NextWave: From Wipeout to Windfall

Its backers will net billions from radio license sales

Last January, things looked bad for NextWave Telecom Inc. founder and CEO Allen B. Salmasi. The high-speed wireless-communications startup he launched in 1996 was in bankruptcy court, having defaulted on $4.2 billion in radio license fees it owed the government. The Federal Communications Commission was reselling licenses seized from NextWave--to the very carriers it had vowed to compete against. Its shares were trading at just $3, down 50% since December 1999--yet another casualty of the telecom meltdown.

NextWave may never get off the ground, but the same can't be said for Salmasi and other investors. In June, a federal appeals court ruled that the FCC was wrong to seize the licenses and returned them to NextWave. The company's shares, then trading at $3, shot up to $12. Then on Nov. 15, in a remarkable turnabout, NextWave struck a $16 billion deal to sell its licenses to a group of wireless carriers. NextWave backers will share a $6 billion windfall after the company pays off the $10 billion in back taxes and license fees it owes the government.

The drama has caused nothing less than a furor. Former FCC Chairman William E. Kennard, who played a role in the original 1996 auction, sums up the frustration: "It's an outrage," he says. "What you have is a company that will walk away with a $6 billion windfall for reneging on a promise to pay the government in an auction."

GRAND VISIONS. No one will walk away with more than Salmasi, who started the company in 1996 with $8.5 million, $5 million of which he put up personally. The former Qualcomm Inc. engineer now stands to clear at least $396 million based on his 15% stake in the company. Others haven't done badly, either. Bay Harbour Management, a business that specializes in distressed stocks, increased its holdings over the summer by acquiring shares for $3 each. Its original $20 million is now worth at least $110 million, says fund manager Doug Teitelbaum. Triumph Capital, another vulture capital firm, expects profits of $74 million on its investment of $31 million. Says Muhit Rahman, managing director at Triumph: "It looks like I am going to make a bunch of money."

Salmasi's original vision for NextWave was grand: He wanted to build a $3 billion digital network in 95 markets. The basis for that business was NextWave's successful $4.7 billion bid in 1996 for the crucial radio-spectrum licenses he needed to build the network. Salmasi's eyes were bigger than his investors' pockets, however. Although the company made a $550 million down payment on the licenses, Salmasi was never able to raise enough capital to service the debt. In 1998, NextWave filed for bankruptcy protection, and the FCC took the licenses back.

That wasn't the end of the story. Early this year, the government auctioned the licenses again for $16 billion to Verizon (VZ ), Cingular, and other carriers. NextWave, however, contested the move, claiming that protections under bankruptcy law prevented the FCC from reclaiming the licenses. In June, a federal appeals court agreed, ruling that the FCC seizure was illegal and NextWave reclaimed the licenses.

Salmasi apparently went back to building his long-delayed network, even claiming in August that the buildout would be completed by 2003. But that was before the Nov. 15 settlement deal. Few telecom observers now expect him to attempt to build a business without that all-important radio spectrum. Salmasi isn't talking, but he said in a written statement that the deal "takes us down a different path."

"ACTIVELY INVOLVED." Skeptics question whether Salmasi's tiny outfit ever would have had the capability to build a national network. Indeed, even as Salmasi hyped the network's technology this past summer, he was in talks with other carriers over the sale of the licenses, says John A. Rogovin, FCC deputy general counsel. NextWave attorney Michael Wack, however, disputes that view. "That's absolutely incorrect," he says. "We were actively involved in the buildout all summer long."

If the government is far from thrilled with the outcome, NextWave's rivals aren't complaining. More than a dozen carriers will divvy up the licenses, which cover 32 of the top 50 U.S. wireless markets. As for Salmasi, he's not likely ever to achieve his goal of building a pioneering high-speed wireless network. But walking away with hundreds of millions of dollars for a failed vision isn't a shabby consolation prize.

By Jeanette Brown in New York

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