That seems an appropriate title, as I head off to London and Paris this week, to hear MSS and other satellite operators talk about their future opportunities. I found it interesting to note that Euroconsult released their updated MSS market assessment a couple of weeks ago, cutting their projection of future wholesale revenue growth from 7% p.a. (in the previous version of their analysis) to 5% p.a. over the next 10 years, getting back much closer to my forecasts from a couple of years ago.
However, by my estimate, MSS wholesale service revenues only grew at 2% in 2011 and 3% in 2012 (not 5% as Euroconsult estimates, perhaps due to double counting of Orbcomm’s revenue growth from resale of Inmarsat and now Globalstar services) and the majority of this growth in 2012 came from Inmarsat’s price rises. While it originally looked like 2013 was shaping up to see a bit better growth, Iridium has reduced its guidance, Globalstar’s second quarter results were nothing to write home about and Inmarsat is again seeing a significant part of its modest revenue growth being driven by maritime price rises. So its now far from clear that we will get even to Euroconsult’s lowered 5% growth projection in the near term.
While spectrum is a wildcard that could provide incremental revenues for Globalstar (through a potential deal with Amazon) and Inmarsat (through a resumption of lease payments from LightSquared), progress here may not be as fast as expected. Globalstar’s hoped for NPRM is not on the tentative agenda for the FCC’s September Open Meeting, presumably meaning that although the NPRM has now been placed on circulation this issue may be left for incoming Chairman Wheeler to finalize. The recent application by Oceus Networks for an experimental license to test TLPS for DoD users also suggests that a partnership with Amazon is far from set in stone as the way Globalstar will be able to realize value from its spectrum assets.
In contrast, it looks increasingly like DISH will succeed in its bid to buy LightSquared’s satellite assets later this year, and DISH has agreed to assume the Inmarsat Cooperation Agreement as part of its stalking horse bid. But buying LightSquared is a sign that DISH is unlikely to move forward quickly with its entry into the wireless market, because it would take until late 2014 or beyond before the FCC could approve any change to downlink use for the 2000-2020MHz AWS-4 uplink band. At the moment it seems that interim FCC Chairman Clyburn doesn’t want to take a decision even on LightSquared’s uplink band (let alone address the purported “swap??? of downlink spectrum, which Ergen doesn’t want or need – leaving MAST Capital Management stuck holding a largely worthless lease of the 1670-75MHz spectrum band), because the FCC will not receive reply comments until September 23 (shortly before Clyburn relinquishes the chairmanship). So even if DISH buys the satellite assets, and drops the request to get hold of the 1675-80MHz band, reaching any resolution of the current regulatory issues in the L-band will undoubtedly be a lengthy process.
Charlie Ergen hinted on DISH’s Q2 call that he doesn’t anticipate simply continuing the Cooperation Agreement in its current form, so it would not be at all surprising to see a fight between DISH and Inmarsat over renegotiation of the Cooperation Agreement in the early part of 2014. One possible compromise could be in the form of a partnership between DISH and Inmarsat to use the TerreStar-2 satellite to preserve Inmarsat’s S-band license in Europe, in exchange for further postponement of any cash payments under the Cooperation Agreement.
Despite (or perhaps because of) the challenges that the MSS market faces, M&A continues apace. Recent agreements include Inmarsat’s sale of its energy sector assets to RigNet and Rockwell Collins’ acquisition of ARINC. I understand a number of additional notable transactions are in the works. Rumors persist that SITA has put OnAir up for sale (only six months after buying Airbus’s stake in the business) and Honeywell appears to be the most likely buyer, while Orbcomm continues its acquisition of satellite M2M service providers and may now be in negotiations to buy Comtech Mobile Datacom.
UPDATE: According to an OnAir spokesperson “SITA has no intention to sell OnAir to Honeywell or to anyone else and remains OnAir’s sole shareholder.”
It will be particularly interesting to see the valuation put on OnAir, given the recent disastrous public offerings of Gogo and Global Eagle/Row44, because if OnAir attracts a much lower valuation than Gogo and Row44 it could be a sign that SITA is pretty pessimistic about the future of the inflight connectivity market. That would be a surprise to many, because after all inflight connectivity is seen as one of the major areas for growth in the MSS market going forward, but at present making an operating profit, let alone a return on investment, is a pretty distant prospect for most if not all of the service providers. So if now is the time for SITA to get out, will this turn out be the age of wisdom for the sellers and the age of foolishness for the buyers, or the reverse?
