05.18.14
Posted in AT&T, DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 8:01 pm by timfarrar
So now AT&T has finally announced that it has agreed to acquire DirecTV for $95 per share, and has indicated that “AT&T will use the merger synergies to expand its plans to build and enhance high-speed broadband service to 15M customer locations, mostly in rural areas where AT&T does not provide high-speed broadband service today, utilizing a combination of technologies including fiber to the premises and fixed wireless local loop capabilities.”
That sounds a lot like AT&T intends to steal DISH’s concept of a fixed wireless broadband connection to rooftop antennas collocated on a satellite TV dish. Indeed, its hard to think of any other way for AT&T to advance an out-of-region TV+broadband strategy, in places where it isn’t the incumbent telco. Of course, the obvious rejoinder is “so why didn’t AT&T buy DISH instead and get hold of its spectrum”.
However, its important to remember that AT&T has already turned down the opportunity to buy DISH twice in the last few years, in 2007/8 and 2012, both times apparently because it refused to pay Charlie Ergen’s asking price. And it seems the same is still true: my understanding is that Ergen has advertised his price to AT&T (and presumably Verizon as well) and indicated it was take it or leave it. Once again AT&T chose to leave it and this time moved on to negotiate with DirecTV instead (just like AT&T jumped to NextWave back in spring 2012).
DISH’s price is pretty clear: in DISH’s Q1 conference call Ergen indicated that his spectrum should be valued at twice the amount that the AWS-3 spectrum is sold for in the upcoming auction, and that he expected the AWS-3 price to be higher than the $5B-$10B range cited by analysts. That implies a price of $20B+, in line with the value ascribed to spectrum in DISH’s current stock price, although perhaps not quite as high as the $26B cited by some reports.
I’ve been skeptical of such high valuations, and think that the value of DISH to an acquirer should include value for both its spectrum and its 14M rooftops, which are potential sites for future small cell network deployments. I would go as far as to say the $20B of value could be attributed half to the spectrum and half to the sites, since 1M small cells generating $100/month in small cell hosting fees would certainly be worth $10B.
If AT&T is thinking likewise, and expects future spectrum auction values to be rather lower than Ergen’s purported $1.33+/MHzPOP ($20B for 50MHz), then even if AT&T was prepared to pay $20B for DISH’s assets (excluding the satellite TV business itself) it would make more sense to buy DirecTV, which can provide the rooftop sites, and for AT&T to acquire the spectrum later. AT&T can look forward to a fairly clear run in the auctions, due to the amount of spectrum on offer over the next year, especially if Sprint and T-Mobile are consumed with trying to get regulatory approval for a merger during that period.
Indeed AT&T has indicated that it plans to buy spectrum in the incentive auction next year and will bid at least $9B for 20MHz of spectrum. That is only $1.50/MHzPOP, little more than Ergen is valuing his spectrum at, for spectrum that should offer rather better deployment economics for rural wireless broadband. It hardly seems to be a coincidence that the DirecTV deal was secured just a few days after the FCC came out with revised incentive auction rules that were acceptable to AT&T.
Ergen has justified placing a higher value on DISH’s spectrum because the AWS-4 band can all be converted to downlink, which should be much more valuable than uplink, as the majority of traffic is directed to the user. Even if that is true (and AT&T doesn’t seem to agree, because it appears to have foregone the option to convert the WCS A and B blocks to all downlink), it is partially offset by the lower efficiency (bps/Hz) of uplink traffic. More importantly, if DISH (or a buyer) actually deployed a fixed wireless broadband network using DISH’s spectrum, it would need to use uplink as well as downlink, so AWS-4 could not simply be all converted to downlink. Only if DISH’s spectrum were to be used in mobile networks, as supplementary downlink for the PCS and AWS bands, could it be used in an all-downlink configuration, and then AT&T or Verizon would have to buy the spectrum and put the effort into standardizing these new bands.
So it would be entirely logical for AT&T to conclude that for fixed wireless broadband and small cell hosting, its simply not worth paying Ergen’s asking price. Instead, by buying DirecTV, AT&T gets the sites it needs thrown in for free with DirecTV’s satellite TV business, and the FCC has now created the right conditions for AT&T to buy the spectrum it needs in the upcoming auctions.
This of course leaves DISH in a difficult position, because Verizon has indicated that it doesn’t believe that deploying wireless connections to rooftop satellite TV antennas makes sense (both DirecTV and Verizon were skeptical after their previous joint trial), so it wouldn’t attribute much value to DISH’s rooftop sites. In any case, after buying Vodafone’s stake in Verizon Wireless, Verizon’s balance sheet would be unlikely to accommodate a near-term purchase of DISH.
So perhaps Ergen’s last option for a near-term deal is a partnership with Sprint, to facilitate a fixed wireless deployment and allow Masa Son to fulfill his promise of competing in fixed broadband if Sprint is allowed to purchase T-Mobile. Even for mobile users, Sprint certainly needs tens if not hundreds of thousands of new cellsites if it is going to deploy its 2.5GHz spectrum beyond urban cores, and DISH’s rooftops would be the best way to get that at reasonable cost.
