The battle for spectrum leads to M&A in the USA

Citation

Curwen, P. (2013), "The battle for spectrum leads to M&A in the USA", info, Vol. 15 No. 3. https://doi.org/10.1108/info.2013.27215caa.002

The battle for spectrum leads to M&A in the USA

Article Type: Rearview From: info, Volume 15, Issue 3

A regular column on the information industries

With 4G – essentially LTE – widely available and LTE-Advanced on the horizon, the need to deal with perceived spectrum shortages in the USA is dominating the thoughts of mobile operators. Because carriers of up to 20 MHz are best suited for high-speed data transfers, considerable numbers of spectrum purchases and swaps are taking place in order to make existing provision more efficient. But with the FCC unable to provide worthwhile amounts of new spectrum in the most suitable bands for LTE, M&A activity is understandably back on the agenda with a vengeance and is notable for the role played by satellite spectrum holders which is the primary focus of this Rearview.

The FCC can do little in the short term. It takes the view that the government needs to re-designate some of its spectrum holdings for commercial use and share them with operators – in particular, the 1755-1850 MHz band paired with 2155-2180 MHz (designated AWS-3). Another possibility is to open up spectrum bands that have so far largely been ignored for LTE. In October 2012, the FCC tabled its latest set of plans which set out to make a further 300 MHz of spectrum available by 2015. The plans largely concerned the AWS band, with a mooted initial auction of the so-called “AWS-2 H Block”, of particular interest to Sprint Nextel (see Table I).

A unique feature of the USA is the plan to launch a wholesale service using mobile satellite spectrum. The main companies involved are LightSquared, Dish Network and Clearwire. Harbinger Capital Partners set up LightSquared using licences owned by subsidiary SkyTerra, and partnered with Inmarsat in order to create the necessary contiguous bandwidth to supply terrestrial services. LightSquared then joined up with rural access start-up OpenRange to provide services in areas neglected by the “big three”. However, widespread concerns arose over the potential for LightSquared to interfere with GPS signals – LightSquared hoped to use 1545-1555 MHz (upper 10 MHz band) while GPS operated in the 1559-1610 MHz band. In March 2011, LightSquared announced that it had 60 potential partners, among them Leap Wireless and Best Buy, but no single major client.

As things stood at the end of August 2011, the Department of Defense standard of September 2008 had effectively granted GPS a 4 MHz guard band, LightSquared had offered a 23 MHz guard band and the GPS industry was asking for a 34 MHz guard band which would leave LightSquared with only 24 MHz of usable spectrum. In October, LightSquared proposed its third solution to the interference problem involving a wideband antenna developed by Petel, but the outcome remained in doubt.

In early January 2012, Sprint Nextel gave LightSquared a final 30-day reprieve to obtain authorization for its satellite service. This was a significant issue for Sprint Nextel given that LightSquared had agreed in July 2011 to pay $9 billion over an 11-year period for Sprint Nextel to manage the roll-out of its wholesale network, although the operator had other irons in the fire such as its arrangements with Clearwire. However, it is possible that LightSquared’s prospects have now been damaged irreversibly by the National Executive Committee for Space-Based Positioning, Navigation and Timing (PNT ExComm) which claimed that there could be interference with aircraft safety systems and that there was no solution to this problem. In late February 2012, the FCC announced that it intended to revoke LightSquared’s provisional permission to proceed. As a result, Sprint Nextel’s agreement with LightSquared was scrapped in late March with highly negative effects upon market perceptions of its financial health.

LightSquared’s financial situation began to look increasingly precarious and Chapter 11 bankruptcy rapidly became the inevitable outcome – a process which allows a company to continue in operation while it restructures its affairs. A debtor-in-possession loan in June 2012 means that the company can at least remain in business until November 2013. LightSquared has filed to modify its licence application to permit the use of the 5 MHz of spectrum that was not held to cause interference problems together with a further five megahertz that it would share with the federal government, while forgoing any further action in respect of the contested bandwidth.

The dire situation faced by LightSquared can be compared with that of Dish Network which paid $2.8 billion for 40 MHz of contiguous S-band spectrum (2000-2020 MHz plus 2180-2200 MHz) – known in FCC parlance as AWS-4 – from bankrupt DBSD and TerreStar. Dish was expected to get the same waiver as had been granted to LightSquared but its main problems remained a cash shortfall to fund a full terrestrial roll-out and a shortage of spectrum. It had begun talking in vague terms of a link of some kind with either Clearwire or Sprint Nextel, but many commentators argued that since the takeover of T-Mobile USA by AT&T had failed to come to fruition, Dish could be interested in merging its spectrum with that of T-Mobile – it had made an unsuccessful bid worth $4 billion for MetroPCS in August 2012 before T-Mobile interceded.

Table I Activity related to spectrum holdings

However, a link-up with AT&T seemed unlikely given the latter’s petition to the FCC in February 2012 that Dish should have the same roll-out obligations as those imposed on LightSquared. Dish considered this to be a wholly unreasonable requirement on the grounds that, first, it intended to operate as a retailer rather than a wholesaler (which has ramifications for the prospects of 4G in the USA) and, second, that it intended to move straight to LTE-Advanced, a launch of which would not be feasible before 2015. In May 2012, it announced that that it now expected to launch LTE-Advanced in 2016. The situation in November 2012 appeared to be that the FCC was prepared to sanction full terrestrial rights but only if onerous conditions were to be accepted by Dish. In effect, the FCC wanted Dish to disable 25 percent of its uplink spectrum and impair a further 25 percent in order to accommodate the potential future use of adjoining H Block spectrum by Sprint Nextel. As this 5 MHz block of spectrum was yet to be licensed, Dish understandably considered the proposal to be unreasonable and likely to cause yet further delays in its roll-out. The official FCC clearance finally came in mid-December with the expected conditions attached.

In March 2010, satellite service provider Clearwire began to assess a switch of technology from WiMAX to TD-LTE, acting as a wholesaler like LightSquared while leaving majority shareholder Sprint Nextel to provide retail services. Sprint Nextel duly signed a new long-term agreement in April 2011 which specified wholesale prices and guaranteed minimum payments to Clearwire. In June 2011, Sprint Nextel reduced its voting rights in Clearwire to 49.9 percent to allay shareholders’ fears that it would be liable for debts incurred by Clearwire if the latter was deemed to be a subsidiary company, and shortly thereafter signed a 15-year deal with LightSquared jointly to develop, deploy and operate its network. In August 2011, Clearwire confirmed that it would be overlaying its WiMAX network with LTE-Advanced-ready technology in the main urban areas provided it could secure the necessary funding.

In October, Sprint Nextel announced that it would be speeding up the roll-out of Network Vision which would combine its various technologies using the 1900 MHz band, aiming for a commercial launch in 2012 (which it achieved in 15 cities in July) and nationwide coverage by 2013 (by which point it expected to have re-farmed the 850 MHz spectrum previously used by its terminated iDEN service). For its part, Clearwire played down the significance of this development, pointing out that it remained the largest wholesaler in the USA and that Sprint Nextel would not be alone in needing to utilise Clearwire’s spectrum at some point.

Sprint Nextel began to back-track, agreeing to pay $350 million in return for LTE capacity provided that Clearwire achieved specified roll-out targets by June 2013. It also agreed to provide additional equity finance in the event of a further share issue. This was needed because, in early December, the owners of SpectrumCo, a group of cable operators including Clearwire investors Time Warner and Comcast, sold their AWS licences to Verizon Wireless for $3.6 billion, subject to regulatory approval. This meant that they would cease to re-sell Clearwire’s 4G services in March 2012. The deal received conditional approval from the Justice Department and FCC in August 2012, and Verizon agreed to sell on spectrum in the 700 MHz Lower A and B blocks to T-Mobile and/or other interested parties.

Clearwire duly raised $715 million in mid-December, of which almost half was provided by Sprint Nextel. In February 2012, it announced that it would complete the first phase of its roll-out by June 2013, while in March it was able to reveal a five-year contract to provide 4G capacity to major regional operator Leap Wireless.

In August 2012, the Clearwire share price fell below $1. At 11 million, subscriber numbers appeared to be healthy, although the great majority were wholesale customers provided by Sprint Nextel. The Softbank takeover bid for Sprint Nextel induced the latter to raise its voting rights in Clearwire from 49.8 percent to a small majority (without affecting its majority equity stake), which meant that Softbank would gain control of two companies, each with significant spectrum holdings. It should be noted that the Softbank bid, if successful, could affect Clearwire insofar that Softbank is rolling out TD-LTE in Japan. Certainly, Clearwire is now intent in slowing down the roll-out of its network in order to conserve cash and align itself better with Sprint Nextel’s own roll-out schedule which in October 2012 was running a quarter behind its year-end goal of 12,000 sites.

In December, it was alleged that Sprint Nextel would proceed with a plan to acquire full control of Clearwire, causing the latter’s share price to rise to $2.68. The implications for the takeover by Softbank were not immediately clear, but in the event Softbank expressed itself to be happy with a bid of $2.97 a share which was accepted by Comcast and Intel but, inevitably, other shareholders set out to contest the bid in the courts. However, all of these plans were thrown into disarray when Dish Network made an unsolicited bid for the whole of Clearwire in January 2013 via an offer worth $3.30 per share or $4.85 billion for the entire shareholding. This included an agreement whereby Clearwire would build and operate the Dish network using some of Clearwire’s spectrum and obtain new funding for Clearwire. Dish also offered to acquire 25 percent of Clearwire’s spectrum for $2.2 billion in cash. In response, Clearwire noted that some of Dish’s proposals might not be permitted under the terms of Clearwire’s existing legal and contractual obligations.

Clearly, given its existing stake in Clearwire, Sprint Nextel can prevent a takeover by Dish and it can mount a higher counter-offer, but Dish is notoriously litigious and hence the proposed links between Softbank, Sprint Nextel and Clearwire will need to be adjusted in some as yet unspecified manner.

Corresponding author

Peter Curwen is Visiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK. He can be contacted at: pjcurwen@hotmail.com