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.
As readers of this blog know, I’ve not been a fan of Row44′s content-focused strategy for inflight connectivity, and I pointed out how ludicrous Global Eagle’s forecasts were last November. However, the meltdown of this strategy has come even sooner than I expected, with today’s announcement that instead of charging for streaming video content on Southwest planes, the service will instead be sponsored by DISH Network and made available for free to passengers, in exchange for watching a 30 second commercial.
The fact that Row44 has struck this deal now, only a few months after launching the inflight TV service, suggests that the paid take-up has been dire (which is hardly a surprise, given the Southwest customer profile, their average flight length and the lack of onboard power outlets). Even worse, according to DISH’s CMO, the sponsorship has no announced end date (although it will run at least through the end of this year), suggesting that instead of being a temporary deal to boost awareness (like Gogo’s Thanksgiving to New Year 2010 free inflight WiFi offer, sponsored by Google), it may never be possible to get many passengers to pay for the service. This move may also be a pre-emptive counter to JetBlue’s plan to offer free inflight WiFi to its passengers, but will do nothing to boost take rates for Row44′s paid internet service, and will more likely undermine them now that Southwest passengers can instead watch video content for free.
The business projections presented by Global Eagle last November (setting out their supposed “highly visible” 2014 adjusted EBITDA forecast) estimated that the TV/VOD/IPTV service would have a take rate of 5.75% and generate $5 per user in 2014 (i.e. $0.29 per passenger opportunity), plus a further $0.15 per passenger in portal services. Although DISH has not revealed its sponsorship payment, according to my calculations based on Gogo’s S-1 filing, Google paid $7M for its 6 week sponsorship, or roughly $0.28 per passenger carried (about $2.50 per Internet session) during the period. Its a safe bet that DISH is paying a lot less than that for an ongoing deal: I’d estimate roughly $1M per month (~$0.10 per passenger carried), or about a third of Global Eagle’s projection for revenues from these services in 2014.
UPDATE (7/1): It was pointed out to me that the sponsorship deal is between DISH and Southwest, so it’s not clear how much of DISH’s sponsorship payments are being passed on to Row44 or indeed if Southwest will be making additional payments to Row44 to subsidize the TV service. That is possible, but its hard to believe that Southwest would want to provide a large subsidy to Row44 for an indefinite duration, when Southwest originally expected to be receiving a share of revenues, just like from inflight WiFi (and when Gogo is offering airlines a ~30% revenue share from its Gogo Vision services).
UPDATE (7/3): Global Eagle confirmed in a press release that “its Row 44 subsidiary has entered into a groundbreaking content and connectivity partnership with its customer Southwest Airlines” or (without the spin), that Row44 has changes the terms of its TV services agreement with Southwest, presumably to a flat fee rather than a revenue share. Undoubtedly this means a reduction compared to Row44′s projected 2014 revenues, although when the next set of financial results come out, look for further spin describing the change as providing a significant boost to revenues in 2013Q3 (compared of course to the near total absence of content revenues in Q2).
Based on Gogo’s published data, revenue from portal services is also going to be vastly less than Global Eagle estimates, while there has also been “an increase in license fees paid for the content delivered to airline customers” (which are unlikely to reduce, even if revenues are lower than expectations) and bizarrely, Global Eagle appears to have ignored any revenue share that may be payable to Southwest in its assumption of a 87% gross margin on content services. By my estimates, even ignoring any negative impact on Row44′s connectivity revenues from the free TV offering, that could leave a $30M to $40M hole in Global Eagle’s projected $75M of adjusted EBITDA in 2014. Put another way, it seems that this business really wasn’t “highly visible” after all.
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.
Gogo’s IPO roadshow is taking place this week (with completion apparently expected next Tuesday) after the company filed a revised S-1 on Monday June 10 indicating that it is seeking to sell 11M shares at between $15 and $17, giving the company an enterprise value (at the midpoint of this range) of approximately $1.3B (or even higher if you assume, as Gogo does, that the cash it raises needs to be spent on upgrading Gogo’s network to ATG-4, including doubling the number of cell sites by 2015). That seems pretty optimistic given the modest revenues that Gogo generates at present ($235M in 2012) and the losses that the company is making outside its well established Business Aviation segment.
I’ve not yet completed my forthcoming aeronautical communications market report, but I know a lot of people will be looking for some realistic numbers to value the company. So I decided to pull together my detailed estimates for Gogo through 2017, into a 21 page profile and analysis which I’ve published today. You can find a report summary and contents list here, and an order form here. And if you decide to buy my aeronautical market report when its available later this summer, you’ll receive a full credit for the price of the Gogo report.
Feel free to contact me for more details. As a taster, here’s the latest quarterly growth breakdown including 2013Q1. The last quarter is quite significantly short of my estimates, as despite the improving take rate trend line, Gogo took a significant hit on Average Revenue Per Session compared to 2012Q4.