So it seems like everyone has finally woken up to Amazon’s tests of Globalstar’s TLPS service that I wrote about in early July. Presumably “people with knowledge of the matter” are talking to the press now because Globalstar is trying to get an NPRM issued by interim FCC Chairman Clyburn, before she steps down in favor of Tom Wheeler, who may be more likely to opt for lengthier approval process (as I noted last month, he appears to favor using TLPS as the test case for a negotiated “harm claim threshold” approach).
Of course the longer that approvals take, the more chance that one or more ecosystems for alternative bands will emerge, and undermine the value of TLPS, so its hardly surprising that Amazon rivals such as Microsoft expressed their “concerns about interference to unlicensed uses in the 2.4GHz band” after Globalstar’s experimental license application gave details of the test locations, and the Bluetooth Special Interest Group has been pushing to delay any NPRM “until a full technical analysis of the impacts has been completed and the impact on the existing users of the ISM spectrum is understood”.
Some questions also remain about the compatibility of TLPS with services other than Bluetooth, particularly legacy BAS license holders, which caused the FCC to limit TLPS testing in Silicon Valley to lower power levels and indoor locations only (and has prompted Globalstar to conduct the latest round of testing in New Orleans where there is no legacy BAS usage, although there are some nearby Part 90 public safety users).
TV White Space spectrum is one possibility as a substitute for TLPS, but a more direct alternative appears to be the 3550-3650MHz spectrum, especially if the FCC follows the licensing approach proposed by AT&T and Google in a joint letter to the FCC on August 6, urging the Commission to move forward with allocation of the 3550-3650MHz for small cell deployments via a streamlined (i.e. low cost) auction, with any applicant allowed access to a secondary exclusive tier of spectrum if they commit to a “substantial service requirement???. So it is obviously extremely important, if Globalstar is to have any chance of realizing the $3B it has maintained that its spectrum is worth, that approvals are received quickly.
However, what Bloomberg’s article didn’t appear to have any clue about, is how Amazon might actually use the spectrum and generate enough value to justify paying Globalstar billions of dollars. In my view, the only realistic plan (as GigaOm notes) is a dedicated WiFi deployment, allowing its own devices (such as Kindles) to use a very extensive small cell network instead of relying on cellular networks for data delivery.
To do that Amazon has to get a device into a huge number of homes, and hope that the higher power and longer range of TLPS (compared to unlicensed WiFi) provides widespread coverage in urban areas. The ubiquitous availability of WiFi access points is the theory behind FON, and its notable that in the UK, BT (which has provided FON service through all of its in-home DSL routers for several years) is now switching to licensed 2.5GHz spectrum that it bought in the 4G spectrum auctions earlier this year, in order to provide coverage over a greater distance.
So really the most interesting question here is how Amazon intends to get a TLPS access point into millions of homes. It seems highly likely that Amazon is developing a product much like an Xbox, which can serve as a “hub” for gaming and for delivery of its streaming video services (which perhaps explains Microsoft’s concerns about TLPS), connected to existing in-home broadband connections. Remember that Amazon has not been as successful as Netflix in ensuring that access to its streaming video service is widely available on consumer electronics devices like DVD players (probably because it is less willing to pay incentives for acquisition of streaming video subscribers), suggesting that Amazon may well want to push its own device instead. Its important to realize this is not about Amazon providing a rival broadband access service, like DISH’s wants to do with its former satellite spectrum in the AWS-4 band, but instead would compete with Microsoft’s Xbox and the home media hubs planned by Intel, Google and Apple, amongst others.
I’d speculate that Amazon will want to provide its “hub” to Prime users pretty cheaply, perhaps even for free, and its notable that Amazon has also been working on remote video processing capabilities using its cloud servers, potentially enabling it to simplify (and reduce the cost of) a gaming device. I’d also guess that Amazon wouldn’t want the launch of this device to be constrained by the timeline of TLPS approvals, not least because the FON-like service is only one part of the entire offering. Indeed its previously been rumored that Amazon is planning to launch a set-top box for video streaming as soon as this fall.
However, if TLPS looks likely to gain FCC approval (with the FCC establishing a way forward in the near future), an initial device launch could take place using standard WiFi (and perhaps other solutions like White Space spectrum), with the embedded capability to upgrade to TLPS, once approval comes through. That could mean an upfront option payment for Globalstar (perhaps some tens of millions of dollars?), if Amazon wants to embed the TLPS capability in its devices, but it may take a while longer before Globalstar finds out if it is going to achieve much more significant returns from its spectrum assets.
