LightSquared Blow Gives Falcone Few Options to Salvage Value

Senior Managing Director of Harbinger Capital Philip Falcone
Senior Managing Director of Harbinger Capital Philip Falcone. Photographer: Brendan Smialowski/Bloomberg

Billionaire Philip Falcone’s effort to build a national wireless network was rejected by U.S. regulators, leaving him limited options to salvage value from his LightSquared Inc. assets and dealing a blow to efforts to increase industry competition.

The Federal Communications Commission said yesterday it won’t let LightSquared begin service after an Obama administration adviser found that it disrupts navigation gear used by planes, boats and autos. Closely held LightSquared invested $4 billion in airwaves crucial to its plan to offer service that lets users browse the Web at higher speeds.

The setback threatens to leave the industry with one fewer competitor, harming regulators’ attempts to spur rivalry and benefiting incumbents, such as AT&T Inc. and Clearwire Corp. LightSquared’s options include selling the spectrum, swapping it for better airwaves, suing the government and reducing costs to stay afloat until a solution is found, said Walt Piecyk, an analyst at BTIG LLC in New York.

“A reorganization might be considered in a situation like this,” Piecyk said. “If the spectrum is deemed unusable they have to cut costs as much as they possibly can, because it might be hard to raise additional capital.”

The rejection is a blow to Falcone’s Harbinger Capital Partners hedge fund, which has invested about $3 billion in LightSquared. Harbinger lost 47 percent for investors in its main hedge fund last year as Falcone, 49, was forced to cut the value of Reston, Virginia-based LightSquared by more than half.

‘Dirty’ Spectrum

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, Lawrence Strickling, administrator of the National Telecommunications and Information Administration, said in a letter to the FCC.

“There are no mitigation strategies that both solve the interference issues and provide LightSquared with an adequate commercial network deployment,” Strickling said in the letter to FCC Chairman Julius Genachowski.

“The reality is, you don’t want to put people’s safety at risk,” John Fletcher, a senior analyst at SNL Kagan. “Their options seem pretty limited at this point. If your main asset is spectrum, and it’s dirty, maybe it’s not much of an asset.”

LightSquared said in a statement that it disagreed with the government’s findings and that it “fully expects” the FCC “to recognize LightSquared’s legal rights to build its $14 billion, privately financed network.”

Out of Time?

Financially, the company may not have enough time to attempt to work through the interference issues. Jonathan Atkin, a San Francisco-based analyst with RBC Capital Markets LLC, said last month that LightSquared may run out of money within six months. While the company has signed on initial customers, including Best Buy Co., it has yet to start operating and earning revenue.

LightSquared Chief Executive Officer Sanjiv Ahuja said in a Dec. 9 interview that the company would be adequately funded through the government’s review period.

Subprime Bets

Falcone, who founded Harbinger in 2001, bet millions in 2006 that securities cobbled together from subprime mortgages would collapse, making the fund $11 billion in 2007. In 2008, the fund was one of the world’s most successful hedge funds, with assets of $26 billion.

Today, Falcone manages about $4 billion as Harbinger’s chairman and chief executive officer. The main fund valued its equity and loans in LightSquared at $1.07 billion as of Jan. 27, according to a loan document. Harbinger Capital Partners LLC owns additional shares and loans of LightSquared outside of the main fund. Falcone’s stake in the main fund is worth at least $850 million.

Harbinger is paying a 15 percent interest rate for a $190 million loan, almost triple what the riskiest corporate borrowers pay, said two people with knowledge of the loan.

As LightSquared’s spectrum challenges threatened to dim its prospects, billionaire Carl Icahn, along with investors David Tepper and Andrew Beal, in December bought $300 million in the venture’s debt sold by Farallon Capital Management LLC. The move may help give Icahn control of LightSquared’s spectrum for less than what Falcone originally paid.

30 Partners

An FCC rejection could unravel LightSquared’s agreements with more than 30 wholesale customers that had signed on to be users of the planned wireless network.

Sprint Nextel Corp., the third-biggest U.S. wireless carrier, is one of LightSquared’s main partners. Under their agreement, Sprint was to build and operate LightSquared’s network during an 11-year period in exchange for $9 billion in payments and an additional $4.5 billion in service credits.

Anticipating a final rejection by the FCC, Sprint has been distancing itself from the project.

“We’ll cross that bridge when we come to it,” Sprint Chief Executive Officer Dan Hesse said in a phone interview last week, referring to the FCC’s decision.

Late last year, Sprint signed a new agreement with its joint-venture partner Clearwire, which extends its network expansion plans through 2016, Hesse said. “We are not spending any more money today on putting new equipment in our network to support LightSquared,” Hesse said.

“If they lose the Sprint arrangement, that brings into question the overall viability,” says John Byrne, a research director at IDC Corp.

Readying Alternatives

Another LightSquared customer, FreedomPop, said today it will use Clearwire’s network. FreedomPop, a mobile data and phone service based in Los Angeles, is the latest effort from serial entrepreneur Niklas Zennstrom, who co-founded Skype Technologies SA with Janus Friis, and later sold it to EBay Inc. Zennstrom is an investor and adviser for FreedomPop, not an executive.

LightSquared not being able to begin operating would also be a setback to the FCC, which has been pushing to make more spectrum available to mobile device users, potentially reducing the dominance of AT&T and Verizon Wireless and keeping prices for consumers lower. The LightSquared proposal looked like a way to take underused spectrum and redeploy it in an arena where capacities are more limited.

“The FCC is clearly interested in increasing competition for AT&T and Verizon,” Piecyk said.

Dish, Clearwire

In addition to the dominant wireless carriers, benefactors from LightSquared’s rejection could include Dish Network Corp., which is also seeking approval for its wireless spectrum and whose airwaves don’t have “any of the same kind of issues” as LightSquared, Piecyk said.

Dish, the second-largest U.S. satellite-television provider, acquired airwaves from the bankruptcies of satellite companies DBSD North America Inc. and TerreStar Networks Inc. Dish is seeking a waiver to convert the airwaves to mobile-phone spectrum.

Clearwire, a wholesale wireless-service provider and direct competitor to LightSquared, is also set to become more important, particularly through its deal to work with Sprint on a faster, so-called fourth-generation service, Byrne said.

Dish shares rose 2.5 percent to $29.07 at 9:42 a.m. New York time, and Clearwire added 4.4 percent to $2.39.

“Both Clearwire and LightSquared were going to figure into Sprint’s 4G plans,” Byrne said. “Clearwire will still be part of this solution, and a more important part of this solution.”


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