Debt Tantrum From Space Forces U.S. Hand in 5G Race
(Bloomberg Opinion) -- A messy situation risked becoming irreversibly messier.
The $35 billion fight over fifth-generation mobile spectrum involves the Federal Communications Commission; a handful of foreign-domiciled satellite operators that think they deserve the bulk of the proceeds (at least one of which desperately needs the money); the U.S. national wireless services providers that want the bandwidth as soon as possible; and a host of politicians keen for American taxpayers to get what they see as their rightful due.
Then, just before FCC Chairman Ajit Pai’s Thursday announcement on how things should go down, one of those players appeared to threaten to throw a temper tantrum if it didn’t get its way. Luxembourg-based Intelsat SA was considering a possible Chapter 11 bankruptcy filing if the regulators doesn’t increase the compensation it receives for giving up some of its airwaves, according to a Wednesday report by my Bloomberg News colleague Todd Shields.
If it was a negotiating ploy, it seemed to work. It placed the burden on the FCC to settle the situation quickly or risk putting the U.S. behind other leading nations in getting 5G off the ground, with all of the rewards that promises. Shields reported on Thursday, that the FCC had reached a settlement with the satellite firms. The details will reveal whether Intelsat’s gambit paid off.
Intelsat and rival SES, also based in Luxembourg, currently hold the licenses for about 90% of what’s known as the C-Band, a tranche of mobile spectrum that’s ideally suited for 5G networks. They were granted these licences decades ago, and have been using them to transmit programming to TV and radio stations around the U.S.
When the FCC’s Pai said two years ago that he planned to make the C-Band available for 5G, shareholders in the satellite peers sensed a bonanza from selling the spectrum licences. Intelstat’s stock climbed ninefold over the next seven months, although the increase in enterprise value was more muted due to its considerable debt pile, of which more later.
But then came the complications. The satellite companies have been pushing for a private auction, which they said would be faster, and one that ensured as the current license holders they’d be the main beneficiaries. The FCC wants to hold a public auction, which could take years, with most of the proceeds going directly into public coffers. But because the satellite firms would have to replace billions of dollars worth of equipment, which might otherwise interfere with 5G, the FCC will have to reimburse them for those costs, while also giving them a strong enough financial incentive to carry out the work quickly.
Intelsat needs the money more than the others. Its $14 billion net debt pile represents a staggering 12 times Ebitda — largely a legacy of its ownership by private equity firms before its 2013 initial public offering. SES’s debt is just three times Ebitda.
On the other side of the equation, carriers such as Verizon Communications Inc. want access to the C-Band as quickly as possible in order to accelerate the pace of the 5G rollout. They don’t particularly care who receives the lion’s share of the proceeds, though they do want to keep costs down. And they might stomach higher costs if they get access sooner. Any move toward a Chapter 11 filing by Intelsat would significantly slow down the process by tying up its assets.
And so while the FCC certainly doesn’t exist to enrich companies based on foreign soil, it’s been in a position of needing to carefully consider its important role of setting the best playing field for American businesses and consumers alike. And where 5G is concerned, speed is of the essence. At any rate, while both SES and Intelsat are technically domiciled in Luxembourg, their headquarters, management teams and most of their investors are in the U.S.
To keep all stakeholders happy, the FCC probably needs to hand more of the proceeds to the satellite firms. Bloomberg Intelligence analyst Stephen Flynn estimates that Intelsat needs at least $6 billion to reduce its debt to manageable levels. The FCC has privately indicated the total pot available to the satellite firms would be less than $10 billion, of which Intelsat would get no more than 45%, Bloomberg News reported last month.
Frankly, a private auction would have been the most expedient option. Political pressure means the FCC won’t follow that route. It’s a catch-22 situation, as my colleague Tara Lachapelle wrote in November.
But given that the FCC has already done the U.S. telecommunications industry a huge favor by clearing the acquisition of Sprint Corp. by T-Mobile US Inc. and thereby reducing the competition, it should probably be prepared to seek greater 5G proceeds and hand more over to the satellite companies. Is that fair? Not really. But in the interests of a faster auction, and thereby a faster 5G rollout, Intelsat seems to have given it little alternative.
Some have estimated the proceeds could reach $77 billion
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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