IN NEW TWIST, SUPREME COURT AGREES TO HEAR FCC'S NEXTWAVE APPEAL

In Oct., FCC asked high court to review ruling by D.C. Circuit (CD June 25 p1), even though at that time negotiations were continuing on settlement agreement on NextWave licenses. In petition, FCC asked high court to consider whether Sec. 525 of U.S. Bankruptcy Code conflicted with FCC’s rules for congressionally authorized spectrum auctions. Commission said auctions provided that wireless licenses obtained at auction automatically cancelled when winning bidder failed to make timely payments. Agency highlighted tension between Communications Act provisions under which FCC carried out spectrum auctions and Bankruptcy Code under which it had operated as creditor in relation to NextWave’s installment payment obligations. D.C. Circuit concluded that Sec. 525 of Bankruptcy Code precluded FCC from cancelling licenses. That provision prohibits govt. units from revoking licenses of debtor or bankrupt entity just because they haven’t paid dischargeable debt. Supreme Court had turned down chance to review 2 previous rulings by 2nd Circuit (N.Y.) in NextWave case. Last year, it also rejected FCC request to review 5th U.S. Appeals Court, New Orleans, ruling involving another bankrupt C-block bidder, General Wireless Inc.

One issue still outstanding at FCC is request by Jan. 2001 re-auction winners that Commission return $3.1 billion in down payments on spectrum that D.C. Circuit ruling had returned to NextWave. FCC has held those payments without interest since Feb. 2001. “The FCC and NextWave can go to litigation heaven” if they want, Verizon Co-CEO Ivan Seidenberg said Mon. at investors conference in Orlando sponsored by Credit Suisse First Boston: “We want our money back.” As largest re-auction winner, Verizon Wireless has been seeking return of $1.7 billion in down payments. His comments came after U.S. Appeals Court, D.C., on Fri. turned down petition by Verizon Wireless asking that court compel “full compliance” with its June 2001 ruling. Verizon had argued that because cancellation of those licenses was found to be unlawful, auction itself had no lawful basis and $3.1 billion in down payments from all carriers should be returned. “The relief sought by the petition does not fall within the court’s mandate,” D.C. Circuit held. Verizon Wireless last month also withdrew petition at Supreme Court seeking review of D.C. Circuit’s NextWave ruling.

“The shame of it all,” Seidenberg said, is that NextWave spectrum was “perfectly valid spectrum” that Verizon and others could be using. After he said in Q&A session that Verizon would like to have more spectrum, he was asked whether he favored getting it by buying licenses or buying wireless company. He said he was open to either, although “we built most value by buying licenses, so that would be my first choice.”

Unless settlement is reached, final outcome of litigation for NextWave licenses now isn’t expected until 2004 because Supreme Court isn’t likely to schedule oral argument until term that starts in Oct. That means ruling wouldn’t be expected until around mid-2003, analysts have said. If court ruled in favor of FCC, several outstanding issues would need to be taken up by D.C. Circuit on remand because they weren’t addressed in court’s June 2001 ruling. Among outstanding issues is whether FCC gave NextWave adequate notice under its rules that carrier’s licenses had automatically cancelled when payment was missed.

“I am gratified that the Supreme Court has decided to review the D.C. Circuit’s decision in the NextWave case,” FCC Chmn. Powell said. “This will allow the court to clarify the relationship between public spectrum auctions and the U.S. bankruptcy laws.”

NextWave Senior Vp Michael Wack said: “We are disappointed that there will be additional litigation and the accompanying delay to full commercial deployment of our licenses. The company is confident, however, that once the court reviews the merits of the case, it will reach the same conclusion as the U.S. Court of Appeals in D.C. has done, and NextWave will prevail.” NextWave shares, which trade over counter, fell 55.9% Mon. morning, according to the Pink Sheets, and ended day down 52.5% to $2.80.

Potential of decision to restart settlement discussions over NextWave’s licenses wasn’t immediately clear. Proposed $16 billion settlement over licenses reached by federal govt., re-auction winners such as Verizon Wireless and NextWave expired Dec. 31 when Congress failed to approve pact. Verizon indicated earlier this year it wasn’t contemplating re-entering settlement discussions until Commission refunded $3 billion down payment on licenses won at re-auction. Several analysts said groundwork for settlement had been altered by deteriorating market conditions in wireless sector, which tightened financing that carriers must spend on licenses in first place, several sources said. “Clearly, spectrum and equity valuations have fallen since the carriers bid $15.8 billion for the licenses that are associated with NextWave,” Merrill Lynch wrote in note to investors Fri. Based on several spectrum deals in 2001, firm estimated those licenses fetched prices 10-40% lower than NextWave re-auction bids. Since start of year when NextWave settlement pact fell apart, U.S. wireless equity valuations have dropped nearly 46%, Merrill Lynch said. It said it expected substantial interest in NextWave’s spectrum at prices above $4.3 billion that bankrupt carrier owed to govt. But it said it was “unlikely” NextWave would see $15.8 billion to which carriers agreed under proposed settlement. Amounts bid in Jan. 2001 re-auction “may represent the high water mark for spectrum valuations in the U.S.,” firm said.

Even if Supreme Court ultimately sides with FCC, litigation could go on for some time based on issues that would await D.C. Circuit on remand, said Schwab Washington Research Group analyst Paul Glenchur. “From NextWave’s perspective, the spectrum is in limbo. It’s a difficult climate anyway to try to construct another national network,” he said. From perspective of re-auction winners, they still have spectrum needs and “these licenses could still play a valuable role in filling spectrum gaps and easing the ultimate transition to next-generation services,” Glenchur said. With all that in mind, he said market conditions have “obviously deteriorated… Selling equity or debt in this environment is a very tough thing to do.”

Legg Mason’s Kaut said there probably would be new attempts to explore settlement options by all stakeholders in NextWave case, although ultimate outcome of such efforts was unclear, in part because of constrained financial situations of some carriers. “You have got some pressures moving in different directions,” Kaut said. For example, while FCC’s hand may have been strengthened in negotiations as result of granting of certiorari, agency also has strong interest in seeing case “through to the end to clarify its spectrum rights as a regulator,” he said.