A Hedge Fund's Big Bet on 4G

Philip Falcone's Harbinger Capital Partners has placed a large and risky bet on 4G wireless Internet service by paying an estimated $500 million for SkyTerra Communications. The hedge fund's filings with the Federal Communications Commission lay out a plan to build 36,000 radio towers and send up two satellites. The spectrum Harbinger picked up in the deal could be worth up to $7 billion, based on a Credit Suisse (CS) analysis of the value of wireless licenses. Harbinger spokesman Joshua Lefkowitz declined to comment for this story.

Falcone generated billions shorting subprime mortgages and going long on steel. Like most hedge funds, though, Harbinger lacks a track record running companies, and the deal is a gamble whether the firm pursues a national rollout or sells the spectrum to another company. To get FCC approval for the SkyTerra deal, Falcone committed to building a wireless network that can serve 100 million Americans by the end of 2012. By 2016 the network must cover 260 million people. If Harbinger misses these targets, the FCC can declare its rights to use SkyTerra's spectrum "null and void," according to a March FCC filing.

Harbinger will need as much as $4 billion to build its network, including $1 billion for the satellites, says Tim Farrar, president of Telecom, Media & Finance Associates. "It's a triple bank shot with a twist," says Matthew J. Desch, chief executive officer of Iridium Communications (IRDM), a satellite company in McLean, Va. "I wish them well."

Harbinger has plans for 4G network trials in Phoenix and Denver by September 2011. Its more established rivals will have a long head start: Sprint (S) already offers 4G services with partner Clearwire (CLWR). Verizon Wireless, the largest U.S. mobile provider, will begin rolling out its 4G network later this year. AT&T (T), the second-biggest U.S. wireless player, plans to introduce 4G service next year. So-called 4G, or fourth-generation, networks offer mobile service at speeds that exceed some of the broadband connections people get in their homes.

Although selling its wireless licenses is an option for Harbinger, there are difficulties with that as well. AT&T and Verizon, the most likely purchasers of Falcone's spectrum, are restricted from buying more than 25 percent of the SkyTerra spectrum without FCC approval—although both companies are trying to change that rule. The agency would approve a larger spectrum sale only if it views the deal as being in the public interest, says Paul de Sa, chief of the FCC Office of Strategic Planning & Policy Analysis. AT&T has filed a petition with the FCC to rescind the restrictions on spectrum license sales, arguing that they are "entirely arbitrary."

The bottom line: Harbinger Capital paid an estimated $500 million for an embryonic 4G wireless provider, bringing it spectrum licenses worth up to $7 billion.

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