If not, and Sprint bids for T-Mobile anyway, then DISH will have to go all out to block that deal. Of course, the most likely way to resolve the difference in expectations about the size of the break fee (Sprint has offered $1B, but DT wants nearer $3B) would be to offer T-Mobile some of Sprint’s 2.5GHz spectrum instead of more cash. However, that would provide DISH with an even bigger incentive to block Sprint’s bid, as giving DISH the opportunity to acquire some 2.5GHz spectrum is precisely what Ergen wanted Softbank to concede when they battled over Clearwire last year. If DISH does succeed in blocking a Sprint bid for T-Mobile, and T-Mobile is left with 20-40MHz of 2.5GHz spectrum, then there would be every reason for DISH to look at buying T-Mobile next year, as the only remaining way to make use of DISH’s spectrum assets.
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05.10.14
Posted in DISH, Globalstar, Operators, Regulatory, Spectrum at 10:43 am by timfarrar
Google’s Project Loon has been in the news again this week, with confirmation that Google will now look to partner with cellular operators to use their licensed spectrum rather than acquiring its own spectrum. Indeed yesterday the FCC issued an STA to permit continued testing in Nevada, using T-Mobile’s AWS-1 F-block LTE spectrum.
I’m particularly intrigued that Astro Teller of Google indicated that in late 2012/early 2013 the company spent “six months negotiating with ‘large companies’ to buy [a relatively thin piece of] harmonized spectrum,” but the plan was vetoed by Larry Page. Its pretty clear that the only “relatively thin” piece of “harmonized” (i.e. multi-country) spectrum out there is MSS spectrum and it was reported in November 2012 that Google had held discussions with DISH about their spectrum. Presumably similar discussions were held with other MSS operators like Globalstar as well (although at least as of late 2012 Google might not have considered Globalstar to be a “large” company on the scale of DISH or even Inmarsat).
However, the idea of partnering with individual wireless operators in different countries is completely incompatible with the concept of using balloons which can travel around the world in 22 days, because of course different spectrum would need to be used in each country. The obvious conclusion to draw is that Google will soon be moving on from balloons to its new Titan drones, which can stay in a defined area and be configured with a specific payload that would use the spectrum available there, just as Facebook predicted. Interestingly drones would operate at the same altitude of “up to 65000ft” and therefore might conceivably even be covered by Google’s current FCC STA. So how soon will we see this change happen?
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05.08.14
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 4:25 pm by timfarrar
Today’s ruling from Judge Chapman on the LightSquared bankruptcy case took four hours to read from the bench, and has not been issued as a formal order, apparently to give the parties involved until to negotiate and find a settlement, before they are ordered to mediation under Judge Drain. However, the oral ruling effectively sets out the parameters for that negotiation, most notably that part of SPSO’s debt is subject to subordination, and though SPSO may be treated differently than other secured debtholders, it may not be discriminated against. Though the judge apparently found Moelis’ valuation more appropriate than that offered by SPSO’s experts, she agreed that it was not valid without FCC approval of LightSquared’s license modification requests.
This appears to be a clear invitation to LightSquared and Harbinger to buy SPSO out of the capital structure if they are prepared to wait around for FCC approval. In that case the main subject of negotiation would be how much is paid to SPSO in respect of its debt, and whether a) that is acceptable to Ergen and b) viable for LightSquared to raise in addition to the amount already contemplated in the reorganization. The judge did not determine a specific amount of Ergen’s $844M in purchases which will be subject to subordination, but did give a range of dates that should be considered: the $320M (face value) in purchases in April 2013 were said to be on DISH’s behalf (and therefore subject to subordination), the $287M bought before October 2012 would not be subordinated and the $238M in purchases between October 2012 and March 2013 might or might not be subordinated.
Moreover, it seems that the extent to which any of these purchases would be subordinated will be dependent on the actual damages caused to LightSquared through the delay in negotiations and increased legal fees associated with the case due to the delays in SPSO closing its trades. As a result it appears only a proportion of the $320M-$558M would actually be subordinated. Given that the time taken to close the bulk of these trades was around 2 months, and LightSquared’s total operating costs including interest are around $1.5M per day, it is quite plausible that the amount actually subordinated could be no more than $100M. This would mean LightSquared having to find as much as $1B (including interest) to buy SPSO out of its capital structure.
Of course, its highly unlikely that Ergen would have been prepared to accept less than the $700M he paid for the debt in the first place, but if the potential damages in the form of subordination are relatively limited, then despite Judge Chapman’s criticism of Ergen’s testimony and behavior, he is still likely to be in a very strong position. Conversely, Phil Falcone will have a much harder time coming up with a plan that will retain value for his equity holdings.
I’m also left wondering about what David Daigle of CapRe, as the biggest single LP debtholder other than Ergen (with $331M in LP debt at face value), will now do, because as Falcone indicated in an email earlier this year “I believe [D]aigle is determined to reduce our position to nothing“. An alliance between CapRe and SPSO to push a debt to equity conversion of the LP debt would probably make it all but impossible for Harbinger to retain value in the reorganization, even if as much as $300M of SPSO’s debt was subject to subordination.
