AFTER SUPREME COURT RULES, CHALLENGES REMAIN FOR NEXTWAVE BANDS

“The big, overriding question is, will they build out if they win it,” said Paul Glenchur, analyst with Schwab Washington Research Group. If they don’t build out, question is “would they sell it, who might they sell it to.” While several pending regulatory issues remain, Glenchur said he didn’t see them as “major showstoppers.” Even if one agreed to sell, how deal got done still could be open question, Glenchur said. As example, he noted that Qwest had been trying to sell its regional CDMA wireless licenses. Before FCC took Verizon Wireless and other carriers off hook last fall for Jan. 2001 re-auction obligations, those bid commitments were factor in whether they could pursue Qwest spectrum, he said. For NextWave spectrum, if Supreme Court ruled in its favor, relevant factors might be how carriers interested in acquisitions would justify acquiring debt to their shareholders, Glenchur said. Questions on demand for new services, impact of Wi-Fi and collapsing value of spectrum also are considerations, he said.

Several analysts and industry observers predicted after Supreme Court heard oral argument in NextWave case in Oct. that it was more likely to rule for bankrupt carrier than for FCC. If that happens, “the good news is they get the licenses,” Precursor Group analyst Rudy Baca said. “The bad news is they get the licenses.” Baca said 2 proceedings were open at FCC on NextWave’s licenses -- challenges on its foreign ownership structure and compliance with construction benchmarks -- that still represented “cloud” on licenses. If NextWave decided to build out markets instead of selling spectrum, venture capitalists also would take into account that it would be 7th or 8th provider “in a competitive market where nobody is making a profit,” Baca said. While Precursor Group has been bullish on sector rotation back into telecom, “we don’t think NextWave will get to benefit from any of it because they don’t have a viable business. Without the money, they can’t meet build-out requirements,” he said.

“It could easily be the case that NextWave will be in a challenging situation as far as laying out any kind of equity value,” Legg Mason wireless analyst Craig Mallitz said. But he added that offsetting factor for NextWave was that “the amount they pay the government will not be paid all up front” because money owed was due in installment payments. NextWave bid $4.74 billion for PCS licenses in original C-block auction in 1996. Minus half-million-dollar down payment on that spectrum, NextWave has note to govt. owing $4.34 million, according to Nov. operating statement submitted to U.S. Bankruptcy Court, White Plains, N.Y. In contrast, winning bidders in NextWave re-auction that concluded in Jan. 2001 bid nearly $16 billion for NextWave spectrum. In June 2001, U.S. Appeals Court, D.C., overturned FCC decision to cancel NextWave’s licenses for nonpayment, leading to return of that spectrum to original bankrupt C-block bidder. Question, several industry analysts and observers said, was how much spectrum was worth now if NextWave were to sell some licenses to other carriers or move ahead with its own buildout plans.

Original price paid by Jan. 2001 re-auction winners was $4.18 per MHz per pop. Verizon Wireless confirmed last month it reached agreement with NorthCoast to buy 50 PCS licenses for $750 million in cash, covering markets such as Boston, Columbus, O., Minneapolis and N.Y.C. With price of that acquisition heavily weighted toward N.Y., where Verizon has sought additional spectrum, asking price was about $1.60 per pop, Mallitz said.

Meanwhile, T-Mobile USA joined Alaska Native Wireless (ANW) last week in asking FCC for approval to withdraw several pending challenges to NextWave’s licenses. ANW requested last month that Commission allow it to withdraw pleadings after agency granted NextWave re-auction winners ability to exit from their bid commitments. Last year, Commission let Jan. 2001 re-auction winners bow out of their bid obligations, which carriers said removed $16 billion “overhang” of financial commitments tied to licenses still under litigation. T-Mobile said it wanted to withdraw support for: (1) July 2001 petition to FCC to launch investigation and audit concerning eligibility of NextWave to hold C- and F-block licenses. (2) Aug. 2001 petition to deny reinstatement of licenses. (3) Oct. 2001 petition, which ANW had joined, to Wireless Bureau seeking reconsideration of decision to reinstate licenses to NextWave. T-Mobile told FCC last week that those challenges were “rendered moot” by Commission’s grant to one of its subsidiaries to dismiss license applications that were part of re-auction.

