I recently came across a bankruptcy court case while reviewing court cases involving business valuations.  This case was particularly interesting because it involved both regulatory barriers and valuation, something often dealt with in the telecom industry.

The case involved the bankruptcy of LightSquared and a disagreement over the value of LightSquared’s assets between various debtors.  As is usually the case in litigation, both parties had valuation experts perform valuations of the assets. 

Ultimately, the court rejected both valuations.  On one side (which we will call side A) the court noted that the valuation expert didn’t have experience in valuing either satellites or spectrum.  On the other side (which we will call side B) the court rejected the valuation because the valuation assumed the FCC’s approval of LightSquared’s application for modified spectrum rights.

In the case of side B’s valuation, the court noted that it praised the valuation expert and his work.  He brought significant industry experience and his valuation methods were consistent with industry norms (a market multiple of MHz/ POPs was used).  However, the report relied on the testimony of a former FCC commissioner regarding the time frame for approval of the spectrum rights.  The court ultimately found the former FCC commissioner did not have specific knowledge as to when the FCC would actually act on LightSquared’s application.  As such, the court found side B’s valuation to be unsupportable because it relied on the FCC expert’s unsupported conclusion.

This case demonstrates that there are other “outside” factors that must be properly taken into account when valuing an entity or asset.  And many times, these outside factors can be the biggest driver of value.  In the case of LightSquared, to successfully implement its business plan, it needed FCC approval.  Furthermore, future cash flows were dependent on the timing of that approval.  To properly value LightSquared’s assets, the probability of realizing those future cash flows must be appropriately accounted for.