Back on May 31, LightSquared asserted in its motion to retain Jefferies as placement agent for its exit financing that “both LightSquared and Jefferies are highly confident [that the retention] will lead to fully committed financing in an amount likely in excess of the face amount of the Prepetition LP Obligations, the Prepetition Inc. Obligations, and the DIP Obligations at relatively low costs to the LightSquared estates”. Two weeks ago, I noted that LightSquared had been forced to scale down its planned $3B debt raise to $2B, and would seek to force Ergen/Sound Point to accept PIK second lien debt instead of being repaid from the exit facility.
However, on Friday night LightSquared acknowledged that exclusivity had been lost and that competing plans for reorganization would be filed, followed by an auction of the company. Moreover, I’m told that today LightSquared and Jefferies dropped the planned exit financing facility completely (not just putting it “on hold” as was reported last week).
Falcone apparently told potential investors that he was unwilling to go forward because the facility was “too expensive” (with warrants for 15% of LightSquared’s equity being granted upfront to potential lenders). However, I understand that the change of direction appears to have resulted from LightSquared being hauled over the coals by the bankruptcy court last week for ignoring Ergen’s $2B cash offer, and the judge was unwilling to accept LightSquared’s contingent reorganization plan, which would have only been funded after FCC approval was received. As the Secured Lenders noted in their submission on July 9:
“Since these Chapter 11 Cases were filed over a year ago, the Debtors have told the Court repeatedly that the only way to realize value is to pursue a resolution of their regulatory problems with the Federal Communications Commission (“FCC”), and that all they needed was sufficient “runway” to achieve their objective. When the Cases were filed in May 2012, the Debtors believed they needed about six months to get there. In January 2013, during the exclusivity hearing, the Debtors’ management testified that they still needed about six months to clear the regulatory hurdles to value maximization. Today, they claim that their elusive objective remains six months or more away…In reality, the Debtors have no idea whether or when they will ever get regulatory approval.”
Now LightSquared has set out a lengthy timetable for an auction in December 2013 (which is already subject to an objection from the Secured Lenders), because (in fantasyland) Harbinger is apparently highly confident that the FCC will approve LightSquared’s request in November, enabling them to raise money for a counterbid on the back of that approval, before the auction actually takes place. However, even if LightSquared’s proposed timetable is approved (and it appears that the judge is actually losing patience with the company’s repeated delays), it seems rather more likely that Falcone is instead going to be 0 for 3 in his battles with Ergen (with LightSquared following the path trodden by DBSD and TerreStar).
I suppose at least for the time being, Phil can still tell everyone he’s “highly confident” that he will ultimately win his battle with the SEC, but again perhaps he now shouldn’t be as highly confident as in May when he “blindsided SEC officials” by publicly declaring that he’d escaped with a “slap on one wrist“.
Last week, John Dooley of Jarvinian, who have been conducting tests of Globalstar’s proposed TLPS service (which is intended to provide a dedicated, managed WiFi channel) made a filing with the FCC in which he stated that the recent TLPS testing in the Bay Area was undertaken “to help a major technology company assess the significant performance benefits of TLPS for a transformative consumer broadband application”. His filing did not state the name of this company, but the testing under Globalstar’s experimental license (issued by the FCC on April 1) was undertaken at 3 locations in Cupertino and Sunnyvale.
Of course, Amazon’s potential interest in Globalstar’s spectrum appears to be a key reason why Thermo agreed to invest another $85M into Globalstar in May, in order to complete the 5.75% notes exchange and restructure Globalstar’s $586M loan guaranteed by COFACE. Many investors are now also eagerly expecting the FCC to issue an NPRM setting out proposed rules for TLPS, although it is somewhat unclear whether Chairman Clyburn will act on her own, or if any decision will have to wait for incoming Chairman Wheeler (who has worked extensively on interference issues as chairman of the FCC’s TAC, which issued a report in February suggesting TLPS would be a good candidate for the FCC’s new approach to adjacent band interference).
The fact that the Globalstar experimental license will last for two years suggests that it may take some time for all interference issues to be resolved (including the dispute with BAS interests which is becoming increasinglyheated) and/or for Amazon to make a final decision on whether to use TLPS or other spectrum for its planned new application. If Amazon does choose Globalstar then this could lead to a substantial windfall: Globalstar has asserted that its spectrum is even more valuable than that of Clearwire, because of the unique compatibility of TLPS with existing WiFi equipment, implying that it puts a value of at least $2B on the 22MHz of TLPS spectrum.
