Struggling SkyTerra Sets March 22 Vote for Purchase by Backer Harbinger Capital

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PARIS — Mobile satellite communications operator SkyTerra Communications’ decision to pursue a takeover by its longtime backer, Harbinger Capital Partners, came after a devastating analysis by the company’s advisers that concluded that after spending five years and several hundred million dollars, the success of SkyTerra’s business plan is still nowhere in sight.

As a result, the analysis concluded, SkyTerra faces the threat of running out of cash starting late this year even if it continues to limit spending to the minimum needed to complete construction of its two satellites and launch the first between August and October.

Reston, Va.-based SkyTerra has set a March 22 meeting of its shareholders to vote on the Harbinger purchase after settling two takeover-related shareholder lawsuits by modifying voting procedures.

As described by SkyTerra management in a March 1 conference call with investors, and in documents filed Feb. 26 with the U.S. Securities and Exchange Commission (SEC), SkyTerra like other mobile satellite services startup companies, including DBSD, the former ICO North America; and TerreStar Networks appears to be facing a day of reckoning.

Whether the company can leverage its relationship with London-based Inmarsat the established mobile satellite services operator in which Harbinger owns a substantial stake into a sustainable business remains unclear, even assuming a purchase by Harbinger.

In its SEC filing, SkyTerra says that in December it paid Inmarsat $31.5 million in cash to maintain L-band spectrum rights with Inmarsat that were agreed to in a December 2007 deal signed by the two companies. The payment now gives SkyTerra until September 2011 to determine how to proceed with Inmarsat. The agreement calls for SkyTerra ultimately to pay Inmarsat several hundred million dollars to pursue the agreement to its completion.

SkyTerra had been the vehicle through which Harbinger had indicated it would purchase Inmarsat as part of an ambitious project to assemble L-band spectrum in North America for a future network using satellite and ground-based signal boosters called Ancillary Terrestrial Components (ATC) to serve broadband mobile devices.

The U.S. Federal Communications Commission (FCC) offered mobile satellite services companies the right to use their satellite spectrum for ATC-enabled terrestrial links to ensure that their systems functioned in urban canyons and other areas out of line-of-sight contact with the satellites.

But deploying the ATC network is a multibillion-dollar expense beyond the reach of mobile satellite services operators. Those relying on an ATC component launched construction of their large satellites in the hope that the spectrum they had secured would attract large wireless communications operators to form strategic partnerships.

This did not happen, and as SkyTerra makes clear in its SEC filings, there is little reason to hope it is about to occur. The company says it hired Morgan Stanley in mid-2009 to review strategic options. The Morgan Stanley assessment is a striking departure from the spectrum-bullish advice Wall Street was giving investors as late as 2009. The Morgan Stanley review concluded that the shortage of spectrum is not so dire as to make it likely that SkyTerra spectrum will be irresistible to anyone in the near term, and certainly not before SkyTerra faces a liquidity crisis.

The report urged SkyTerra to focus on conserving its radio spectrum and reducing to a minimum its expenses. In particular, it recommended restructuring part of the two-satellite construction contract with Boeing into a debt-type obligation. SkyTerra would pay Boeing just enough to avoid Boeing’s terminating the contract for payment default.

In the March 1 conference call, SkyTerra Chief Financial Officer Scott Macleod said that to conserve cash, the company continues to defer spending needed to deploy its mobile network.

The company said it had paid Boeing $491.9 million as of Dec. 31 and would pay another $54.9 million through September. Macleod said the Boeing payments and other SkyTerra bills due in the first nine months of 2010 total $211 million. The company’s cash on hand plus a $100 million credit facility are expected to leave it with $155.4 million as of October.

The company has deferred about $155 million in Boeing payments so far as part of the cash-conversation policy, and has also slowed spending on new chipsets and satellite base stations that will be needed to communicate with the satellites.

SkyTerra, whose U.S. and Canadian operations operate two aging satellites providing low-speed voice and data links, reported revenue of $34.5 million in 2009, flat from 2008. The company reported a net loss of $215.3 million, also similar to 2008. The loss includes a $14.1 million write-off of a payment to Sea Launch Co. of Long Beach, Calif., which had been scheduled to launch the SkyTerra-2 satellite in late 2010 or early 2011.

The company has since transferred the SkyTerra-2 launch to Reston, Va.-based International Launch Services, which is also launching SkyTerra-1 under a two-launch contract valued at $175.5 million.

Total SkyTerra debt as of Dec. 31 was about $1.4 billion.