Falcone Airwaves Left With Dwindling Value After Rejection

Falcone Airwaves Left With Dwindling Value After Rejection

Philip Falcone may have to seek a
buyer for LightSquared Inc.’s airwaves after regulators rejected
his business plan. If he has to sell, the proceeds will probably
be a fraction of what the billionaire invested.
The U.S. Federal Communications Commission said Feb. 14 it
won’t let LightSquared begin service because it interferes with
GPS navigation of cars, boats, planes and tractors. Falcone’s
Harbinger Capital Partners hedge fund has invested $3 billion in
the wireless venture.
The rejection prompted Falcone to seek to swap the spectrum
with other airwaves controlled by the U.S. Defense Department, a
person with knowledge of the company said this week. Analysts
say the Defense Department is unlikely to agree to such a deal,
potentially leaving Falcone trying to find a buyer for spectrum
that can’t be used for the most valuable wireless services.
“There’s no business plan that would generate value for
that spectrum,” said Tim Farrar, an analyst at research firm
TMF Associates Inc. in Menlo Park, California. “The spectrum
value is approximately zero.”
As of the end of January, Falcone carried his investment in
Reston, Virginia-based LightSquared’s equity at $1.5 billion, or
about half of what his hedge fund had invested to date,
according to a Harbinger document. Falcone has hired Moelis &
Co. and other advisers to help study alternatives, the person
familiar with the matter said.
Mike Sitrick, a spokesman for New York-based Harbinger, and
Chris Stein, a spokesman for LightSquared, declined to comment
on the spectrum’s value or any plans to sell it.

Adjusting Down

Falcone started building his wireless stake in 2006 and
completed his purchase of SkyTerra Communications Inc. in March
2010, which awarded him the spectrum licenses that analysts at
the time said were worth $9 billion. Anticipating the rising
popularity of data-hungry smartphones and tablet computers,
Falcone sought to convert those satellite-only airwaves to also
be used for a terrestrial wireless service.
Then this week, the FCC said it is preparing to withdraw
the preliminary approval it granted last year for LightSquared
to build a network serving as many as 260 million people.
Government tests found that the proposed ground-based network
would interfere with navigation equipment including gear used by
aircraft.

No Parallels

That leaves the company with no business model and cash to
last it for about six months, as estimated by Jonathan Atkin, an
analyst at RBC Capital Markets LLC. While LightSquared has
signed up more than 30 wholesale customers, including Best Buy
Co., it has yet to start operating and collecting revenue.
Assuming it is reset to its original value under a
satellite-only license, LightSquared’s spectrum is worth about
$500 million, said Brian Miller of bg Research. Miller
based his estimate on the book value that it had under SkyTerra,
before those assets were turned into what is now LightSquared.
Even as recent spectrum sales have reached price tags of
billions of dollars, the high costs and potential difficulties
in making LightSquared airwaves usable bring their value down.
“I don’t know how you even begin to put a value on it
now,” said Will Power, an analyst at Robert W. Baird & Co. in
Houston. “There’ve been no clear parallels to this before that
would give you the right benchmarks.”

Bad Record

Using them airwaves for a satellite service only, as they
were once intended, would make little business sense, Farrar
said. The high costs to operate satellites, pay partners and
handle things like distribution require a lot of revenue, he
said.
“Look at Iridium and GlobalStar — the record is extremely
bad,” Farrar said.
Satellite ventures Iridium LLC, GlobalStar Inc. and
Teledesic, backed by wireless pioneer Craig McCaw and Microsoft
Corp. co-founder Bill Gates, all sought bankruptcy protection
about a decade ago after investing billions in satellite systems
that never paid off.
The swap plan probably won’t succeed because the Defense
Department is unlikely to give up its valuable spectrum for
airwaves that may be unusable, said analysts including Farrar
and Walt Piecyk of BTIG LLC. The defense department has “always
been very resistant” to give up its airwaves, Farrar said.

Not Realistic

“A swap of spectrum isn’t a realistic option,” said
Piecyk. “First, there’s nothing readily available and second,
if there was, that’s spectrum that could be auctioned off for
billions in proceeds.”
U.S. lawmakers yesterday agreed to give regulators
authority to conduct auctions of airwaves sought by phone
companies such as AT&T Inc. and Verizon Wireless to help meet
surging consumer demand for smartphones and tablets. The
Congressional Budget Office estimated that auctions included in
legislation passed by the House in December would raise $16.7
billion.
“We are in the context of a budget crisis where they are
trying to raise money by auctioning spectrum,” Farrar said.
“It’s not likely that you are going to be giving away spectrum
that you could have auctioned.”

Seeking Solution

Five years ago, Falcone ran a $26 billion hedge fund firm,
one of the industry’s biggest, after more than doubling clients’
money on a successful bet that subprime mortgages would tumble.
As little as two months ago, he said in an interview that he
wanted to use Harbinger Group Inc., a publicly traded holding
company he controls, to make long-term investments akin to
Warren Buffett’s Berkshire Hathaway Inc.
As of the end of January, his Harbinger Capital Partners
had dwindled to $4 billion, with LightSquared as the biggest
single bet. Falcone, 49, is Harbinger’s chairman and chief
executive officer whose stake in the main fund is worth at least
$850 million, according to a loan document.
The wireless venture is still pushing ahead to get an
approval, according to a statement from the company.
“We remain committed to finding a solution and believe
that if all the parties have that same level of commitment, a
solution can be found,” LightSquared said.
Failing that, Falcone is left with an asset he may find
tough to convert into return for his clients.
“It’s probably worth something,” said Christopher King,
an analyst at Stifel Nicolaus & Co. in Baltimore. “But it’s
difficult to see what it could be used for anytime soon.”