With the FCC’s intention to license additional spectrum for unlicensed or shared use in the 3600MHz and 5GHz bands, along with promotion of white space access technology, Amazon may have a choice of other cheaper spectrum (albeit without the same ecosystem) in the near future or even using capacity on an existing wireless network. However, until we find out more about the nature of Amazon’s plans it will be hard to know which spectrum is most suitable, and how much Amazon would want to pay to gain access to it.
On Wednesday afternoon, it emerged that Jefferies’ attempts to raise a $3B exit financing facility for LightSquared had failed, with news that the debt was being split into two tranches, a first lien of $2B, with an increased interest rate (3% extra of Pay In Kind interest) and additional warrants (10% of diluted equity instead of 5%, with all of the warrants immediately vested, instead of the warrant grants increasing over time). In other words, third parties didn’t believe that LightSquared’s spectrum was worth more than $2B, even with the required FCC approvals. The terms of the $1B second lien were not specified, except that it would be all PIK interest and the syndication of this facility would be “handled” by Harbinger.
On Friday, the New York Post revealed that LightSquared plans to ask the bankruptcy court to force Charlie Ergen’s Sound Point Special Opportunities (SPSO) fund to accept this second lien debt, because, according to Harbinger’s court filing on Wednesday, Sound Point “fraudulently entered LightSquared’s capital structure…to prevent the Debtors from successfully reorganizing and acquire the Debtors’ assets on the cheap”. Instead Harbinger, wants the court to extend the July 15 exclusivity deadline, allowing LightSquared to pursue its own reorganization plan.
Its not a little ironic that Harbinger describes Ergen’s $2B offer for LightSquared’s satellite assets and spectrum as a “low ball bid” when Jefferies has only been able to raise $2B of debt secured against all of LightSquared’s assets, including its Crown Castle lease, and it will be interesting to see how the court views Harbinger’s arguments. As I noted on Monday, it seems like fantasyland to believe that the FCC will simply give LightSquared the 1675-80MHz spectrum band in the next few months and so it might not even be possible to get hold of the $2B loan and pay off the other (non-Ergen) debt in the foreseeable future. Presumably that is why (according to the NY Post article), LightSquared plans to borrow another $200M of DIP financing to extend its cash runway into next year.
However, LightSquared will of course be supported by everyone else in the capital structure apart from the secured debtholders, because Ergen’s proposed $2B bid would do little more than pay off the secured debt, and so LightSquared’s plan is their only chance of a recovery. As a result, we saw MAST and US Bank claiming in their court submission on Monday that FCC approval is “near certain”, a ludicrous distortion of the reality of the situation, based only on Genachowski’s expressed opinion, in response to my question, that the L-band will ultimately “be freed for terrestrial use”, which supposedly “foreshadowed approval of the application”.
Its therefore going to be very interesting to see how things develop at Tuesday’s status conference. Although the subordination plan may not be discussed in detail at that hearing (I’m told it will likely be published on July 15), it would certainly be a dramatic move if the court decided to subordinate Sound Point’s $1B holding to $2B of new debt, raising the possibility that Ergen’s $1B will never be repaid if LightSquared is unable to realize more than $2B when it tries to sell its spectrum. Then perhaps Phil can commiserate with Charlie that this is how it feels to lose $1B by investing in LightSquared…
Today Charlie Ergen’s next battle has officially begun, with the filing of LightSquared’s motion to extend exclusivity and potentially reject Ergen’s purchases (through Sound Point Special Opportunities Fund or SPSO) of LightSquared’s debt. Its important to note that Ergen personally (not DISH) owns SPSO, and Ergen (through an entity named L-Band Acquisition Corp or LBAC) made the $2B offer to acquire LightSquared back in May.
LightSquared wants to extend exclusivity to give it more time to secure approvals from the FCC, because Jefferies is currently trying to get commitments for a $3B exit financing loan (which should be confirmed one way or the other this week). That loan, which carries an 8% interest rate plus substantial warrants for LightSquared equity, would pay off all of LightSquared debts and give Harbinger another year or more to find a buyer for LightSquared’s spectrum, while allowing the company to meet all of its obligations (including a resumption of lease payments to Inmarsat in April 2014).
However, LightSquared would not be permitted to draw down the loan unless and until the FCC has granted LightSquared rights to use the 1675-80MHz spectrum band. LightSquared has assured potential investors that it expects approval from the FCC this fall, shortly after Tom Wheeler takes over the chairmanship of the FCC, and that there will be no auction of the 1675-80MHz band (instead LightSquared will pay $80M for weather balloon relocation plus a further $170M “fee” in 2017). LightSquared also believes that it will be free to use its L-band uplinks without any GPS problems, as soon as the ruling is issued, and has told potential investors that the lower L-band downlinks will be available for use in 2015.