ANW and T-Mobile had asked agency to deny reinstatement of NextWave’s PCS licenses, arguing $2.5 billion investment agreement by UBS Warburg gave banker “de facto control.” Verizon Wireless joined earlier petition with ANW and T- Mobile challenging eligibility of NextWave to regain C-block licenses based on compliance with foreign ownership restrictions and its designated entity status. But Verizon wasn’t part of Dec. 2001 petition that questioned Warburg funding. Verizon Wireless spokesman wasn’t available for comment on whether carrier would withdraw NextWave licensing challenges.

NextWave Senior Vp Michael Wack declined to speculate on outcome of Supreme Court case. “If we are fortunate enough to prevail in the litigation, we think there are opportunities for success for our creditors and shareholders in the marketplace,” he said.

Among issues still before FCC on NextWave spectrum is challenge filed last month by Eldorado Communications to Wireless Bureau decision to grant NextWave re-auction winners relief on their bid obligations. Eldorado filed application for review by U.S. Appeals Court, D.C., Dec. 24, arguing bureau decision should be overturned because it conflicted with statutes, regulation, case precedent. Eldorado competed with NextWave in original C-block auction, later filing for Chapter 11 and returning spectrum.

DCC PCS, which was among re-auction winners allowed to exit from its bid commitments, in FCC filing last week criticized Eldorado’s challenge as “a transparent attempt to gain advantage for itself” in NextWave re-auction. DCC said “Eldorado has failed to establish even a colorable basis for standing in this matter” and asked FCC to dismiss petition. DCC told FCC that “to deter further frivolous filings” by Eldorado it should consider fines and designation of hearing to “determine whether Eldorado and its principals remain fit to be FCC licensees.”

Company named N.Y. Telecom also challenged status of NextWave compliance with its PCS construction requirements. It contended NextWave had missed construction deadlines, which carrier disputed at FCC, saying it had outlined its compliance in its initial construction filings in Jan. 2002. One issue at center of filings by N.Y. Telecom and NextWave over buildout deadlines is whether settlement agreement reached by FCC, NextWave and re-auction winners in 2001, but which Congress never ratified, gave NextWave more time to meet deadlines.

NextWave has opposed requests that FCC investigate its compliance with foreign ownership provisions. In 2001 filings, it noted that Wireless Bureau originally had granted PCS licenses because it concluded that any violation of statutory benchmark for foreign ownership was de minimis. World Trade Organization telecom agreement in 1997 and subsequent FCC rules had effectively eliminated foreign ownership issues in all but “most egregious circumstances,” NextWave told FCC. Foreign ownership questions originally were raised in 1997 when 2 failed C-block bidders, Antigone Communications and PCS Devco, asked FCC to dismiss NextWave’s conditional license approval based on alleged violations of foreign ownership limits. Before Commission took final action on petition, NextWave licenses were cancelled for nonpayment. Antigone and Devco reached settlement with NextWave on issue that FCC hasn’t yet approved, source said.

Wireless Bureau in Aug. 2001 returned NextWave’s licenses to “active status” after D.C. Circuit held that Sec. 525 of U.S. Bankruptcy Code barred cancellation of licenses for missed payment. Public notice at time said license litigation continued at Supreme Court and Bankruptcy Court as well “potential or ongoing regulatory proceedings.” Several sources said fact that NextWave now held licenses changes standard for revocation as it examined challenges. FCC’s authority to grant licenses or deny application is based on broad public interest standard, but its ability to revoke license is relatively narrowly proscribed by statute, including requirement for full hearing on record in which agency would carry burden of proof.

Several analysts said they envisioned that NextWave spectrum would be appealing to competitors for purchase on piecemeal basis rather than single carrier’s buying all its licenses. While several industry observers pointed to NorthCoast asking prices as benchmark of where wireless market was now, they cautioned that dearth of deals in last year had made spectrum valuation difficult to pinpoint. “A lot of it will depend on the timing of when it is available,” Legg Mason’s Mallitz said. He said NextWave licenses were more likely to be bought as part “of a market-by-market type of auction,” providing blocks of spectrum that carriers could use as filler. But one risk to NextWave, he said, “is the longer this stays in court, the more likely another scenario develops in which carriers are filling in their spectrum needs from elsewhere.”