Elimination of Harbinger’s position would be equally unacceptable to Falcone, and thus it seems rather unlikely that agreement will be reached in the next couple of weeks. The best bet would therefore be to assume we will be headed to mediation and yet more DIP financing from the LP holders to extend the process for a couple more months, probably ending up either in an auction with credit bids or directly in a debt-to-equity swap. That presumably means no money for Inmarsat in June. It also implies that the probability of LP debtholders getting paid out in cash with accrued interest anytime soon has also decreased significantly. However, in the medium term it may be better news for GPS, because the debtholders would probably be prepared to drop LightSquared’s current lawsuit against the GPS industry, if it helped their efforts to get the necessary approvals from the FCC.
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03.14.14
Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, Thuraya at 9:35 am by timfarrar
Back in 2009, only a year before it embarked on the original $1.2B and now $1.6B Global Xpress Ka-band project (this new figure implicitly includes the launch of the fourth I5 satellite), Inmarsat’s CEO was happy to tell investors that “We are going into a period of capex holiday”. So perhaps it was inevitable that earlier this month at Inmarsat’s Q4 results presentation, some analysts were worried about the “risk that CapEx in 2015 won’t come down by the $300M figure you’ve mentioned”.
It does seem they were right to be concerned, because its now being reported (and I’ve confirmed) that Inmarsat and Arabsat are negotiating the inclusion of an S-band payload on Hellas Sat 3, similar to the Solaris piggyback payload on Eutelsat W2A.
I’m told that Inmarsat is now actively applying for national licenses to preserve its rights to 2x15MHz of S-band spectrum in Europe, after turning down an offer from Charlie Ergen to buy the license from them (in fact Ergen met with Rupert Pearce, Inmarsat’s CEO, in Washington DC this week). Inmarsat was previously exploring the development of an Air-To-Ground (ATG) network using this spectrum in Europe, but that has been abandoned, because it proved impossible to resolve the regulatory issues in the short timeframe available before the license deadlines (for a satellite launch) expire.
The new S-band business plan is instead directed at “smaller, cheaper terminals” for traditional MSS services (an opportunity that Inmarsat’s CEO highlighted on the MSS CEO panel that I moderated at Satellite 2014) rather than terrestrial exploitation of the spectrum. Another potential reason for Inmarsat’s move is that Thuraya will be trying to secure backing for a replacement L-band satellite over the next year, and by teaming up with Arabsat, Inmarsat could look to undermine Thuraya’s pitch that having an MSS satellite from the Middle East is a matter of regional pride.
In fact, Inmarsat was very firm at the conference that MSS spectrum should not be reallocated for terrestrial use, and even described the LightSquared Cooperation Agreement as something they were “forced” into (implicitly by the FCC), with Inmarsat’s preoccupation being to protect their MSS users from interference. This was quite a striking signal that Inmarsat may not be very supportive of compromise with LightSquared, which is a condition of the current bankruptcy exit plan.
In particular, Inmarsat is sitting on about $260M of deferred revenues, which were paid by LightSquared prior to the bankruptcy, to pay Inmarsat for fitting filters to its existing terminals (as I’ve noted before Inmarsat concluded this wasn’t actually required, so they kept the money). If Global Xpress revenues don’t ramp-up as quickly as expected (and there is now a high likelihood that the third I5 satellite will not be launched this year, since its not even on the latest Russian schedule and the second satellite is currently listed as launching in September), then the easiest way for Inmarsat to meet the 8%-12% wholesale revenue CAGR from 2014-16 that it reiterated on the Q4 results (which requires an increase of $200M to $300M in absolute terms) would be to book most if not all of those deferred revenues in 2016.
Of course, that is actually supportive of Ergen’s original proposal to just use the LightSquared uplink spectrum, because filters would only be required if the downlink band is actually used for terrestrial services. On the other hand, because Inmarsat would want to book the deferred revenues in 2016, rather than 2014 or 2015 when the bankruptcy process is complete, it seems plausible that Inmarsat would agree to an additional two year deferral of most payments from April 2014 to early 2016, aligned with the assumptions in LightSquared’s latest plan that FCC approval would be received by the end of 2015 and that their new funding would last through the first quarter of 2016.
At that point, if LightSquared has made no progress with the downlink band and is forced to fall back on uplink only use of the MSS spectrum, Inmarsat could book the deferred revenues and potentially could even get some additional payments for leasing the uplink spectrum at a later date. Don’t forget that Ergen might still be on the scene as well, since the deadline for completion of what will now likely be two competing European S-band projects is also in the first half of 2016.
So now we move to the key hearings next week in the LightSquared bankruptcy case, which will address the adversary proceeding against Ergen and LightSquared’s plan for emergence. As I’ve noted previously, despite the evidence LightSquared has marshaled about Ergen’s strategic objectives for his investments, it would be a major step for the judge to allow LightSquared to put Ergen/SPSO in a class of his own, then designate his vote and give him a third lien note with no exit for 7 years (and potentially no value in the absence of FCC approval). However, no one seems clear about what the judge will do, and what any compromise ruling might entail.
