I haven't talked him in a long time but even I am surprised by the boldness of it all. Phil Falcone, the contrarian investor whom I had likened to Wilbur Ross, is turning into someone else. In bold move that could make or break his reputation, Phil Falcone is betting as much as 40% of his partners' funds in LightSquared, a company trying to provide 4G wireless communications throughout America. The goal is to provide wholesale wireless services through a network of terrestial towers and orbiting satellites. Reuters has a lengthy story on Phil Falcone:
Harbinger's two main investment funds are the owners of LightSquared, an upstart Reston, Virginia-based telecom company that plans to use two orbiting satellites to bring high-speed Internet service to some 260 million in the U.S. by 2015.
Roughly $3 billion or 40 percent of Harbinger's assets are tied-up in LightSquared, say people familiar with the funds. Formerly known as SkyTerra Communications, the telecom company is the hedge fund's single largest and most concentrated bet.
In some respects, Falcone's LightSquared gambit is one of the riskiest hedge fund trades ever. And that's saying a lot for an industry where brash managers are famous for making outsized bets on everything from oil to gold to natural gas to lumber.
The difference is few hedge funds have ever staked so much on the success of a single business -- especially one a manager is trying to build himself largely from scratch in the protean technology field.
Harbinger's gradual metamorphosis from a fund that specialized in distressed debt investing to a mobile telecom incubator is a stark example of how some big hedge funds are looking more and more like private equity firms or even venture capital shops.
I know William Ackman is famous for making bold, risky, bets but Falcone's bet may be one of the riskiest in hedge fund history. The telecom industry is one of the most competitive, with big players willing to spend tens of billions building wireless networks; and the satellite communications business is arguably even worse, with many losing their shirt. I never would have imagined someone like Phil Falcone betting on a venture to provide wireless access everywhere in America. In fact, Falcone seems to have bought up a distressed satellite communications company, TerreStar:
Falcone can not take much solace in history. LightSquared is competing in an industry where many upstart telecoms -- especially those with satellite dreams -- have been buried under an avalanche of debt and insufficient revenues to pay the bills. Right now, TerreStar, a cash-strapped mobile telecom company with a similar business plan as LightSquared, is teetering on the verge of bankruptcy.
Sources say Harbinger, which owns 30 percent of TerreStar's voting shares and a good chunk of its debt, is lining up to provide the company with debtor-in-possession financing -- basically, a loan that enables a company to keep paying bills as it tries to restructure in bankruptcy. LightSquared, meanwhile, has a deal that allows it to purchase minutes for voice and data transmission from TerreStar's telecommunications satellite.
Some faint-hearted individuals might consider Falcone insane given how TerreStar has been a failure and very close to bankruptcy. However, Falcone obviously thinks the LightSquared strategy will work.
It is interesting to me how Falcone values telecom providers. He is apparently betting that the wireless sprectrum licenses, which is a limited resource, is worth far more than what is on the balance sheet. There is some dispute over the value of the spectrum but Falcone seems confident in his call.
In an email exchange with a Reuters reporter, Falcone suggested that even a bankrupt TerreStar might be worth between $1.5 and $2 billion because of the value of its spectrum license. Using those rough figures, Falcone would appear to be valuing LightSquared at a minimum of between $3 billion and $5 billion based solely on the size of its transmission spectrum -- which is twice that of TerreStar's.
When asked whether a $3 billion to $5 billion valuation figure for LightSquared based on it spectrum assets is appropriate, Falcone responded in an email: "I've been offered more but u r getting warm." He didn't elaborate but in another email he implored: "Do the math."
Yet a $2 billion spectrum valuation for TerreStar would be quite rich. That is twice the value of the outstanding debt for a company with a market-capitalization under $50 million.
By comparison, DBSD North America, a telecom company that filed for bankruptcy last year and has a similar spectrum and satellite capacity to TerreStar's, was given a potential post-bankruptcy valuation of between $492 million and $692 million. The judge in the case chose that range after hearing expert testimony from witnesses who offered valuations that began as low as $140 million and went as high as $3.1 billion.
"There are some arguments for putting a high valuation on the spectrum but a lot of it comes down to supply and demand," said Farrar, one of the experts in the DBSD bankruptcy. "If there were plenty of buyers and not many sellers a fairly high valuation could be realistic, but that isn't the case right now."
I don't know if Falcone is too optimistic but one thing is for certain: you can't create spectrum out of thin air.
Overall, I'm impressed with Phil Falcone. It would have been easy to call it quits after making a killing but he is turning into a visionary. The only problem is that this industry sucks in a lot of capital. Falcone may be an expert bond investor but he surely knows that raising debt is not easy. If LightSquared needs to raise another $2 billion to $6 billion in debt and/or equity, it looks like a hard sell.
If Phil Falcone succeeds, he may be on the path to owning a modern equivalent to a railroad. As technology devices become smaller and smaller, with more features and services, wireless communications will surely become more popular. The icing on the cake, obviously, is that once the wireless spectrum has been assigned, there isn't any more left for anyone else.
Side Note: I didn't realize Phil Falcone restructured Spectrum Brands (SPB). Long-time readers may recall how Spectrum Brands was on my watchlist—good thing I never invested in it since it went bankrupt—and Falcone's involvement lends credence to my original belief in the strength of the business. The problem with Spectrum Brands, like most companies, is that it was too leveraged and couldn't handle the declining sales, especially in batteries. Tags: Phil Falcone