06.17.14
Posted in General, Regulatory, Spectrum at 4:02 am by timfarrar
Back in February, I wrote an article for GigaOm, questioning the unrealistic projections of future data traffic produced by the ITU Speculator model. Since then the conclusions of one of the studies I mentioned, conducted by Real Wireless for Ofcom in June 2013, have been amended to reduce the modeled traffic per sq km by a factor of 1000 (from 10 PB per sq km per month to 10 TB per sq km per month in suburban areas), by the simple expedient of changing the label on the chart axis in Figure 44. The new version of the report fails to give any explanation of why this thousandfold “error” occurred, or indeed how the new results are consistent with the ITU model (which of course does project traffic demand of petabytes per sq km per month by 2020).
Ofcom claimed by way of explanation, in a statement to PolicyTracker, that “since the report has served its purpose we do not plan to carry out any further work to update it,” but one therefore has to wonder exactly what that purpose was, if not to exaggerate future demand for mobile spectrum and/or shore up a model which even Ofcom now apparently considers to be in error by a factor of 1000.
Just to give another illustration of quite how badly wrong the Speculator model is, I thought it might be helpful to compare the predicted levels of traffic demand with that experienced during the Superbowl in 2014, which is documented in a Computerworld article from earlier this year. That article highlights that AT&T carried around 119 GB of traffic in the busiest hour of the game, while Verizon carried roughly 3 times as much as AT&T. Broadly, we can therefore estimate that the total amount of data traffic across all mobile networks in the busiest hour of what is widely viewed as the most extreme situation for mobile demand in the entire US (if not the whole world) is around 500GB in the square kilometer in and around the stadium (depicted in red below).
For comparison, the Speculator model projects that by 2020, the typical level of everyday demand that needs to be accommodated by mobile networks (excluding WiFi) in a dense urban public area will be 51 TB per hour per sq km, one hundred times more than the traffic level experienced in the busiest hour at the Superbowl in 2014.
When AT&T reports that data usage in the busiest hour of the game has increased by only a factor of four in the last 3 years, is it really credible to expect traffic at the Superbowl to increase by 100 times in the next 6 years? And even if traffic at the Superbowl itself grows by leaps and bounds, why should global spectrum allocations be set based on traffic in the busiest hour at the busiest location in the whole of the US? Clearly, a more rational conclusion is that the Speculator model is simply wrong, and cannot possibly be representative of typical scenarios for mobile data usage in 2020.
Permalink
06.04.14
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 6:18 am by timfarrar
Does the LightSquared bankruptcy case need a mediator or a psychiatrist? That’s what I’m wondering after learning that with the sole exception of Phil Falcone, all the creditors now agree on a revised plan for the company to emerge from bankruptcy. That plan apparently involves Harbinger being left with no stake in the reorganized company, as I predicted when Judge Chapman made her ruling last month. As a result, although the suggestion last week from the lawyer for LightSquared’s independent committee was that “A mediator could help us get over the finish line” it seems more likely that the current job for Judge Drain involves talking Phil out of “riding the bomb” and suing the FCC.
In any case, the lawyers involved appear convinced that ultimately Harbinger won’t be allowed to sue the FCC, because any potential claims against the FCC for suspending LightSquared’s ATC license would be property of the LightSquared bankruptcy estate, not of Harbinger. Thus, just like the bankruptcy court blocked Harbinger from proceeding with its litigation against the GPS industry (with LightSquared itself taking over this litigation), it seems that as part of the reorganization, the company would ask the court to prevent Harbinger from suing the government.
Judge Chapman certainly appears a little irritated about Phil’s actions, telling lawyers at an emergency hearing yesterday that she doesn’t like learning about developments in her cases “in the New York Post or the Wall Street Journal.” So it will be interesting to see how long she gives the mediation, especially given the rapid depletion of LightSquared’s existing funds, and whether she agrees that in fact Phil just needs to see a therapist instead.
Permalink
05.29.14
Posted in Broadband, General, Services, Spectrum at 4:04 pm by timfarrar
Over the last two weeks rumors have swept the satellite industry about Google’s plans to build a huge new broadband satellite constellation (dubbed “son of Teledesic” in a February article). I’ve done a fair amount of digging and since it looks like we will see this story in the mainstream press pretty soon, I thought it would be useful to summarize the analysis I produced for research clients last weekend.
As The Information reported on Tuesday, last month Google hired Brian Holz (former CTO of O3b) and Dave Bettinger (former CTO of iDirect) to work on the design of a massive new broadband satellite system, as part of Google’s Access division.
What has so far gone unreported are the technical details of the planned system, which is expected to involved 360 LEO Ku-band satellites using a filing by WorldVu in Jersey. The constellation will have 18 planes of 20 satellites, with half at an altitude of 950km and the remainder at 800km. I would expect the constellation to be launched in two phases, with the higher altitude satellites providing complete global coverage, and the lower satellites being added later, in between the initial 9 planes, to provide additional capacity. It also seems likely that the system could include inter-satellite crosslinks (within each of the two halves of the constellation) given the near polar orbit that is planned. WorldVu is apparently owned/controlled by Greg Wyler, the founder of O3b, who is rumored to have a handshake agreement with Larry Page to move ahead with the project.
The satellite system is budgeted to cost $3B, which is a very aggressive price target (recall Teledesic was supposed to cost $10B back in 1999), based on a plan to use very small (100kg) satellites. If this ultimately proves infeasible then the cost would certainly rise: for example the O3b and Iridium NEXT systems (700kg and 800kg respectively) cost at least $40M per satellite to build and launch.