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02.27.14
Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum, Sprint at 2:29 pm by timfarrar
Today the H-block auction finally came to a close, after taking longer than many expected to reach the reserve price of $1.564B. Its clear that DISH won virtually all of the licenses, since it was able to select a sequence of bids to exactly match the reserve price.
However, DISH has also faced unexpectedly prolonged opposition from one other bidder who kept bidding on one or two small licenses (and switching around to find the relatively cheaper licenses) for several days in an attempt to secure a license that DISH might buy out later on. The competitor seems to have had only about 60,000 bidding units of eligibility yesterday and more than likely ended up winning one or two small licenses for a couple of million dollars total (a price of about $0.30 per MHzPOP). Stopping at the reserve price and being prepared to buy out the competitor later on (for say $10M-$20M) certainly made more sense for DISH than continuing to play Whac-a-Mole and bidding up licenses across the board to win all of the licenses at a much higher price.
So now the question is whether we will see DISH announce some sort of deal to put its spectrum to use in the near future. Ergen has ruled out bidding against Sprint for T-Mobile, but that doesn’t mean DISH wouldn’t oppose such a bid at the FCC and DoJ. Indeed, if Sprint decided to pay T-Mobile a break fee mainly in spectrum, which would almost certainly be in the 2.5GHz Clearwire band, DISH would have a big incentive to try and block Sprint’s bid before later engineering a lower priced deal with T-Mobile. On the other hand, DISH’s H-block win now gives Sprint more incentive to include DISH in any deal with T-Mobile (most likely joining with DISH to roll out a competitive fixed broadband wireless solution using DISH’s satellite TV antennas while perhaps leasing the H-block from DISH).
However, if DISH is left out in the cold by Sprint, Ergen could eventually turn his attention to a merger with DirecTV. Some thought that the asset swap between DISH and EchoStar that was announced last week was intended to “pave the way for a merger with DirecTV”. However, I think that misunderstands what the next move is going to be and that this deal was intended to set EchoStar not DISH up for a near term transaction, by giving it more satellites plus a guaranteed (and incentivized) satellite broadband customer for the next 10 years, while removing some of the risk associated with consumer retail sales (which is less attractive to an FSS operator). That deal is highly likely to be with Telesat and/or Loral, which recently was reported to be up for sale and has been looked at by Ergen in the past. In contrast, any deal with DirecTV is more likely to be months away.
In addition to all of this action for DISH and Echostar, Ergen was also basically told by the judge in the LightSquared bankruptcy case on that he (i.e. SPSO) needs to come up with an alternative plan for LightSquared before the confirmation hearing on March 17, because she is “not going to say today ‘lights out on this company’” by rejecting the current plan from the company, even though SPSO has “strong” arguments that the plan is infeasible.
So now we appear poised to see one or more transactions from DISH, EchoStar and/or SPSO in the next few weeks. I would estimate that the probability of a LightSquared offer from SPSO is at least 90%, and the likelihood of a Telesat/Loral deal with EchoStar is perhaps 60%-70%, but the chance of a (much more significant) Sprint deal with DISH is no more than 30%. Nevertheless, that will still be plenty to keep Charlie busy for the time being.
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02.19.14
Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 3:47 pm by timfarrar
LightSquared’s Valentine’s Day message to Charlie Ergen was neither short nor sweet, with the filing of an 883 page long third amended bankruptcy plan on Friday night. The new plan no longer requires FCC approval of LightSquared’s license modification application before emergence, because as I pointed out last month, the FCC’s intervention had made LightSquared’s previous contingent plan untenable.
LightSquared has instead delayed the assumed timetable for FCC approval until December 31, 2015, and at this stage plans to raise enough money to carry the company through the first quarter of 2016. That will include a new $1.65B DIP facility, which will be sufficient to pay off all of the existing creditors of LightSquared (including accrued interest) with the exception of Ergen/SPSO. The new DIP facility would be expected to close at the end of March 2014, so the creditors wouldn’t even have to wait for the company to emerge from bankruptcy.
Because of the lack of FCC approvals, LightSquared can’t raise enough new money to pay off all of its debts, and so the plan involves subordinating Ergen/SPSO’s debt in the form of a third lien 7 year note, paying PIK interest at 12%. Ergen’s debt would rank behind a $1B first lien exit facility (which could be increased by another $500M after FCC approval of the license modification) and a second lien LP facility which would include $930M from the planned $1.65B DIP financing.
Of course, there is little incentive for Ergen to agree to this proposal, and even if the judge decides to approve the plan, including the new DIP financing, I would expect that LightSquared’s emergence from bankruptcy could be delayed while appeals take place (the current expectation is for the plan to become effective on or before October 31, 2014).
Importantly, LightSquared won’t have to make any payments to Inmarsat until it emerges from bankruptcy, and the plan contemplates that “the Inmarsat Agreement shall have been amended in a manner acceptable to the Lenders, which amendment shall include an extension of the period for election of spectrum and corresponding deferral of payments in respect thereof acceptable to the Lenders.”
