Analysis: LightSquared's options include deal with Sprint, bid for TerreStar

Now that LightSquared has been granted a two-week extension from the FCC to file a report on tests showing how much the company's L-band spectrum interferes with GPS receivers, analysts and industry watchers are speculating over what's next for the wholesale LTE startup. The company has multiple options and appears to be hedging its bets as it continues to test and collect data on the GPS interference issues.  

The three main courses of action LightSquared could take include a long-rumored network-sharing deal with Sprint Nextel (NYSE:S), a possible purchase of TerreStar Networks' assets and spectrum in bankruptcy court or a solution with the FCC to put restrictions on how much of the company's L-band spectrum LightSquared can use for its LTE buildout. Here is a breakdown of the main options:

Sprint: The Sprint deal appeared to inch closer to reality, with the Wall Street Journal reporting that LightSquared received approval from its creditors to have Sprint take control of its spectrum should LightSquared default on its debt. According to the report, under a network-sharing deal, Sprint would be paid in a mixture of cash and use of the spectrum. LightSquared CEO Sanjiv Ahuja confirmed last week that the company had held talks with Sprint, but said there was nothing to announce. Representatives from LightSquared and Sprint declined to comment on the report.

However, while partnering with Sprint would help LightSquared meet its aggressive network buildout mandates sooner, it would not resolve the GPS interference issues. Tim Farrar, an analyst with TMF Associates, said that if LightSquared signs a deal with Sprint, it means LightSquared will have to "fight to the death" over its right to use the L-band spectrum it owns, in the 1525 through 1559 MHz band and 1626.5 to 1660.5 MHz bands. "One would hope they would have Sprint helping argue in their corner," Farrar said. "If they go with Sprint, they are basically committed."

TerreStar: Another option would be for Harbinger Capital Partners, the hedge fund backing LightSquared, to bid on different spectrum that would not cause GPS interference, specifically the 20 MHz chunk of MSS spectrum TerreStar owns in the 2 GHz band. Charlie Ergen's Dish Network won the "stalking horse" bid for TerreStar's assets with a $1.375 billion offer, according to bankruptcy court filings. Dish will allow TerreStar to extend the deadline for bids until June 27, with a court-supervised auction set for June 30, one day before the new July 1 deadline LightSquared has to submit the final GPS report.

What makes the TerreStar auction more interesting is that Harbinger, along with Solus Alternative Asset Management, offered to buy bankrupt DBSD North America, which also holds a 20 MHz block of MSS spectrum adjacent to TerreStar's spectrum. Dish wound up buying DBSD for $1.4 billion. "I'm sure [Harbinger] would be just as interested in that," said BTIG analyst Walter Piecyk. "But can they get it financed?" A Harbinger spokesman declined to comment on whether the company would bid in the TerreStar auction.

Piecyk said he thinks that if Harbinger bids, it will do so with a company that has similar interests, most likely MetroPCS (NASDAQ:PCS). Reuters reported that Ergen's bid beat out a group of TerreStar's debt holders that also included MetroPCS. A MetroPCS spokesman declined to comment. Such a bid could complicate any negotiations with Sprint, Piecyk said. "If I am Sprint, do I want to do network share with a guy who is in bed with MetroPCS, who is a competitor?" Piecyk said.

Complicating the TerreStar matter is that Ergen has an incentive to bid up the price of the spectrum and ultimately capture it. "It's a lot more valuable to have DBSD and TerreStar than either one on their own," Farrar said. And yet, noted Jeffrey Silva, an analyst at Medley Global Advisors, "If LightSquared is thinking everything could crumble, they may pay a premium."

FCC: Still another course, and the least radical, would be for LightSquared to ask the FCC to allow it to use the lower part of its L-band holdings, which tests indicate caused less interference than the upper portion. Farrar said the company could outfit its network infrastructure with filters and hope that the GPS industry comes up with a technical solution that would allow LightSquared to use the upper portion of its spectrum a few years down the road.

Silva said that all of LightSquared's options have inherent risk, but that LightSquared has a few things working in its favor, including that it has inked a series of roaming and commercial deals with wireless carriers, and that the FCC wants to make as much spectrum available for mobile broadband as possible. Nonetheless, he said opposition from federal agencies, including the Department of Defense, could prove for lethal to LightSquared's ambitions.

"It's not in a great place right now," he said of LightSquared. "They have this combination of risk and uncertainty that can be debilitating. And my sense is it's not going to go away any time soon."

For more:
- see this LightSquared filing (PDF)

Related Articles:
LightSquared gets extension on GPS report, inks deal on Sprint network sharing
Dish Network lands $1.38B bid for TerreStar, reportedly outflanking MetroPCS
Seybold's Take: Why LightSquared's proposed system will interfere with GPS
LightSquared CEO Ahuja confirms talks with Sprint
Two government agencies say LightSquared's network interferes with GPS
Lawmakers continue to press FCC on LightSquared GPS interference concerns
FCC's Genachowski: We won't let LightSquared operate without GPS interference resolution

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