That sounds a lot like fantasyland (for example the FCC’s proposed FY2014 budget indicates that the 1675-80MHz spectrum will not be available until 2017 after weather balloons have been relocated), and some investors are apparently considering making a commitment in the expectation that no approvals will be received, because then they will get their commitment fees (in cash), but never have to put their money at risk.
A plausible best case for LightSquared is that the FCC defines a way forward later this year (i.e. more GPS testing and work to define interference standards), but it seems inconceivable that the FCC could simply hand over the 1675-80MHz spectrum band without at the very least defining service rules and an allocation framework through an NPRM and then conducting a 9-12 month comment cycle before any ruling is issued. More likely is that Wheeler has other things on his plate (like the incentive auctions), and a giveaway to LightSquared (along with alienating the DoD through more GPS testing) is not worth the political battle.
LightSquared is suggesting that a $3B loan would be well covered by the spectrum value, because it considers its spectrum to be worth the same as AWS-1 spectrum ($0.69/MHzPOP based on the Verizon-SpectrumCo transaction) and that there will be strong demand for its spectrum from AT&T and Sprint, who LightSquared believes would want to pair L-band uplink spectrum with WCS or BRS/EBS downlink spectrum respectively. While AT&T has the power to create a new ecosystem and has permission from the FCC to use WCS in an all downlink configuration, its hard to see why AT&T wouldn’t instead just buy the 1695-1710MHz uplink band which will be auctioned (very likely as unpaired spectrum) next year, with little competition from other carriers (except possibly DISH).
Sprint on the other hand has certainly learned its lesson from paying Apple $15.5B to ensure its own non-standard LTE spectrum was included in iPhones, and it would be crazy to try and make another unique band pairing when it will be far more straightforward to simply make use of the globally allocated BRS/EBS band in SoftBank’s small cell vision. Remember that Ergen wanted to buy Clearwire spectrum to take advantage of the emerging handset ecosystem in this band (as a mobile small cell play), and was going to use the AWS-4 spectrum for fixed wireless broadband (backhauling the mobile small cell traffic), so it wasn’t necessary to force the creation of a handset ecosystem in AWS-4. There’s no way that LightSquared’s spectrum will get an ecosystem outside North America (because international regulators won’t rush to address GPS issues and the 1670-80MHz band will still be allocated for meteorological systems elsewhere in the world), and without AT&T or Verizon, no-one will create an ecosystem in the US either.
So why is Ergen interested in buying LightSquared? If he’s now stuck without a wireless partner (and I don’t expect him to bid for T-Mobile now he won’t control any Clearwire spectrum), then he won’t be able to sell the AWS-4 spectrum to AT&T or Verizon (the two carriers who can force the creation of a new ecosystem at little cost to themselves) until after the next Presidential election, so it would be possible to take this time to reband AWS-4 spectrum to downlink and use LightSquared as uplink. More importantly, LightSquared’s spectrum is part of Ergen’s leverage in a battle with DirecTV (due to the upcoming Mexican coordination), which in my view is a far more plausible near term merger target for DISH, especially if the promise of a fixed wireless broadband network is sufficient enticement for the FCC to approve a DISH-DirecTV merger.
Of course, prospective lenders to LightSquared are therefore also betting that they will ultimately be backstopped by DISH’s interest in the spectrum band. Indeed some even think that Ergen will be prepared to bid $3B+ for the spectrum (despite the fact that this is far higher than DISH offered for Clearwire’s spectrum). Lenders might instead want to consider that by next year, a DISH-DirecTV merger will either have happened or not, and LightSquared’s spectrum will then offer little in the way of leverage to DISH.
In addition, the forthcoming FCC auctions of 75MHz of spectrum (H block, 1695-1710MHz uplink and AWS-3 likely paired with 1755-80MHz) may reset some expectations with regard to spectrum pricing, especially in unpaired uplink bands. Given that the new $3B loan will all have been spent within 12-18 months of emergence, it therefore seems there would be little reason for anyone interested in this spectrum not to wait until LightSquared once again runs out of money, and the price of the debt falls.
The one piece of good news, for Falcone, if not for the new lenders, is that as part of any exit financing deal, it seems that Harbinger will be released from any liability for misleading investors during the sale of LightSquared debt in 2010 and 2011 (when lenders were assured that GPS interference was no problem). So even if Phil ultimately does lose all of his investment in LightSquared, at least he will then only have to account to Harbinger’s investors and not to LightSquared’s investors as well.