However, LightSquared’s attempts to subordinate SPSO’s debt holdings are not based solely on the pending adversary proceeding, in which Ergen and Falcone testified in January. Instead LightSquared is seeking to designate SPSO’s vote, based on the DBSD precedent, which of course also involved DISH (disclosure: I testified as an expert in that case).
That Second Circuit ruling was based on deterring “attempts to ‘obtain a blocking position’ and thereby ‘control the bankruptcy process for [a] potentially strategic asset’ (as DISH’s own internal documents stated)” although it “[left] for another day the situation in which a preexisting creditor votes with strategic intentions” (which SPSO might be, because at least some of its purchases were made before LightSquared filed for bankruptcy). In addition, DBSD doesn’t address whether a debtor is able to divide one class of its debt into two so that there is only one creditor in a subclass, who can be treated differently from the rest of the class once that creditor’s vote is designated. Importantly, if the vote of the sole creditor in a class is designated, then (under DBSD) there then is no need to provide that creditor with “the indubitable equivalent” of its claims, as would otherwise be required under the “(more arduous) cram-down standards of §1129(b)”.
That’s why LightSquared is presenting allegations in the new bankruptcy plan which attempt to match the DBSD findings as closely as possible, stating that:
“LightSquared and the Supporting Parties believe that Ergen Entities’ inequitable scheme – which was outlined to the DISH board in a May 2, 2013 presentation – began when SPSO, which is controlled by Ergen, acquired LightSquared LP secured bank debt and preferred stock to influence these Chapter 11 Cases. The parties further believe that the evidence at trial contradicted the Ergen Entities’ contention that SPSO purchased LightSquared LP’s debt solely as an investment. Rather, the evidence demonstrated that SPSO’s acquisition was a scheme to control LightSquared’s bankruptcy process and to facilitate a spectrum acquisition option by DISH. Among other things, Ergen’s and Stephen Ketchum’s testimony demonstrated that (a) the Ergen Entities paid a third percent (30%) premium on what Ergen believed the debt was worth in order to obtain a blocking position, (b) obtaining a blocking position was an early objective, and (c) the Ergen Entities’ equated the blocking position with facilitating the acquisition of LightSquared’s spectrum assets.
LightSquared and the Supporting Parties further believe that, in the next phase of the Ergen Entities’ concerted scheme, shortly after SPSO had acquired a blocking position, Ergen caused LBAC to make a bid for substantially all of LightSquared LP’s assets, a bid that Ergen designed to be particularly attractive to LightSquared LP’s other secured lenders by consisting of an amount sufficient to pay LightSquared LP’s secured debt in full, and conditioning payment only on Hart-Scott-Rodino approval. The Ergen Entities, however, were already contemplating ways in which they could pay less than the agreed purchase price for the LightSquared LP assets if no other bids materialized. This tactic – reverting at a later date with an altogether different bid – was also outlined in the May 2, 2013 presentation.”
So now the question is whether Judge Chapman will go along with LightSquared’s plan, agree to treat SPSO’s debt as a separate class and designate SPSO’s vote. One argument that SPSO is likely to make is that it should not be in a separate class from other LP debtholders (in which case designation of its vote would become irrelevant, because the LP debtholders are being paid in full in cash). And of course, we will certainly hear a very different explanation of the developments described above.
I also wonder if Ergen will make an offer to purchase LightSquared through SPSO in an attempt to provide an alternative for the judge, perhaps at a price of roughly $2B as he tentatively offered last summer (although a lower offer of say $1.7B, or face value for the debt, might be plausible in view of the regulatory risk that the FCC introduced with its intervention last month). Remember that Ergen testified last month that he had considered bidding himself, by borrowing against his stake in EchoStar.
However, an offer by DISH seems unlikely, in view of DISH’s focus on other opportunities, and the fact that it would complicate Ergen’s defense against LightSquared’s allegations of an “inequitable scheme…to pay less than the agreed purchase price”. Indeed the defense would be stronger if DISH entered an alternative deal, providing the judge with a coherent rationale for the abandonment of its LightSquared bid.
In summary, it looks like it will be at least another month before there is any certainty about what happens to LightSquared. In the meantime, the H-block auction has been fairly quiet, with only a very slow rise in the total bids (to reach just below $1.5B at the end of Round 96 today). This afternoon, the pattern of new bids has changed somewhat, suggesting that DISH is mostly bidding against itself right now, and its remaining opponent(s) may have as little as a few hundred thousand bidding units of eligibility left. Once the auction is complete (which may finish on Friday or drag on until early next week) then I expect we’ll hear a lot more speculation about what else DISH has in mind and perhaps even a deal ahead of the confirmation hearing on LightSquared’s latest plan.
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01.28.14
Posted in DISH, Financials, Operators, Regulatory, Spectrum at 2:22 pm by timfarrar
Although some guesswork is still required, today’s activity pretty much confirmed my view about where we stand with the H-block auction. In particular, I’m still convinced that there have been no significant bidders other than DISH since Round 1 and now there is no-one else left in the auction with more than a few million bidding units of eligibility at most. As a result, the auction should be completed, with DISH paying the minimum amount of $1.564B, by the end of this week or very early next.
