With DBSD Bid, Ergen Aims To Draw Spotlight from LightSquared

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PARIS — EchoStar and Dish Network Chairman Charles Ergen, who has invested in many ideas in the satellite sector in the past decade and taken his share of losses, on Feb. 1 struck again, hoping to turn investors’ attention away from startup satellite-terrestrial provider LightSquared and back toward assets Ergen wants to acquire.

Dish Network’s announcement that it has agreed to purchase struggling satellite-terrestrial wireless broadband provider DBSD North America, formerly called ICO North America, for $1 billion will make it more difficult for anyone to compete with Ergen’s effort — this time through his EchoStar Corp. — to wrest control of TerreStar Networks.

Whether DBSD’s other creditors will accept Dish Network’s proposal remains unclear.

DBSD and TerreStar have a lot in common. Both are in Reston, Va., both have licenses to operate satellite-terrestrial services in the 2-gigahertz, or S-band, portion of the radio spectrum, and both are in Chapter 11 bankruptcy proceedings. After they filed for bankruptcy, both of these erstwhile competitors were thrown cash lifelines by Ergen’s companies.

DBSD and TerreStar each have access to 20 megahertz (MHz) of S-band spectrum over the United States. Almost from the day they were formed, representatives of both companies have conceded that their business plans would look much better if they became one, with the merged company presenting investors with a 40-megahertz swath of spectrum for mobile broadband.

The merger never occurred. Each company pursued different business niches, and each launched a large, expensive satellite — DBSD in April 2008, TerreStar in July 2009. Both spacecraft are healthy in orbit and nearly empty of users.

The value of the spectrum play that each was supposed to represent never caught on with strategic investors, even if retail investors and Wall Street were enthusiastic for a while. Neither company was able to attract the funds needed to roll out a network of thousands of terrestrial signal carriers, known as an Ancillary Terrestrial Component (ATC).

DBSD filed for Chapter 11 protection in May 2009, and TerreStar followed in October 2010. With the freedom of movement that comes only when you are the principal shareholder of your companies, Ergen invested an initial $45 million in DBSD, and $75 million in TerreStar. Ergen has made similar-sized investments in the past — in satellite consumer broadband, in S-band mobile satellite broadband in China — that have gone sour.

That might have been the case here too, but for the U.S. Federal Communications Commission (FCC), which on Jan. 26 approved a modification to LightSquared’s license that permits LightSquared’s resellers to offer smartphones with terrestrial-only capability. In the minds of many investors, that improves the business case dramatically. Forcing a satellite mode on all user handsets would raise the cost of the terminals and increase their size to accommodate the larger satellite antenna.

The FCC decision made clear that a similar modification would be offered to other so-called ATC licensees. Globalstar Inc. of Covington, La., which is launching its second generation of low-orbiting satellites this year and expects to use its ATC license similarly, lost no time in issuing a me-too statement.

“With this order LightSquared has been granted the authority to provide terrestrial-only wireless broadband services using mobile satellite spectrum,” Globalstar General Counsel L. Barbee Ponder said in a Jan. 31 statement. “This relaxation of the gating criteria for LightSquared is necessitated by the explosive growth of spectrum-hungry mobile broadband devices. We look forward to the FCC extending similar flexibility to other mobile satellite services providers including Globalstar.”

LightSquared is using the L-band portion of the radio spectrum for its satellite-terrestrial service. To give itself a broad enough section of spectrum to offer the service, it has secured an agreement with L-band mobile satellite services operator Inmarsat of London to use part of Inmarsat’s spectrum in the United States.

LightSquared has agreed to pay Inmarsat $337.5 million to offset Inmarsat costs of adjusting its business in the United States. Once the FCC waiver was announced, LightSquared triggered a second part of the Inmarsat agreement that calls for it to pay $115 million a year, rising by 3 percent per year, for so long as LightSquared operates.

Two industry officials said LightSquared, which is owned by Harbinger Capital Partners of New York, was preparing to announce a set of strategic partners that would help finance deployment of its multibillion-dollar network, including 40,000 ATC stations across the United States.

That was before Ergen interrupted the LightSquared party. Assuming the $1 billion offer secures bankruptcy court approval, the deal puts Ergen on the inside track to purchase TerreStar as well.

“The problem for anyone else [besides EchoStar] bidding for TerreStar now is that they would only end up with one of the two S-band assets, and 20 MHz is not enough,” said Tim Farrar of the TMF Associates telecommunications consultancy of Menlo Park, Calif., which specializes in mobile satellite services.

Farrar said that if prospective investors believe the U.S. market can support only one ATC player, then the arbitrage between DBSD/TerreStar on the one hand and LightSquared on the other appears clear.

“You are looking at nearly $5 billion for LightSquared’s spectrum, including $2 billion for the Inmarsat payments, versus about $2 billion for DBSD and TerreStar,” Farrar said, tallying Harbinger’s stated valuation of the LightSquared assets, plus an assessment of LightSquared’s long-term obligation to Inmarsat.

Those costs may not be the end of the story. Wireless carrier Sprint Nextel is asking for $100 million each from DBSD and TerreStar to recoup costs it says it incurred in clearing, at FCC demand, the S-band spectrum to make way for mobile satellite services.

For LightSquared, a principal risk factor may be allegations by the U.S. Defense Department and the U.S. GPS Industry Council that LightSquared, with its FCC-approved ability to provide terrestrial-only smartphones, will interfere with GPS positioning, navigation and timing services. The FCC has ordered LightSquared to resolve the issue before entering commercial service.