Now that Clearwire’s board has urged its shareholders to reject the Sprint bid, and Sprint has initiated litigation to try and block DISH’s tender offer, it seems Charlie Ergen has a good chance of achieving his objective: to ensure Sprint is unable to make use of Clearwire’s spectrum and enhance its network capacity as SoftBank desires. DISH has indicated that it will now focus on its Clearwire tender instead of making a further bid for Sprint in advance of today’s deadline.
While that doesn’t rule out DISH making another higher but unfinanced offer to disrupt the Sprint-SoftBank vote next week, it seems Ergen might be better off having SoftBank complete a takeover of Sprint and then discover that its $21.6B investment will go to waste unless Sprint agrees to sell DISH the 40MHz of Clearwire’s spectrum that Ergen wants.
So I’m left wondering if DISH’s actions have all been part of a grand plan:
a) keep making offers that persuaded Clearwire shareholders (and ultimately the Clearwire board) to reject the Sprint takeover
b) make an uncommitted bid for Sprint to persuade SoftBank to overpay for Sprint
c) make noises about LightSquared’s spectrum to persuade Sprint to raise its bid for Clearwire by less than expected
d) come in with a much better offer for Clearwire shares at the last minute, which was high enough to ensure that the Sprint bid for Clearwire will be rejected
e) hedge the bid with just enough conditions that will ensure that Sprint is unable to make use of Clearwire’s spectrum and that Clearwire, DISH and Sprint are tied up in litigation for months to come.
Given that sequence of events, its reasonable to ask if SoftBank really wants to own Sprint without the Clearwire spectrum? If not, then will SoftBank have any option other than to ultimately do a deal with Ergen on his terms? If you think that’s unlikely, then you only need look back to the Cablevision-DISH trial over Voom last fall, where DISH had a terrible position in the courtroom, but still managed to get to a settlement which achieved Ergen’s objectives (including a purchase of the MVDDS spectrum which will be part of DISH’s planned wireless broadband network).
After all, remember that DISH still has a number of options to make SoftBank’s life even more miserable, including mounting a rival bid for the PCS H-block spectrum which Sprint desperately needs to enhance the capacity of its existing LTE network.
So maybe the question is now when not if SoftBank will be forced to settle with DISH? As Vijay Jayant told The Hollywood Reporter in April “Charlie’s attitude is, ‘At some point, they’ll negotiate with me on my terms.’ He’s bluffing until he’s not.”
Please Masa, don’t throw me into the litigation briar patch!
This week saw an apparent reversal for DISH on Monday, when SoftBank agreed to increase its bid for Sprint slightly and Sprint rejected DISH’s bid as unlikely to lead to a “superior offer”, followed by a victory on Wednesday when Clearwire’s special committee recommended that shareholders accept DISH’s $4.40 per share tender over Sprint’s $3.40 per share bid to buy out minorities.
Despite this apparently split decision, many seem to believe that the outcome will have to be all-or-nothing, with either DISH or Softbank winning both Sprint and Clearwire. In other words, either Sprint increases its bid for Clearwire to fend off DISH, or DISH brings in an equity partner to further improve its bid for Sprint. However, Sprint has put some serious roadblocks in DISH’s way, increasing the break-up fee due to SoftBank if its bid is rejected and more importantly, requiring any counterbid by DISH to be “fully financed pursuant to binding commitments from recognized financial institutions“. Sprint has also stated that it will “enforce its governance rights in Clearwire” and previously described DISH’s offer for Clearwire as “illegal”.
In my view, rather than pointing towards a new DISH bid for Sprint with committed financing (costing hundreds of millions of dollars) which would potentially still be rejected by the Sprint board, that suggests to me that DISH might instead make a much higher (non-financed) bid for Sprint and then initiate legal action over Sprint’s refusal to consider it. Similarly, DISH has been trying to delay FCC approval for the SoftBank bid, because Softbank has been emphasizing the urgency of moving forward quickly to improve Sprint’s network and the deal becomes less attractive to SoftBank the longer it is delayed. Going forward DISH would presumably also bid against Sprint for the H-block spectrum, closing off yet another avenue for Sprint to improve its network.