Tomorrow or so we might still see the odd competing bid here and there, if one or two bidders jump into the few remaining blocks that have not yet received any bids, in order to preserve their remaining eligibility. However, DISH has made it very obvious to rivals that it will simply keep pushing up the price of licenses that receive competing bids (even raising its own winning bid) until any other bidder gives up. Moreover, in Rounds 16 and 17 there were no longer any competing bids whatsoever in the auction.
The table below shows the decline in the number of competing bids and how the last few remaining competitors switched to low priced licenses in the earlier rounds today, prior to stopping further bids. As I noted yesterday, it looks like someone other than DISH (probably a financial speculator) put in bids for NY and LA in Round 1, but then seeing how little competition there was, gave up on any more bidding. That’s logical, because unless there is a critical mass of other bidders, DISH can simply target its firepower on any smaller bidder until that player stops bidding (or is prepared to pay $0.50/MHzPOP plus for its target licenses).
Thus, by sometime tomorrow morning, it looks like no other players will have any remaining eligibility and it will be left to DISH to raise the price step by step to the $1.564B minimum price and the auction will be done. Indeed that seems to already be happening, with DISH renewing its bidding on NY and LA in Round 17 as any potential competition ebbed away. Then we will be able to move on to renewed speculation about DISH’s plans, and whether a deal with Sprint will be announced soon. After all, leasing the H-block to Sprint as part of that deal would be an entirely logical path for DISH to take.
UPDATE (1/29): Today’s bidding threw up a few more medium-sized licenses that had been held by other bidders since the early rounds of the auction, notably in Minneapolis and Las Vegas, which DISH turned its attention to after bidding up NY & LA in Rounds 17 and 18 and Boston, DC, Chicago, Dallas and SF in Rounds 19 and 20. The sequence of bids in these licenses is not incompatible with DISH and one other player bidding actively against one another, as some other commentators have suggested is the case. However, that would not be aligned with DISH’s signaling strategy in other licenses (of overbidding its own winning bid, until competitors got the message and gave up, seen in the chart as a yellow cell followed by one or more green cells) and would also require the competing bidder to have won both NY and LA in the first round (only 25% probability, due to the random allocation of licenses between equal bids).
As a result, I conclude that it is more likely that DISH has been bidding against itself for most major licenses and has left a few winning bids from competitors alone until it has bid up the other desirable cities so far that it would be unappealing to switch to them. Now DISH is concentrating its firepower on a few smaller licenses, the increase in total bids (now at $781M) has actually been slower than yesterday, suggesting that it will take 3 or 4 more days before the auction finishes. The chart of licenses with multiple bids is as follows:
Many may now wonder if DISH’s spectrum (and that held by others such as LightSquared) should be revalued downwards, because of the low price of the H-block. That’s not unexpected (and indeed exactly what I predicted last month), but in my view DISH’s real asset value is in its potential “towers” (i.e. satellite TV antennas) not in the spectrum itself. DISH’s spectrum holdings may no longer be worth $10B, but if DISH can monetize its antennas (say 1M sites at $100/month) via a fixed broadband network deployment, then there is a very clear alternative source for $10B in incremental value.
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01.27.14
Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 3:10 pm by timfarrar
No, not LightSquared, although a renewed auction, with no contingencies associated with FCC approval, does now seem like the most plausible way forward for the company. The big issue is then whether Ergen/SPSO’s debt holding are subordinated as a result of the recent trial: if he is then it might not require much more than a $1.2B credit bid for the debtholders to take control of the company, although in those circumstances I’d still expect Ergen to come back with a rival (personal) bid for the assets so that he doesn’t lose his $700M investment. However, if there is no subordination, then we may not see anyone outbidding Ergen even at a price of $1.5B-$2B (which would not repay the secured debtholders in full).
Actually I’m more interested in the lack of competitive bidding in the H-block auction, which slowed even further today. So far, after Round 12, only $456M has been bid for the licenses on offer, or less than 30% of DISH’s minimum bid commitment of $1564M. The bidding is anonymous, so its hard to tell whether two different bidders are bidding in turn for many of the licenses or if DISH is bidding against itself in order to reach the minimum commitment.
However, the evidence now points increasingly to it being the latter situation, after bidding on the New York and Los Angeles licenses (which had accounted for $216.5M or 56% of the total bids) stopped at the end of Round 8. Then bidding resumed on several other large cities, including Boston, Washington, Chicago, Dallas, San Francisco, which had seen no bids since Round 1. The coordinated nature of this switching could mean that DISH faces a single large opponent, who ceased bidding on New York and Los Angeles and used its eligibility to bid for these other cities instead.
Instead, it seems more likely that DISH has been bidding against itself since the early rounds of the auction, because DISH has committed to bid $0.50/MHzPOP on average across the country and the bids have only reached $0.51 in New York and $0.41 in Los Angeles. Obviously any opponent would have had to have been prepared to bid rather more than $0.50/MHzPOP to win the licenses in NY or LA, and even if the objective of a DISH opponent was actually to pick up less expensive licenses in other cities, it would have been necessary to force DISH to bid more than $0.50/MHzPOP in NY and LA so that DISH could reach its committed minimum bid threshold without owning all of the licenses nationwide.
