its proposed solution to the Federal agencies for testing and evaluation. Separately, another source has confirmed to me that there is no agreed timeline or funding for the high precision and timing testing, especially given recent cuts in the FAA budget.
As an aside, the Reuters article on LightSquared’s finances appears to broadly confirm my assessment that LightSquared is likely to run out of money by the second quarter of 2012. In view of the net loss of $427M in the first three quarters of 2011, it also seems that my estimate of LightSquared’s cash burn rate is in roughly the right range. However, I’m told by another source that my supposition that LightSquared might not have repaid the Boeing vendor financing is incorrect, and that in fact, as LightSquared has stated, the company has raised “over $2.5B in debt and equity” (at least $150M more than I had estimated), which accounts for this discrepancy. Indeed, with the Boeing loan repayment only being $120M, LightSquared’s cash burn over the last two years must have been even more than I had projected.
Permalink
12.22.11
Posted in General, Regulatory, Spectrum at 9:15 am by timfarrar
As my article yesterday for GigaOm highlighted, the potential ripple effects of an AT&T/DISH deal are almost too numerous to mention. However, in addition to the political consequences, its also worth considering the implications of this potential industry realignment for the US spectrum market. As I’ve noted before, spectrum didn’t look like a good investment a year ago, and while the cable companies have come out OK (based mainly on their smart bidding strategy in the 2006 AWS auction), companies like Clearwire and NextWave who have bet on more speculative spectrum bands have suffered badly from a lack of buyers for the spectrum they’ve tried to sell. Even DISH faced little or no opposition from major wireless operators in its acquisition of DBSD and TerreStar’s spectrum assets.
Now, if deals between AT&T/DISH and Verizon/SpectrumCo go through, network sharing will create significant bandwidth efficiencies and with only two national LTE networks there will be even less competition in future spectrum auctions. That could well mean that incentive auctions will come to naught, because it will not be possible to generate high enough bids to persuade broadcasters to give up their spectrum (although that probably won’t prevent Congress eventually passing a bill so it can count imaginary future revenues against the deficit and/or D-block buildout).
In the near term, it also means that it will be difficult if not impossible for Clearwire to find eager bidders for the portion of its spectrum holdings it would like to sell (at anything from $0.25 to $0.75 per MHzPOP according to its recent roadshow). Indeed I’ve been told that the only offer to buy spectrum from Clearwire (during its efforts to sell spectrum earlier this year) came from Sprint, and its far from obvious that enough has changed to justify the recent speculation about new near term Clearwire partners/spectrum buyers ranging from MetroPCS to DirecTV.
As an aside I also find it hard to see how DirecTV’s involvement in a 2.6GHz TD-LTE venture in Brazil, which is focused on fixed wireless broadband in residential suburbs, just like Clearwire’s original fixed WiMAX business plan, has much relevance to Clearwire’s current small cell mobile data roaming plan in core urban hotspots. In theory DirecTV could buy Clearwire spectrum to deploy its own separate fixed wireless broadband network in the US, with a completely different cell spacing than a mobile network would require, but that hardly seems a productive use of capital when the US has vastly better fixed broadband infrastructure than Brazil and we’ve just seen the ignominious collapse of Open Range, which was trying to execute such a plan in rural areas, with subsidized loans from the USDA. As I’ve said before, fixed broadband is by far the best way to go for almost all in-home data delivery, and so I think that ultimately DirecTV will have to reach some agreement to use AT&T’s wireline infrastructure, completing the alignment of AT&T with the satellite TV companies against Verizon and the cable companies.
Permalink
12.20.11
Posted in Financials, Regulatory, Spectrum at 9:35 am by timfarrar
Stifel Nicolaus’s note on DISH is getting a lot of attention in the press today, with DISH shares sharply higher on the news. Of course, if you’d read this blog, you would have seen all the salient points of their note in my post last week, including:
- how the “windfall” issue could be avoided “through an agreement to reimburse the government if the adjacent AWS spectrum sells for a higher price in a subsequent auction”
- why the FCC would “want to address both deals simultaneously…to extract matching commitments for…the wholesale access conditions needed to ensure that other wireless operators such as T-Mobile remain viable”
- why AT&T “needs to find additional clean paired spectrum for Carrier Aggregation with the 700MHz unpaired downlink…outside the 700MHz band”
- and why AT&T “will have to buy the whole company, not just the spectrum”.
Permalink
12.16.11
Posted in Regulatory, Spectrum at 6:29 pm by timfarrar
It seems like a lot of readers agree with my sentiments that an AT&T takeover of DISH is inevitable, and the only question is timing. In that context, this week’s ex parte filing by DISH is particularly intriguing, not just for the multiplicity of lawyers present, but for the omission of DISH’s recent refrain that “any so-called ‘windfall’ concerns raised in the record are entirely unfounded”.
That implies to me that a deal on the waiver conditions was likely negotiated and agreed at this meeting, potentially setting the scene for an announcement by the FCC at the end of next week. That would give Mr. Ergen a much more welcome holiday card than Mr. Falcone, and keep AT&T even busier over the holidays.