A similar strategy may be at work in the Clearwire bidding, and even if Sprint was to mount an increased bid (which seems less likely now that SoftBank has increased the offer to Sprint shareholders and reduced the cash available to Sprint for investment), I’m convinced that Ergen would simply increase DISH’s tender offer once again. As a result, DISH is very likely to gain a substantial stake in Clearwire, and then Ergen will be able to block Sprint from taking full advantage of Clearwire’s spectrum, and probably tie the company up in another legal battle over Sprint’s “governance rights”.
Remember that as Craig Moffett noted “Dish is unique in that it uses litigation as a profit center” and Charlie Ergen said last year “I may be the only CEO who likes to go to depositions…You can live in a bubble, and you’re probably not going to get a disease. But you can play in the mud and the dirt, and you’re probably not going to get a disease either, because you get immune to it. You pick your poison, and I think we choose to go play in the mud.”
So now the question for Masayoshi Son is, does he want to tie up Sprint and Clearwire in litigation for years, or will he instead reach an accommodation with Ergen, and sell DISH the 40MHz of Clearwire spectrum that Ergen wants, in exchange for getting full control of Sprint and the remainder of Clearwire? Such a deal might enable Ergen to become a wireless competitor (as it would likely be followed by DISH purchasing T-Mobile), but the alternative may be that SoftBank’s $21.6B investment in Sprint wastes away, as Sprint fails to improve its network and does not become any more competitive with AT&T and Verizon.
So the question is who holds the LightSquared LP Preferred Shares, which I was told were sold to Ergen/Sound Point by Fortress and Providence in April when they sold their Term Loan debt. Notably, Solus (who have been on the opposite side from Ergen in previous MSS bankruptcies) has also sold its LP Preferred holdings in recent months. So its pretty clear that there is likely a single large undeclared holder controlling virtually all of the fulcrum security in this bankruptcy. Is it DISH (perhaps holding the preferred shares directly rather than through Sound Point) or someone else? And what happened to the indications I’d received that Sound Point owns more than half of the Term Loan? Is there another undisclosed Sound Point fund (perhaps backed by Carlos Slim?) in addition to SPSO that controls an additional $300M to $400M of the term loan? Its going to be very interesting to see how this works itself out and who now owns what, as we look forward to another epic legal battle over LightSquared’s proposed reorganization plan.
Some observers may be wondering if Charlie Ergen is serious when he suggests using LightSquared spectrum as an alternative to Clearwire, as suggested by today’s news that DISH made a $2B cash bid last week to buy LightSquared (note that the offer is for LightSquared LP not Inc, i.e. ignoring the 1670-75MHz Crown Castle lease). After all, some might think this is yet another in a series of increasingly implausible maneuvers, as DISH tries desperately to find a way to exploit its spectrum assets.
However, its important to note that this story comes immediately before Clearwire shareholders were set to vote on Sprint’s bid for the company. That’s curiously similar to the leak of news that DISH was interested in buying T-Mobile (also to Bloomberg), just a few days before DISH made its bid for Sprint last month, so I wonder what Charlie Ergen has in mind this time around.
In the case of LightSquared, the company still has exclusivity to propose a plan until the end of this month, while DISH has indicated that its offer only remains valid until May 31, so DISH has plenty of outs if it wants. In addition, its hardly likely that Harbinger would accept an offer that would wipe out their equity, even if value is left for preferred holders (where Sound Point owns an 80% stake and would thus control the fulcrum security in any reorganization) after paying off the $1.7B plus interest due on the term loan.
LightSquared’s spectrum is certainly not a near term alternative to Clearwire, given that it will take years for use to be approved, and an L-band ecosystem won’t develop until well after that for DISH’s AWS-4 spectrum. On the other hand, the L-band has near term value to DISH because of the Mexican situation, and could be a long term backup option, if DISH plans to sit on its AWS-4 holdings for the next several years and wants to reband it to downlink spectrum, so its worth forcing Harbinger’s hand and ensuring that LightSquared’s assets are ultimately auctioned off.
However, just as the T-Mobile story was a red herring to distract from DISH’s planned bid for Sprint (even though it remains a possible alternative option for DISH), I wonder if the LightSquared story indicates that DISH has another plan to announce in the next few days. Could it be a deal to buy spectrum from Clearwire, if Sprint’s bid is unsuccessful? Certainly the suggestion that LightSquared is a viable option might help DISH in negotiations with Clearwire over price.
Another possibility is that DISH is trying to persuade Clearwire shareholders to sell out to Sprint for a relatively lower price, on the basis that DISH could then go all out to buy Sprint, without worrying about Crest trying to hold out for more money for Clearwire investors. Finally, and perhaps the biggest stretch: could DISH be poised to reach an understanding with SoftBank that it will gain control of some of Clearwire’s spectrum if SoftBank succeeds in buying Sprint and Clearwire without a significant increase in the current bids?