If we look at all of the 24 licenses that have attracted competing bids at any stage during the auction, as shown in the chart below, we can see that virtually all of the competitive bidding has been confined to a few small areas, notably in Colorado, Nebraska, Wyoming, Idaho and Utah, where 10 licenses (including Denver and Salt Lake City) have seen multiple bids. There has also been another smaller cluster of activity in Virginia, North Carolina and West Virginia.
It is particularly notable that DISH appears to have been deterring any rival bids through multiple rounds of incremental bidding, regardless of whether it holds the license (which is randomly assigned between equal competing bids), until any competitors have demonstrably given up, as seen in the repeated rounds of multiple bids (note competitors with no minimum bid requirement would not overbid themselves, but DISH would be happy to do that while it remains below the minimum bidding threshold).
My suspicion is that the same factor may have been in play in New York and Los Angeles, where a token competitive bid was mounted in the first round, and then DISH’s one or more major rival(s) dropped out of the auction, leaving only a handful of small regional players to fight a doomed battle with DISH over a few insignificant licenses like North Platte and Scottsbluff, NE. If that were not the case, then we would again have seen DISH make overbids when it held the NY or LA license itself and that would have manifested itself in two competing bids being made for these licenses if a competitor were present. The fact that no competing bids were offered in NY and LA after Round 1 strongly suggests that no competitors were bidding against DISH for these licenses after that point.
Even more significant than the slowing increase in overall bids (where the determining factor is clearly DISH bidding against itself), the increase in total bids for once contested licenses today has been only $1M-$2M per round, demonstrating that virtually no-one is still fighting against DISH. DISH therefore appears well set to capture all of the H-block licenses in the country that it wants, as it has enough spare eligibility to bid for all of these licenses (including those still held by the FCC) for many rounds to come. The fact that the FCC has now increased the pace of the auction to 5 rounds per day, starting Tuesday, also supports the view that DISH is the only bidder for most licenses and most other participants have dropped out.
Taking a wider view, many commentators will undoubtedly try and explain away the results of the H-block auction as an aberration, due to the lack of major competitors for DISH. However, even if you accept that view (and ignore the fact that an unprecedented amount of spectrum is being made available through auctions this year and next, which is likely to change the balance of demand and supply significantly), it still doesn’t give much comfort to those who believe that spectrum is a scarce, appreciating asset. After all, this auction has demonstrated that if, like LightSquared, you don’t have many buyers for your spectrum, you’re not going to be able to realize a high price for that asset.
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01.18.14
Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 6:16 pm by timfarrar
It seems that contrary to Phil Falcone’s testimony on Thursday, its not true that “if you talk to anybody, they’ll tell you LightSquared will get the FCC license” at least if that “anybody” is FCC Chairman Wheeler (who of course did talk to LightSquared just before Christmas). It seems he wanted to send that message loud and clear with a Friday evening court filing, telling Judge Chapman that:
“The FCC is not in a position to confirm whether it will able to complete the work required to act on each of the conditions specified in the FCC Exit Condition before December 31, 2014. It is also impossible to predict what decisions the Commission may reach on these matters.”
The filing went on to explain that the first Exit Condition in the LightSquared bankruptcy plan (which requires approval for use of LightSquared’s 20MHz of uplink spectrum) “is not solely within the FCC’s control” because “the FCC coordinates certain spectrum-related matters with the NTIA, which in turn consults with all federal stakeholders through the Interdepartmental Radio Advisory Committee.”
That’s particularly important in view of a Bloomberg article earlier this month which indicated that “The Transportation Department, whose concerns that the LightSquared network could affect airliner navigation helped kill the company’s original plan, is withholding assent from the Interdepartment Radio Advisory Committee.” So in effect, the FCC is saying that if the DoT/FAA veto is maintained (and remember they would have to walk back the prediction that LightSquared’s operations could cause 800 deaths), it will not approve LightSquared’s application.
In addition, the filing noted that with respect to the second Exit Condition (which requires LightSquared to have gained approval to use the 10MHz of downlink spectrum between 1670-80MHz) “the FCC will need to conduct a notice-and-comment rulemaking process…[which] will include issuing a Notice of Proposed Rulemaking (“NPRM”), seeking comments from the public and adopting a Report and Order to allocate, develop service rules for and assign the [1675-80MHz] spectrum. At this time, it is not possible to provide any assurances that the processes outlined herein will be completed by December 31, 2014.”
This intervention potentially throws the LightSquared bankruptcy into chaos, and could leave Judge Chapman in a near impossible position, because as the FCC emphasized “Under the Revised Second Amended Plan, if the Effective Date has not occurred on or before December 31, 2014, the Plan shall be null and void.” We’ve already had DISH withdraw its bid, and as I noted the other day, it looks very much like DISH has alternative deals in mind. Commitments were also due on the LightSquared exit financing on Friday, and the FCC’s intervention could make the status of that financing even more uncertain.