UPDATE 6/13: And here is a comparison with the various analyst forecasts for Gogo which were given out at the roadshow. I’ve left off the names, to spare people’s blushes, but the bank that forecast this to be a $1.6B business in 2017 has clearly been drinking the same Kool Aid as Global Eagle.
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!
Softbank has been downplaying the prospects of an increase in its bid for Clearwire, and my guess is that it will be prepared to let Sprint’s current bid be rejected in the May 21 vote, because its hard to see Clearwire’s shareholders approving a deal with Sprint with only a modest bump in the price (say to match DISH’s $3.30 offer). Then the question is whether Sprint (and SoftBank) would allow Clearwire to sell DISH the 40MHz of 2.5GHz spectrum that DISH has been seeking (with the likelihood that Ergen might then withdraw his bid for Sprint)?
Tonight an analyst report from Macquarie is speculating that DISH will instead team up with American Movil and bid for LightSquared, as an alternative to Clearwire (whose spectrum could then be sold to Verizon). While a partnership between Ergen and Slim is plausible (and indeed is something I’ve been writing about for the last year), using LightSquared’s spectrum as an alternative to Clearwire makes little sense (even if Verizon was able to buy all of Clearwire’s spectrum, which of course it can’t because the BRS spectrum is counted in the spectrum screen). Strangely, Macquarie thinks DISH could get 20MHz of uplink and 10MHz of downlink spectrum from LightSquared, but the 1675-80MHz spectrum won’t be allocated until 2017, and even if it were available, only 10MHz of downlink spectrum would be insufficient for DISH’s plans.
Our report on DISH sorts through the options for DISH, and discusses the reality of what can be done with LightSquared’s spectrum. We also consider the relative advantages of DISH and SoftBank’s plans for Clearwire’s spectrum. In particular, we consider one question that appears to have escaped all of the analysts looking at this situation: what is the value of DISH’s 14M potential cellsites?
The CTIA released its latest semi-annual survey of the US wireless industry this morning, and for the firsttime in years, the press release did not focus on growth in data traffic. That’s perhaps not surprising, given that traffic growth has now fallen sharply (to only 69% in 2012 over the 2011 total and 59% in 2012H2 compared to 2011H2) and these statistics are hardly supportive of the message that there is an impending spectrum crisis.
Ironically, CTIA instead trumpet how high US wireless capex is compared to the rest of the world and how the number of cell sites is growing rapidly, when previously the message of those (including the FCC Chairman) campaigning for more spectrum was that unless 300MHz of spectrum was made available, operators would be forced to invest far too much in their networks and build an implausibly high number of cellsites. Amusingly enough, the FCC’s erroneous model from October 2010 asserting that this economic cost would be $120B (which the authors took their name off), has just been disinterred, and supposedly updated (with the same errors as the FCC made), by those seeking to ensure that no limits are placed on AT&T and Verizon’s participation in the broadcast incentive auctions.
The lack of discussion of data traffic is a shame, because the CTIA survey actually shows an interesting rebound in the growth of traffic per device in the second half of 2012, with 15% growth compared to only 3% in the first half of 2012, as shown in the chart above. That resulted in 2012 traffic growth coming at almost 70% compared to the 60% growth that would have resulted from a continuation of the trend seen in the first half of the year. The two primary factors causing this rebound are likely to be that:
1) data caps caused a rapid one-off adjustment in offloading to WiFi during the first half of the year (which did not repeat in the second half, even though WiFi usage continued to grow), and
2) take-up of LTE increased significantly in the second half of the year (after the launch of the LTE iPhone), and higher average speeds meant that users of LTE devices consumed more wireless data than on their previous 3G devices.
Interestingly the 69% year on year growth appears broadly consistent with the 62% growth in US wireless data traffic estimated by Cisco between December 2011 and December 2012, although the CTIA survey also indicates that Cisco’s traffic estimates are around 30% higher than the actual amount of wireless data traffic in these months.
Looking forward, the most intriguing question is whether this pickup in traffic growth per device will be sustained into 2013. If it is then we could see year-on-year traffic growth in the US for 2013 come in as high as 70%, but if it doesn’t, then traffic growth will fall to 50-60%. My assessment is that traffic growth per device will be faster than in the first half of 2012, now the adjustment to capped data has taken place. However, once the early adopters have mostly switched to LTE and as customers start to predict and control their data usage, the rate of growth will likely be slower than in the second half of 2012.
So a reasonable estimate for overall US wireless traffic growth in 2013 is around 60%, falling to 50% or less in 2014, as smartphone penetration reaches saturation, assuming that there is no step change in data pricing. That appears unlikely, because AT&T and Verizon’s family data plans limit their room for maneuver: if Verizon or AT&T offered more wireless data for the same amount of money, then many customers would trade down to a less expensive plan.
