Hedge fund manager Philip Falcone is ruling out a bankruptcy filing for his telecom startup LightSquared Inc, one day after U.S. regulators said they planned to revoke approval for the company to build a national wireless broadband network.
"It is clearly not on our table," Falcone said in an email to Reuters on Wednesday when asked if LightSquared, the biggest investment in his Harbinger Capital Partners fund, was considering a bankruptcy filing.
He said there is a plan for dealing with the Federal Communications Commission's plan to rescind its permission for LightSquared to build out a land-based network, but he declined to offer any details.
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.
Tim Farrar, a veteran industry analyst and principal at TMF Associates, agreed but said a bankruptcy filing may not occur immediately. "Investors don't have leverage to force a filing right now," he said, adding that a final FCC ruling would strengthen the hand of investors to force it.
The FCC announced its 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 telecommunication 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 build a high-speed wireless service so it could 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.
"We have an agreement with LightSquared that goes to March 15 to give LightSquared time to address the issues it's had with the FCC," Sprint spokesman Bill White said.
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." White said.
LightSquared has argued that its network would help relieve 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 consider suing the government if the FCC's final determination goes against the company after the comment period ends March 1.
"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.
LightSquared would likely have to wait until the comment period is over before it could sue the FCC and such a case would likely take about nine months or more, the lawyer estimated.
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, one investor in Falcone's fund and other industry analysts have suggested, but they acknowledge that 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.
(Reporting By Svea Herbst-Bayliss in Boston and Sinead Carew in New York; Editing by Matthew Goldstein and Tim Dobbyn)