UPDATE (6/1): The WSJ now has more details of the plan, confirming my supposition that it would start with 180 satellites and add the rest later. I was quoted in that article as stating that “180 small satellites could be launched for as little as about $600 million” but that should not be interpreted as a total cost for building and launching the satellites. If the target of 100kg could be achieved, the all-in cost for the first 180 satellites would certainly approach $2B, and if the satellites end up being more like 200-300kg, which a satellite designer suggested to me might be easier to achieve, then that all-in cost could reach $3B. The full 360 satellite system would likely cost $3B for the 100kg satellites and $4B-$5B for the 200-300kg satellites.
Notably the satellites would use the Ku-band, not the Ka-band which has been popular for broadband in recent years. This takes advantage of the FCC and international rulings secured by Skybridge in the late 1990s, which made over 3GHz of spectrum available for NGSO Ku-band systems, so long as they avoid interfering with satellites along the geostationary arc. In practice this means turning off the satellite when it is within about 10 degrees of the equator and handing over to an another satellite that is outside this exclusion zone. WorldVu apparently has priority ITU filing status with respect to this huge amount of spectrum on a global basis.
The total system capacity is unclear, but it could certainly be 1-2 Tbps or more for the full constellation, although not all of this will be usable (for example in polar and oceanic regions). Importantly, any LEO system would be critically dependent on the successful development of Kymeta’s new flat panel meta-materials antennas (which are being developed initially for Ka-band, but could also be extended to operate in Ku-band), because otherwise the need for tracking dish antennas makes it impossible to build terminals cost-effectively. After all, this terminal problem ultimately proved terminal for Teledesic in the late 1990s, and O3b is already telling potential enterprise customers that they should look to Kymeta to provide a viable low end terminal in a couple of years time.
Construction and launch of the first half of the constellation could probably be achieved within 5 years, if the satellites were small enough for dozens of them to be launched at once, and sufficient launch slots could be secured. However, it seems Google has not yet engaged actively with satellite manufacturers to seek their input on design feasibility (let alone bids) and so it might be premature to expect any formal announcement (and for the clock to start running on construction) at this stage.
Nevertheless this prospect is causing considerable excitement amongst satellite manufacturers, who had been bracing for a potential decline in business after record orders in recent years, and corresponding trepidation amongst satellite operators, who were already wary of a potential price war (and accelerated depreciation in the value of some older satellite assets) brought on by new high throughput Ku and Ka-band GEO satellites. Those investing in new broadband satellite systems of their own (like Intelsat, Inmarsat, ViaSat and Hughes) will certainly have to take this wildcard into account, but like the movie, only time will tell if Google’s space odyssey is going to be regarded as more than just dazzling special effects.
Permalink
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 10:34 am by timfarrar
Yesterday, Harbinger’s new lawyers at Cooper & Kirk, filed an ex parte with the FCC, documenting a meeting last Friday with FCC staff, plus two representatives of the DoJ (who would presumably defend the FCC in the event of a lawsuit), including Alicia Simmons who signed the devastating Jan 17 filing in LightSquared’s bankruptcy case. The FCC personnel included Associate General Counsel Jennifer Tatel and the letter also identified Hillary Burchuk as an FCC staffer, although she is in fact apparently a DoJ trial attorney. Interestingly, Cooper & Kirk has never filed an ex parte with the FCC in the past, and Harbinger has previously been represented at the FCC for many years by its regulatory law firm, Goldberg, Godles, Wiener and Wright.
It seems pretty clear that the purpose of the meeting was to threaten to sue the FCC, not least because Cooper & Kirk’s own website boasts that according to Legal Times, it is “The top choice for plaintiffs who want to sue the federal government.” This may be Falcone’s last effort to avoid being excluded from the resolution of LightSquared’s bankruptcy case, where (as I concluded) Judge Chapman’s decision to reject the LightSquared bankruptcy plan has made it far more difficult for Harbinger to maintain a stake in the reorganized company.
If Harbinger is excluded from the reorganization, then it would not benefit financially from the increase in spectrum value resulting from a future FCC approval (or indeed any proceeds from the litigation against the GPS industry). As a result, if that happens Harbinger is threatening to sue on its own account, because litigation would likely block any possibility of progress at the FCC, and Harbinger would not have any incentive to drop that litigation as part of a settlement which resulted in an FCC approval. Thus Falcone is basically offering the threat of mutually assured destruction to persuade the other LightSquared debtholders to give him a share of the reorganized company, exactly as his earlier emails suggested: “if I don’t like the result, maybe I’ll just sue the FCC and tie this up for 10 years.”
On Tuesday the LightSquared stakeholders were ordered to mediation, as expected, although reportedly some progress had been made on a “global restructuring” deal. That phrasing would suggest the aim is to keep the 1670-75MHz spectrum together with the L-band MSS spectrum, rather than auctioning the two pieces of spectrum separately, perhaps with the holders of the 1670-75MHz secured debt being paid off via a new injection of capital. If that deal comes to fruition it would suggest that the target would still be to gain access to the NOAA 1675-1680MHz spectrum, in which case it might also make sense to keep Ergen in the capital structure (in order to avoid the threat that DISH or EchoStar might bid against LightSquared in an auction). But its harder to see what bone might be thrown to Falcone to prevent Harbinger from filing suit against the FCC.
Permalink
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.
Permalink
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?
Permalink
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.
Permalink
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.
Permalink
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.
Permalink
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.
Permalink
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »
