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 Bloomberg 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. (T) 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. (HRG), 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.”

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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