UPDATE 3-Falcone rejects a LightSquared bankruptcy but problems loom

Wed Feb 15, 2012 9:05pm EST

* Falcone says has a plan, offers no details

* Analysts, some investors, see options dwindling

* LightSquared owes Inmarsat $56 mln by Saturday-sources

* LightSquared hired Moelis for restructuring advice-sources

By Sinead Carew and Svea Herbst-Bayliss

Feb 15 (Reuters) - Hedge fund manager Philip Falcone is ruling out a bankruptcy filing for his telecom startup LightSquared Inc even as sources familiar with the matter said the company was seeking restructuring advice.

"It is clearly not on our table," Falcone said in an email on Wednesday when asked if LightSquared was considering a bankruptcy filing after communications regulators said they planned to revoke its approval for a national wireless network.

Falcone, for whom LightSquared is the biggest investment of his Harbinger Capital Partners fund, said there was a plan for dealing with the Federal Communications Commission's effort to withdraw permission for a land-based network.

"There are other ways around this," he wrote in a second email, without offering any details.

LightSquared has already hired investment bank Moelis & Co as a restructuring advisor, according to two people familiar with the matter. Moelis declined comment and LightSquared did not respond to a request for comment.

The company is due to make a $56 million payment to its satellite partner Inmarsat by this Saturday, according to another person close to the situation and one of the sources who knew of the Moelis hiring.

LightSquared did not respond to request for comments about the payment and Inmarsat declined comment.

Industry analyst Tim Farrar said investors had told him they were concerned about a $56 million payment due this weekend.

"Investors don't want to see such a large sum of money being paid out given the current situation," said Farrar, principal at TMF Associates. "They would prefer LightSquared to file for bankruptcy before that payment is made."

LightSquared said the FCC's action had harmed it and the public by preventing construction of a network vital to U.S. competitiveness.

Industry analysts and some LightSquared investors say the telecom startup is running short of options with cash draining away and little chance of getting the FCC to change its mind. They also say it could be hard to find a buyer for LightSquared. Several suggested that a bankruptcy filing, while perhaps not imminent, is the likely outcome.

In a financial filing last year, LightSquared said it could run out of money by the middle of this year.

"A bankruptcy Chapter 11 filing seems inevitable," said a person with one of the hedge funds that owns some of LightSquared's more than $1 billion in outstanding debt. The person declined to be named because the situation is still fluid with LightSquared.

Farrar said investors would have more leverage to press for a bankruptcy filing after the FCC makes a final ruling. The agency has set a March 1 deadline for public comment.

GPS INTERFERENCE

The FCC announced its proposed decision late on Tuesday, minutes after the National Telecommunications and Information Administration said LightSquared's network would interfere with the Global Positioning System, vital to the military and with civilian uses ranging from airline navigation to irrigation.

Many telecommunications analysts have said it will be difficult for the financially-strapped company to either raise additional financing or ever become profitable with just the satellite-based portion of its network.

Its plan had been to tap into the massive demand for data on devices like smartphones and tablet computers.

"We remain committed to finding a solution and believe that if all the parties have that same level of commitment, a solution can be found," LightSquared Chief Executive Sanjiv Ahuja said in a statement without tipping the company's next move.

The fate of LightSquared also is critical investors in Falcone's hedge fund, which once controlled $26 billion in assets but is now down to about $4 billion. A little more than half of Harbinger's money is tied-up in LightSquared and the hedge fund is the company's single largest equity investor.

Last year, Harbinger, a fund known for its volatile returns with years of big losses often following year of big gains, gave up 47 percent of its value in large part because of a sharp markdown on the value of the LightSquared investment.

Falcone, an expert in distressed investing whose well-timed bet against the overheated housing market earned him a big following in the $2 trillion hedge fund industry, still has a prominent roster of investors. The list is said to include hedge fund legend George Soros, who declined to comment on the Falcone's current troubles.

For now, LightSquared's main business partner, Sprint Nextel , is sticking to its plan to give the company until the middle of next month to try and come up with a solution.

Sprint and LightSquared already decided at the end of last year to try and save money by shelving work on the network until the situation was clearer.

If Sprint scuttles the deal it could mean money coming back to LightSquared. "There is $65 million that would be returned to LightSquared to reflect work that was paid for (but) not carried out." Sprint spokesman Bill White said.

LightSquared has argued that its network would help ease a national wireless capacity shortage, in line with FCC goals to devote more airwaves to mobile services.

But the GPS interference and the FCC's subsequent decision may pose too great an obstacle to overcome, analysts said.

"While we could not commit to saying that it is the 'end of the road' for LightSquared, we believe it will be an extremely tough slog for the company to show value in the spectrum it holds," Wells Fargo analyst Jennifer Fritzsche wrote in a research note.

OPTIONS AND ALTERNATIVES

One route would be for LightSquared to file a lawsuit against the FCC, but it would likely have to wait until the comment period is over and such a case could take months.

"The odds are against (LightSquared) in being able to persuade the FCC that it is wrong," said Andrew Lipman, a partner who heads law firm Bingham McCutchen's telecommunications practice.

Another way to deal with the GPS issues would be to arrange a spectrum swap with another carrier or company, a person close to LightSquared who is not authorized to speak publicly said.

A sale of LightSquared might also be possibility, but it might be tough to find a buyer.

"Right now (LightSquared is) in a world of hurt and the thing is it is toxic enough that no one wants to take it," said one telecommunications mergers and acquisitions expert who could not speak about the matter publicly.

This person added that companies like AT&T and Verizon have been interested in snapping up spectrum, but said buying LightSquared would not be a desirable way to do so, considering the complications around it.

The value of LightSquared's spectrum declines significantly if it cannot be used for cellular services, analysts have said.

For Falcone, the regulatory set-back is the latest in a string of problems dogging the 49-year old former Harvard hockey star who grew up in rural Minnesota but now lives on Manhattan's Upper East Side in a townhouse once owned by Penthouse publisher Bob Guccione.

The U.S. Securities and Exchange Commission recently warned Falcone and some of his key lieutentants they face questions over whether they might have engaged in improper trading. Falcone has also faced investor anger over having failed to tell them that he took a loan from the fund to pay his personal taxes at a time they could not get their money out.

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