So the question now is whether there is any feasible plan for Judge Chapman to confirm at this point in time? If she decides there is not, perhaps she could order the company to resume the auction of assets, this time without any conditionality on FCC approval. Would that mean Ergen jumping back in with a personal bid at a lower price? After all he suggested on Monday that had been a possibility, backed by a loan against his stake in EchoStar. Would the other LP debtholders compete against him (and put up cash to buy him out) if they weren’t going to get paid off at par plus accrued interest as they expected a few days ago?
Worryingly for LightSquared’s own reorganization plan, if the FCC intervention, which few expected at this point in time, is regarded as a direct smackdown in response to Falcone’s comments in court, that again raises the question of how big a “Phil risk premium” needs to be attached to the regulatory process, if Falcone maintains a substantial ownership stake in the company (even if he is no longer involved on a day-to-day basis, which seems to be the intent of the Fortress-backed plan).
After all, Senator Grassley (who has been a vocal critic of how “the FCC nearly granted billions of dollars in taxpayer assets to someone accused by our nation’s financial regulator of having ‘victimized’ ‘clients and market participants alike’ and leading a ‘graduate school course in how to operate a hedge fund unlawfully’”) was only too happy to give a statement for Bloomberg’s recent story about the lack of progress in Washington, and I’m sure that he won’t remain silent about any future FCC approvals while Phil remains involved with LightSquared.
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01.16.14
Posted in DISH, Financials, Operators, Regulatory, Spectrum, Sprint at 5:27 pm by timfarrar
After all the back and forth in court this week, with testimony from Charlie Ergen and Phil Falcone about Ergen’s purchases of LightSquared debt, the casual reader could be forgiven for thinking that this is still a battle between the two of them for control of LightSquared. However, a court filing from LBAC today emphasized that DISH is withdrawing its bid and if their argument (that DISH’s bid is not locked-up) stands, it appears that the Ad Hoc Committee will have an uphill task in moving to confirm a plan based on sale of the assets.
Instead, if LightSquared can get sufficient commitments tomorrow so that the $2.5B of new debt needed to back its reorganization plan is in place (contingent of course on FCC approval), then both Ergen and DISH appear happy to step back and wait to see what happens. If the FCC did give LightSquared the approvals it wants, which Falcone has “a pretty good feeling about” (mirroring his confidence back in 2011 that GPS interference issues could easily be solved), then Ergen would get repaid with interest (assuming he wins the current trial), and if the FCC refused (or declined to rule), then he could come back with another (lower) bid later on.
What’s far more intriguing is why DISH now seems to regard LightSquared as dispensable, at least for the time being. Remember that Ergen testified DISH only became interested in LightSquared as a backup plan once it became clear DISH would not succeed in buying Sprint or Clearwire. In addition, rebanding the AWS-4 uplinks to downlinks and pairing with LightSquared’s uplinks would delay any network deployment by at least a couple of years.
So it seems highly likely that Ergen has another plan in mind, which DISH will move to implement soon after the H-block auction is complete. There are repeated rumors about a Sprint bid for T-Mobile and an expectation that DISH would mount a counterbid. But it still seems that Sprint would have a tough job getting regulatory approval.
BTIG seem to think that a asset sale by Sprint to DISH would be one solution (what assets this would be is unclear, but we suspect DISH’s main objective would be to get hold of Clearwire spectrum, not a retail wireless business, and Sprint doesn’t need to buy T-Mobile for its spectrum). But isn’t a direct Sprint/DISH partnership a simpler solution, with a Sprint bid for T-Mobile acting as a backstop option if a deal with DISH falls through?
Its surprising how few people really seem to have grasped what DISH’s key asset is, namely that its 14M potential towers (i.e. rooftop satellite dishes) are at least as valuable as its spectrum (and perhaps more so, since using the AWS-4 spectrum for a fixed wireless broadband network wouldn’t be a very high value use).
Consider for example, a wireless broadband network deployed to 20% of DISH’s current customer base (2.8M households), let along the 8.5M targeted in DISH’s April 2013 Sprint bid proposal. If DISH can rent even a fraction of this tower space for $100 per month (compared to the $1700 or so that is charged by traditional tower companies) to Sprint to host its 2.5GHz small cell buildout, then that could generate at least $1B per year of incremental cashflow, with little or no offsetting costs (remember the power and space is provided by the homeowner). Moreover, DISH’s best use of its money would then be to try and buy DirecTV, offering a national broadband fixed wireless competitor and ensuring that AT&T couldn’t gain a similar buildout opportunity via DirecTV’s satellite dishes.
We’ll see what happens in the H-block auction next week, but even that may not be particularly critical to DISH’s near term plans, and I’d expect DISH could be quite content to be outbid on many licenses by non-strategic investors. Then regardless of what happens to LightSquared in the next few weeks (and things may go at least somewhat quiet for much of this year while the company makes yet another effort to secure FCC approval), my bet is that we’ll be hearing a lot more about Ergen’s wireless plans in the next few months.
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