Dish pulls bid for LightSquared as court battle begins

NEW YORK Thu Jan 9, 2014 6:59pm EST

1 of 3. A sign in the lobby of the corporate headquarters of Dish Network shows subscription packages in the Denver suburb of Englewood, Colorado in this file photo taken April 6, 2011.

Credit: Reuters/Rick Wilking/Files

NEW YORK (Reuters) - Satellite television company Dish Network Corp (DISH.O) has withdrawn its $2.2 billion bid to buy bankrupt wireless broadband company LightSquared Inc, throwing the future of LightSquared's valuable spectrum rights into further doubt.

Lawyers involved in LightSquared's bankruptcy confirmed Dish had pulled its bid at the start of a trial Thursday over whether Dish Chairman Charles Ergen had unlawfully bought LightSquared's debt in an effort to take over the company.

Dish, which is considering entering the wireless market, saw its shares fall 2.6 percent. Its shareholders had considered a deal with LightSquared a good way for the company to expand its capacity to provide mobile video and other Internet services.

LightSquared's creditors had supported Dish's bid, but LightSquared itself and its controlling shareholder, Phil Falcone's Harbinger Capital Partners, had opposed it. Harbinger is pushing a separate $4 billion restructuring, financed in large part by Fortress Investment Group.

The news, first reported by the Wall Street Journal late on Wednesday, came on the eve of a trial in which Harbinger and LightSquared accuse Dish and Ergen of buying up LightSquared's debt surreptitiously to take control of the company.

The trial, in the U.S. Bankruptcy Court in Manhattan, could determine LightSquared's structure when it eventually comes out of bankruptcy.

Harbinger and LightSquared have alleged that Ergen used a separate entity to buy LightSquared debt to hide the identity of the buyer and get around a credit agreement that barred such purchases by competitors.

The entity then delayed the closing of certain trades to hinder LightSquared's efforts to negotiate a consensus restructuring with creditors, Harbinger and LightSquared have said.

At Thursday's hearing, Matthew Barr, a lawyer for LightSquared, said Dish's decision to pull its bid at the last minute may be an attempt to hurt LightSquared, either by forcing it to liquidate or by allowing Dish to swoop in later with a lower offer.

But Robert Giuffra, a lawyer for Dish, said "speculation is not the stuff of proof."

'ERGENOMICS'

David Friedman, a lawyer for Harbinger, drew a laugh from a packed courtroom when he characterized Ergen's debt buys as "Ergenomics."

Friedman rejected Ergen's position that the debt purchases were personal rather than made on Dish's behalf, saying Ergen used money in a family trust yet did not tell his wife, who was its trustee.

"If it's a personal investment, you would think there would be some discussion within the marital unit," Friedman said. "As in, ‘Honey, I'm gonna spend all my money on spectrum assets - what do you think?'"

Ergen also used money from his daughter's trust fund, Friedman said, a move he only would have considered safe if he knew he could replenish the fund through a Dish acquisition of LightSquared.

Lawyers for Dish rejected that argument, saying that gaining a controlling stake of a company's secured debt class, as the Dish entity did, does not guarantee a favorable result. "His wife and his daughter may be mad, but he's got no downside protection," Giuffra said.

Rachel Strickland, another lawyer for Dish, said bankruptcy plans can be approved over the objections of creditors in some cases, and another entity could have outbid Dish.

"This case is very long on innuendo and inference, and very short on evidence," Strickland said.

LightSquared declared bankruptcy in May 2012 after the Federal Communications Commission blocked its plans to build a wireless network, saying it could interfere with GPS networks.

The battle for LightSquared pits two outsized personalities, those of Falcone and Ergen, against each other.

A lawyer for LightSquared said that Ergen would testify in the case on Monday. Falcone could also testify in the trial, which is expected to last about a week.

Harbinger wants to retain some control of the company, saying it can regain regulatory control and ultimately salvage the wireless plan.

Dish, meanwhile, has spent billions of dollars buying spectrum, but has struggled to find a way to put that spectrum to use. Ergen has said he wants to use the airwaves to build a broadband service for wireless delivery of video.

Its withdrawal from the auction meant Dish would lose spectrum, which could have matched well with airwaves it already owns, analysts at Barclays wrote in a note for clients. While Dish could have other options to acquire more spectrum, it has benefited from obtaining spectrum through bankruptcies, they wrote.

"If the company participates in an active auction process, the upside to the equity is proportionately lower," the analysts wrote.

Dish's shares were down $1.48 at $56.48 at the end of trading on the Nasdaq.

The case is In re: LightSquared Inc, U.S. Bankruptcy Court, Southern District of New York, No. 12-12080.

(Reporting by Nick Brown and Sinead Carew; Editing by Eddie Evans and Ken Wills)

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