Permalink
12.14.11
Posted in LightSquared, Operators, Regulatory at 6:02 pm by timfarrar
As scrutiny of the LightSquared and Harbinger situation intensifies, it seems to me that there are more and more questions to be answered. Firstly, will the FCC concede to Sen. Grassley’s request for its communications with LightSquared, to overcome the hold he has placed on the two nominees for vacant Commissioner slots? This certainly seems to be very likely (especially as LightSquared and Harbinger have apparently agreed to produce their communications with the FCC, which I doubt they would have done if they did not believe the FCC would produce these documents anyway). If that is the case, could last night’s unexpected resignation of Chairman Genachowski’s Chief of Staff, Ed Lazarus, have anything to do with what these emails might contain?
A second question relates to what role Jared (Jerry) Abbruzzese, who featured as a witness in the corruption trial of Senator Joseph Bruno back in 2009, has been playing at LightSquared/Harbinger? Bruno (a Republican state senator in New York) was paid consulting fees by Motient, the predecessor of TerreStar, and one time parent company of MSV, which ultimately became LightSquared. The New York Times mentioned Abbruzzese in a 2007 article on President Obama’s 2005 investment in SkyTerra, and a host of allegations related to Abbruzzese’s involvement in Motient/TerreStar and connected companies were made by Highland Capital in 2006. iWatchNews reported in July that “Abbruzzese eventually left the [TerreStar] satellite group”. However, in the White House FOIA email production from November, Abbruzzese turns up being copied on an internal LightSquared email to senior executives and legal counsel in August 2011.
Permalink
12.13.11
Posted in Regulatory, Spectrum at 7:42 pm by timfarrar
After the Verizon-SpectrumCo deal that represents “the end of the world as we know it” it has been very surprising how little attention has been paid to the nearly inevitable consequence, namely an AT&T purchase of DISH. With the SpectrumCo deal, Verizon has not only gained a greatly increased block of spectrum in the AWS band for the next stage of its LTE buildout, but has also aligned with the cable companies, as their “out of region” partner for TV service. In response, AT&T not only needs to come up with an alternative source of spectrum, now the T-Mobile deal is as good as dead, but is all but certain to align with satellite TV as their equivalent out of region video offering.
From a spectrum point of view, AT&T obviously needs to buy DISH’s 700MHz E-block spectrum (to give it a clean 12MHz unpaired block when combined with the spectrum it is purchasing from Qualcomm). Less obviously, it also needs to find additional clean paired spectrum for Carrier Aggregation with the 700MHz unpaired downlink. This needs to be outside the 700MHz band to avoid interference with AT&T’s existing LTE network, but AT&T will have to give up most of its AWS spectrum holdings (originally intended to be used for this aggregation pairing) to T-Mobile as part of their breakup fee. Of course at this point in time, the only spectrum that could realistically be used for this purpose is DISH’s 2GHz MSS spectrum (from DBSD and TerreStar), subject to securing a waiver of the ATC gating criteria from the FCC.
By approving the Qualcomm spectrum purchase the FCC appears to be giving AT&T a pretty direct signal to abandon the T-Mobile acquisition in favor of a deal with DISH. DISH is signaling with the suggestions that it has other options (like a deal with T-Mobile or Sprint) and that it is not interested in selling the spectrum, that AT&T will have to pay a high price and will have to buy the whole company, not just the spectrum. And AT&T has just been told by the judge in the DoJ’s antitrust case to go away and decide what it wants to do by January 12.
So now the big question is whether the FCC will take the obvious next step and grant DISH a waiver on Christmas Eve, leaving them to negotiate a deal with AT&T over the holidays. There would have to be a creative way to overcome the windfall issue (probably through an agreement to reimburse the government if the adjacent AWS spectrum sells for a higher price in a subsequent auction), and time is pretty short, but if the FCC wants to process both a Verizon-SpectrumCo and an AT&T/DISH deal in parallel before the election, then action is needed pretty imminently.
The reason that the FCC would want to address both deals simultaneously is that it would be the best (only?) chance to extract matching commitments for near universal (97%-98%) deployment of two competing LTE networks along with the wholesale access conditions needed to ensure that other wireless operators such as T-Mobile remain viable and have access to these networks in the future. Verizon has already struck a wholesale access deal with the cable companies which it could be required to extend to other companies in the future, and presumably AT&T would agree a network sharing/wholesale access deal with T-Mobile in order to reduce the amount of the breakup fee it will need to pay. Of course, these conditions would likely only be imposed under a Democrat administration, providing another reason for the FCC to want to hurry the process along to a conclusion before the November 2012 election, rather than risk the parties potentially delaying things until they see how the election is going to turn out.
In this context, Charlie Ergen has played a masterful game of poker, and far from making the FCC “look foolish” as some have suggested, he simply makes Harbinger look foolish for having failed to do adequate due diligence on the potential problems with the LightSquared spectrum. DISH also looks good in comparison to DirecTV (which ironically has been much more highly valued by investors in recent years), by securing an exit from the satellite TV business at precisely the time that the business case for a standalone satellite TV play in the US looks ever more difficult.
Permalink
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »
