Entries in LightSquared (5)

Thursday
Jan122012

Vision Purchase Complete, Helping EATEL Achieve Expansion Goals  

New Opportunities in Services and Territory for Louisiana RLEC

The sale of BV Investment Partners’ Vision Communications to Gonzales, Louisiana-based RLEC EATEL, announced in September 2011, wrapped up last week. EATEL, under president and vice chairman John D. Scanlan, looks to gain new customers, expanded service area, and a plethora of communications services from the deal. According to the BV Investment Partners press release on the deal closure, “Vision provides a comprehensive suite of residential and commercial services, including digital video, high-speed Internet, local and long distance telephone, alarm monitoring, and commercial data services.” Add this to EATEL’s extensive100%  FTTH network, FiberEdge, and EATEL appears well-poised for a competitive advantage in its new and existing Southern Louisiana service areas.

Vision and EATEL have long-standing histories in rural Louisiana, as both were founded to bring service to areas not seen as profitable by the Bell system. Vision (formerly SJI, LLC) was founded in 1945 and family-owned until 2007 when it was sold to BV Investment Partners; and EATEL, also family-owned, dates back to 1935 and “has earned a reputation as a communications pioneer.” Despite humble beginnings, both companies grew throughout the generations, continually innovated and added infrastructure—EATEL claims to have started one of the first 100% FTTH networks in the country, and both companies were early entrants in other advanced services.

When JSI Capital Advisors first reported this deal in September, we estimated a value of $11-12m. Since financial information about the deal has not been made public, our rough estimate was based on access lines. Our Phone Lines 2011 lists 10,156 access lines and 1,710 broadband lines for Vision and 28,854 access lines and 11,542 broadband lines for EATEL in 2010. The deal appears to add a nice-sized chunk of access lines to EATEL’s holdings, but JSI Capital Advisors also noted that Vision experienced an unusually high annual line loss of 9% (The Deal Advisor: EATEL to Acquire Vision Communications).

Given rampant line loss throughout the market, it is unlikely that any RLEC deal is going to be based solely on adding new telephone subscribers, so the purchase of Vision presumably is providing a strategic advantage for EATEL. It appears as though the deal will add new services and territory as well as potential opportunities for future growth for EATEL. The service areas, although not directly adjacent, are relatively comparable in size and both located in Southern Louisiana. Although rural, the respective service areas are also close to Baton Rouge (EATEL’s) and New Orleans (Vision’s). One can make the argument that an RLEC located in close proximity to an urban/suburban hub is fairly attractive in terms of opportunities for population growth and new business.

EATEL also appears to be experiencing a “just go for it” moment as Vision is not their only expansion project right now. EATEL’s website shares one of the company’s key objectives: “Grow the customer base and market area through planned expansion by market segment and by geography.” The Vision deal may help EATEL achieve the geography component, but EATEL is hoping to edge into the 4G wireless market through a partnership with LightSquared.

Following in its footsteps of being one of the first 100% FTTH providers, EATEL was also the first RLEC to partner with LightSquared. According to LightSquared’s press release announcing the partnership on November 28, “This agreement will allow EATEL, an Incumbent Local Exchange Carrier, to provide its customers with a world-class broadband service that competes on price and quality with any wireless carrier in the nation.” EATEL ceo Arthur “Smokey” Scanlan commented that “LightSquared’s unique ability to offer both broadband and satellite connectivity over the same device will be a breakthrough product for our customers.” Of course, approval for LightSquared’s extensive 4G service is pending approval, but this has not stopped multiple carriers of all shapes and sizes from entering partnerships with the wholesale 4G/satellite provider whose mission is “to revolutionize the U.S. wireless industry.”

LightSquared uncertainty aside, EATEL appears to be determined to forge ahead in achieving its growth objectives in both service territory and market segments. Coming at the end of a year with only 6 ILEC deals, the EATEL-Vision deal may prove to be a sign of a turn-around in this market as companies begin to have some closure regarding regulatory issues and realize that it will take more than simply keeping the lights on to be attractive to potential buyers.

Thursday
Jun022011

Clearwire Urged to Sell Spectrum

Letter to Ceo Stanton Highlights Clearwire’s Missteps--But Imminent Spectrum Sale Seems Unlikely

Private investment firm Pardus Capital issued a press release last week disclosing the content of a letter sent to Clearwire (Nasdaq:CLWR) interim ceo and chairman of the board John Stanton wherein Pardus president/ ceo Karim Samii outlined in detail Pardus’ concerns that Clearwire is increasingly up against the ropes when it comes to its efforts to raise funding for its business plan, as well as in regards to its negotiating leverage with 54% owner Sprint (NYSE:S).

The letter raises numerous valid points, but the most pertinent one in my mind is the question of who has the upper hand between Sprint and Clearwire today.  Clearly Sprint believes that it does—and it may be right, for now anyway, although I’m not fully convinced. And despite Pardus' many arguments for a "small spectrum sale" now, I don't see it happening in the near-term.

Sprint’s Network Vision plan to reconfigure its network over the next several years will decommission its Nextel/iDEN network and repurpose the spectrum and network assets for CDMA service; presumably there is also a path-to-LTE element in the planning which would reduce Sprint’s reliance upon the Clearwire WiMax network. But the project is expected to last for three to five years and that’s an eternity in the wireless marketplace.  Without Clearwire and pre-Network Vision completion, Sprint doesn’t HAVE a 4G strategy.  Meanwhile, Verizon (NYSE:VZ) introduced a handset for its LTE 4G network in mid-March and reported 250k sales of the device in just two weeks before the quarter ended. 

Customers—the high-value ones anyway—want 4G services.  AT&T (NYSE:T) doesn’t have it, MetroPCS (NYSE:PCS) has it in just a few markets and others, most notably Leap Wireless (Nasdaq:LEAP), are looking to LightSquared to provide it.  At this point, however, I see LightSquared as a red herring.  Not only because the pure wholesale business model has never succeeded before, but because it now says it might lean on AT&T for early LTE capacity, because the interference issues it has with global positioning services (GPS) have not been resolved, because its capacity will be limited as a result of that interference and because, “Service will be available in the second half of this year,” is the most detail I’ve seen on the actual buildout…LightSquared is reportedly now in talks with Sprint too…it’s all getting very incestuous but the fact is, for now anyway, the only up and running 4G networks with measurable coverage are Clearwire’s and Verizon’s.

Which brings me to subscriber growth.  Sprint has turned its sub growth around admirably compared with the serious losses it was experiencing a few years back.  But if you look at the detail of Sprint’s most recent quarter, of the 1.1m in net adds, they were ALL either prepaid subs (not likely to be heavy spenders or data users) or they were added by Sprint’s wholesale partners and affiliates.  On the postpaid, retail side of the business, Sprint lost 114k customers.  Obviously the Verizon iPhone and AT&T’s competitive response had an impact on its ability to retain high-value postpaid customers.

Now take a look at Clearwire’s results in the same quarter.  The company added 1.6m new wholesale subscribers—those are essentially all Sprint customers.  My interpretation of these data points would be that Clearwire’s 1.6m new wholesale customers are 1.6m customers who would have moved from Sprint to Verizon if the 4G product that Sprint offers—over Clearwire’s network—wasn’t available.  Had that happened, Sprint would have been reporting a loss of half a million subscribers, even with the prepaid growth. Yes, this is probably an oversimplification, but the point is, I think Sprint needs that 4G network, for its marketing and for its status as a carrier and to ensure that its entire subscriber base isn’t comprised of $28/month prepaid subscribers in a few years.

Clearwire on the other hand, has a different set of woes.  First, it’s gone out and invested billions in a next-generation wireless data network that runs on a technology that increasingly appears to be the Betamax of 4G wireless data technology. 

Now it’s nearly run out of money, has had to suspend its retail strategy and is scrambling to cover costs, while Daddy (Sprint) has refused to up its allowance.  In fact, it cut the allowance if you buy into Pardus’ argument that the new wholesale agreement came in 30% low:

“The market also took as a negative the ultimate resolution of the Sprint pricing dispute.  We expected the deal would yield around a penny per megahertz for Clearwire. It appears to have come in closer to $0.007/MHz. Another way to look at it: instead of yielding $7.60 per in-market subscribers in more mature markets, Clearwire should be making $10.00 per sub. The market took this as a “sweetheart” deal for Sprint.”

Clearwire’s failure to sell excess spectrum last fall, before T-Mobile was taken out of the picture as a potential buyer, means that it has an even smaller potential buyer pool today, which translates generally to lower values, despite the widely espoused view that the country is heading for a major spectrum crunch.  And herein lies Clearwire’s biggest problem with regards to an immediate spectrum sale.

As Pardus Capital points out in its letter to Stanton, Clearwire’s current equity value implies a value per MHz POP of less than $0.20.  Assuming that some value should be assigned to the subscriber base and network assets (admittedly fairly low), the implied public spectrum value falls even further.

Clearwire’s spectrum is comprised of 2.5 GHz BRS/EBS licenses, which does not have the attractive propagation characteristics of lower band spectrum like 700 MHz.  But it has  a LOT of it; the company’s 10-K reports 46 billion MHz POPs and more than 150 MHz in top markets.  Its deployed network covers 70 markets nationwide, or about 130m POPs.

Of interest regarding BRS/EBS spectrum is a recent FCC release where the Commission asks for comments on proposed changes to the out-of-band emission limits for BRS/EBS service.  Proponents, including Clearwire, have suggested that the change would allow WiMax-based networks to use channel bandwidths of 20 MHz rather than the 10 MHz used today, and Clearwire suggests that it would then be able to deliver data speeds of 90 Mbps, which it cannot do today. Satellite concern Globalstar has opposed the proposal saying that it would result in interference with its service, but other engineering studies refute that claim.  The FCC is taking comments on the matter but it seems clear to me that should the out-of-band emission limits be raised, the relative value of Clearwire’s spectrum holdings would rise--yet another possible reason to wait for a sale. 

At the end of the day, Clearwire remains challenged in many respects, but so too does Sprint.  And the spectrum assets Clearwire holds, assuming it can keep its head above the water, could, in my opinion, be worth a little more than Wall Street is acknowledging.  That’s Pardus Capital’s opinion too, though the investment firm is clearly losing patience.

But John Stanton didn’t become a wireless billionaire simply by virtue of being in the right place at the right time.  As he pointed out on the company’s last earnings call, “Every time a kid downloads a video onto his phone or a company arranges for a video conference call via their iPads, you're in effect seeing the value of spectrum rise. And I think that it would be prudent for us to be in a position to hold that spectrum, all the spectrum, even that which is beyond what we immediately need.”  I tend to agree. As long as Sprint continues to load the Clearwire network with customers, the company should have enough cash flow to survive this year and on into a period where its excess spectrum assets may be more highly coveted.

Monday
Feb072011

Auction Likely for DBSD North America

Not So Fast, Mr. Ergen

Sat-TV operator DISH Network (Nasdaq:DISH) attempted an end run at DBSD North America last week, when it made a $1b offer to acquire the satellite company—and its 20 MHz of S-band satellite spectrum—out of bankruptcy, but a judge today said that the company has an obligation to consider other buyout offers.

According to a Bloomberg report, Steven Reisman, a lawyer for DBSD’s creditors, told U.S. Bankruptcy Judge Robert Gerber today that, “We have been contacted by a third party.”  The report implied that LightSquared, which is building a next-generation business plan around satellite spectrum, might have made the competing offer.

Gerber reportedly said, “There should be free access to a company that is in play, as this company seemingly is.  I expect aggressive efforts by the debtors to do whatever it takes to maximize value for the estate.”

A lawyer for the noteholders, Andrew Leblanc, said that DISH’s offer is “more of an option to buy than a firm proposal.”  He added, “We believe this is a conflicted board represented by a conflicted counsel,” because two of DISH’s board members also sit on the board of DBSD parent company ICO Global Communications, and the two companies are represented by the same legal firm.  A hearing to consider the DISH offer is scheduled for Feb. 15, but it appears the bid, which valued DBSD at about $0.17/ MHz POP, may just be the first shot in what could become quite a battle.

Friday
Feb042011

LightSquared Accelerates Access to L-Band Satellite Spectrum

FCC Waiver Gives Planned Satellite Service Viability

Reston, Virginia-based LightSquared said on January 28, 2011 that it has delivered notice to Inmarsat for the triggering of Phase 2 of the Cooperation Agreement between the two companies whereby LightSquared will lease L-band spectrum from Inmarsat for an initial cost $115m per year. The annual cost will increase 3% per year thereafter.

Under the Cooperation Agreement originally signed in December 2007, Inmarsat and LightSquared designed a two-phase plan aimed at increasing the amount of contiguous spectrum available to both parties and at providing LightSquared with enhanced operational flexibility for the deployment of its 4G-LTE integrated terrestrial and satellite network.  LightSquared triggered Phase 1 of the Cooperation Agreement in August of last year, and is currently making a series of payments to Inmarsat that will total $337.5m by the middle of this year. 

LightSquared chmn and ceo Sanjiv Ahuja said that the company is “experiencing very strong demand for capacity on its 4G-LTE wholesale network,” and for that reason had decided to accelerate the triggering of Phase 2.  He noted that the company will have use of up to 59 MHz of terrestrial and L-band Ancillary Terrestrial Component (ATC) spectrum across the U.S. and Canada once Phase 2 is fully executed, a process which is expected to take 30 months.

It seems to us that, whether or not claims of “strong demand” are valid, the FCC’s decision two days earlier to grant LightSquared a waiver of the ATC Integrated Service Rule may have been at least as critical to the timing of the Phase 2 trigger.  The waiver will allow LightSquared’s wholesale customers to provide terrestrial-only handsets to its subscribers, as opposed to the often clunky dual-mode satellite/terrestrial devices.  The waiver was supported by tire-kicker T-Mobile, for one.  Though T-Mobile is reportedly also considering a purchase of spectrum from Clearwire, the number 4 carrier may now give a LightSquared resale arrangement serious thought.

How Cheap is Cheap When it Comes to Spectrum?

LightSquared management said at a recent industry conference that it has invested a “modest” $0.20 per MHz POP for its spectrum.  That implies somewhere in the neighborhood of $4b if you assume 340m U.S. and Canadian POPs at 59 MHz, although some reports we’ve read indicate that not all of the 59 MHz will be usable for LightSquared’s planned system. LightSquared’s investment to date is nearly $3b according to its web site and future spectrum lease obligations are said to exceed $2b.  And then there’s the company’s 8-year deal with Nokia Siemens Networks, which obliges LightSquared to invest $7b in infrastructure…It sounds to us like the aggregate investment could approach $10b before all is said and done.

Meanwhile, on the topic of spectrum values, LightSquared may have spent “just” $0.20 per MHz POP, but despite the fact that some analysts have suggested that Clearwire’s spectrum auction will generate closer to $0.50 per MHz POP, not all followers agree, and the offer made by DISH Network (Nasdaq:DISH) earlier this week for bankrupt DBSD and its S-band satellite spectrum, which implied a value of just $0.17 per MHz POP, gives credence to the naysayers.  Now that the FCC has paved the way for terrestrial-only use of these spectrum bands—which by the way have more attractive propogation characteristics than Clearwire’s 2.5 GHz spectrum—we  wonder if earlier estimates for the value of Clearwire’s excess spectrum may have been on the high side.

Thursday
Feb032011

DISH Network Shooting for the Stars, Bids $1b for DBSD

Offer for Bankrupt Satellite Concern Highlights Spectrum Ambitions

Back when Harbinger Capital’s LightSquared first appeared on the wireless scene in early 2010, there was a lot of skepticism surrounding a next-gen wireless business plan built around spectrum traditionally reserved for satellite-based services.  But recent machinations related to two bankrupt satellite firms, as well as LightSquared’s recent receipt of an FCC waiver to build a terrestrial-based service, bring the potential value of the spectrum once reserved for satellite-based services to the fore.

DISH Networks (Nasdaq:DISH) announced on February 1, 2011 that it has entered into an agreement to acquire 100% of the equity of the reorganized DBSD North America, Inc. (DBSD), a hybrid satellite and terrestrial communications company, for approximately $1b subject to adjustments, including interest accruing on DBSD's existing debt.  DISH also committed to provide a debtor-in-possession credit facility to DBSD in the amount of $87.5m. 

The transaction is subject to satisfaction of certain conditions, including approval by the FCC and DBSD's emergence from bankruptcy.  Under the terms of the investment agreement, DISH has committed to pay holders of DBSD’s 7.5% convertible senior secured notes and The Bank of New York in full, as well as to meet all of the company’s obligations under its Credit Facility.  Holders of unsecured claims will receive partial payment. 

DBSD, based in Reston, Va., was launched to build a hybrid satellite-terrestrial communications network for mobile content. It has been in bankruptcy protection since May 2009.  DISH, a creditor for DBSD, lost an appeal in December to overturn the company’s bankruptcy plan, which gave noteholders most of the stock in the company.  Sprint Nextel Corp. (NYSE:S), another creditor, at the time won a partial reversal of a lower-court ruling approving the bankruptcy plan.

DISH’s move is just the latest in a three-year struggle over DBSD’s fate, and a hedge fund group led Highland Capital, which controls most of DBSD’s debt, reportedly plans to fight the proposal at a February 15 hearing.   The funds prefer DBSD to swap its bonds for equity and emerge as a standalone entity in coming months, leaving them in control, as had been previously proposed.

As The Spectrum Turns

The Wall Street Journal reported in December that DISH founder Charles Ergen has been using DISH as well as Echostar (Nasdaq:SATS, the satellite hardware side of his business) to take over not only DBSD but also bankrupt Terrestar Networks.  Terrestar and DBSD own contiguous S-band spectrum that would have significant value if combined.  Speculation abounds that Ergen might try to partner with T-Mobile or another spectrum-hungry carrier, that he might just sell the spectrum to the highest bidder, or even that Ergen fancies developing a mobile video play of his own.

DISH had previously bought up about 15% of DBSD’s $750m in bonds as well as $50m in outstanding loans in an effort to take over the company. The hedge funds that own the balance of those bonds defeated Ergen in bankruptcy and appellate courts by arguing that his status as a competitor to DBSD presented a conflict of interest that disqualified him from voting on how the company’s debt is restructured.  Under the latest offer, however, the bondholders would be unimpaired and lose their right to vote on the plan.  Echostar also owns more than half of Terrestar’s debt, but here too, hedge funds are fighting the company’s efforts to take over.  MetroPCS (NYSE:PCS) has also been named as a bidder for the Terrestar spectrum, but seems unlikely to come out on top.

By combining the S-band licenses held by DBSD and Terrestar, along with some 700 MHz spectrum EchoStar acquired at auction, Ergen-led companies would control nearly as much spectrum as T-Mobile and Sprint, and would be positioned to offer a service competitive with that of LightSquared.  One analyst speculated in October, prior to the DBSD takeover offer, that Echostar/Ergen will use the Terrestar spectrum to provide a wholesale mobile video network, with DISH as the first customer.  Citigroup analyst Jason Bazinet  also suggested that Ergen would make a move into mobile video as soon as 2011 and noted that S-band spectrum is ‘well-suited’ for mobile video service using the DVB-SH transmission system, which EchoStar has been testing.  He wrote, “A pay TV mobile video service is a relatively unique – and lower cost – means of delivering mobile video services.”

Spectrum Value Implications

The DISH offer for DBSD values the spectrum at approximately $0.17 per MHz POP, but the deeper spectrum position of the combined DBSD/Terrestar licenses could be worth substantially more, according to some analysts.  Walt Piecyk of BTIG wrote, “We believe that combining the two 20 MHz S band blocks of spectrum of DBSD and TerreStar increase the value of the spectrum by at least 25%. In the 2006 AWS auction, the 10 MHz D and E blocks were sold for $0.62 per MHz POP and $0.61 per MHz POP respectively, while the 20 MHz F block was sold for $0.73 per MHz POP, a 20% premium.  We estimate deeper spectrum positions are worth more because it increases the technology alternatives that can be deployed and improves the spectral and therefore capital efficiency.  That is more relevant to operators today than it was during the AWS auction in 2006 which occurred before the first iPhone was ever sold and the subsequent explosion in data.”

Piecyk also noted that Ergen will control 46 MHz of spectrum if he is able to combine the 20 MHz of S-band spectrum owned by both TerreStar and DBSD along with the 6 MHz of 700 MHz spectrum he already owns—nearly as much as Sprint and T-Mobile hold.  And while Ergen et al may have to make some concessions in order to receive FCC approval for a terrestrial-based offering using the S-band licenses, it appears that yet another competitive wireless service—probably in the video space—is incubating.