News tonight that Clearwire may decide to delay the vote on Sprint’s bid certainly suggests that Sprint might now succeed in securing the votes to buy Clearwire with only a modest increase in its bid price (to say $3.30 to $3.50 per share). In that case, DISH would have to either negotiate with or outbid SoftBank if it is to secure access to the Clearwire spectrum it wants, unless DISH succeeds in persuading the FCC that Sprint should be forced to dispose of some of Clearwire’s spectrum as a condition of closing the deal.
At least from SoftBank’s point of view, DISH would certainly be a more palatable purchaser of Clearwire’s spectrum than Verizon. If that presents too much of a problem (from the point of view of Sprint shareholders who would then be unable to realize the benefit of a rival DISH bid), could Sprint sell some 2.5GHz spectrum to T-Mobile instead, presenting DISH with another indirect route to acquire this spectrum?
Many epitaphs are being written today, and perhaps even a few pitches for book deals, bringing back memories of my comments to Bethany McLean for her Vanity Fair article two years ago. However, some apparently think the LightSquared saga has a few more chapters to be written, after Chairman Genachowski’s comments yesterday that “he expects LightSquared Inc. to eventually win approval for using its airwaves”. Since I actually asked him the question that prompted this statement (at the Jefferies conference) about what lessons he took from the LightSquared debacle (a characterization he disputed), I thought it would be useful to set the comment in context.
It was prefaced by the statement that Genachowski believed all satellite and broadcast spectrum was underused and should be reallocated for flexible terrestrial mobile broadband use, to meet the “obvious” spectrum crisis, and because of this “crisis” the L-band spectrum was “too valuable to be left unused”. Of course, he didn’t state any timeframe for action, and acknowledged that it was not possible to use the L-band spectrum without new receiver standards or similar changes to protect GPS (which will take years).
Recent actions, such as tomorrow’s NPRM on Qualcomm’s plan to use Ku-band satellite spectrum for Air-To-Ground communications and the effort to allocate C-band spectrum for small cells certainly bear out Genachowski’s lack of regard for satellite services, and so its not surprising that Globalstar has been urging him in recent days to move forward with an NPRM on its TLPS plan “prior to the Chairman’s expected departure later this month”.
In contrast, observers I’ve spoken with expect his successor, Tom Wheeler, to have a keen appreciation of the challenges associated with reallocation of spectrum, by virtue of his chairmanship of the FCC’s Technological Advisory Committee (whose February 2013 white paper on harm claim thresholds notably didn’t even mention attempting to solve the LightSquared/GPS conflict). I’m also told that given the battle that will take place with the DoD over gaining access to the 1755-80MHz spectrum for an auction next year, it is highly unlikely to be worth extending this fight to cover LightSquared/GPS as well.
So why was Sound Point, which is widely believed to be backed by Charlie Ergen, buying up LightSquared’s debt and preferred shares last month? After 3 days of meetings with dozens of investors in New York this week, I’ve been refining my view of Ergen’s plan for Sprint, Clearwire, LightSquared etc and will shortly be issuing the next update to last week’s report on DISH’s wireless ambitions. On the LightSquared front, what has emerged is that Sound Point has now acquired the majority of LightSquared’s Term Loan debt, and there appears to be reasonably wide consensus that both Ergen and Carlos Slim are backing Sound Point. I’ve also concluded that the near term focus is likely to be on the leverage that gaining control of LightSquared would give Slim to get a Mexican broadcast license, as part of a settlement with the Mexican government to resolve the dispute over spectrum allocation for MEXSAT. That could provide a windfall for Slim (and DISH Mexico) that is worth far more than the $600M-$700M that Sound Point has paid for what is likely to be a controlling stake in a reorganized LightSquared.
In those circumstances, there would be little point in Sound Point offering to buy out the rest of the term loan holders, and instead a debt for equity conversion of the LP Term Loan seems much more plausible. That would leave the remaining Term Loan holders with illiquid equity in an entity with only a very long term possibility of owning valuable spectrum (assuming that any further payments to Inmarsat can be deferred indefinitely until terrestrial usage rights can be established in the L-band) and perhaps some optionality based on future litigation. That might come as a big shock to those who believe that the only outcome is that the Term Loan will get taken out at par plus accrued interest, because of how important LightSquared’s spectrum assets are to Ergen!
