CINGULAR, NEXTWAVE SUBMIT PCS DEAL FOR BANKRUPTCY COURT APPROVAL

Particulars involving the transaction emerged Fri. when Cingular confirmed it was in talks with NextWave and an outside PR firm retracted a news release on what was then a not-final deal (CD Aug 4 p1). NextWave’s filing in bankruptcy court Tues. provided other details, such as break- up fees in the Cingular agreement and a term sheet of provisions under which the bankrupt carrier would pay the FCC for that set of licenses. The sale is contingent on court approval of the term sheet with the FCC. NextWave told the bankruptcy court the term sheet awaited Dept. of Justice approval.

In the 155-page court filing, NextWave said it was in negotiations on the overall value of the Commission’s claims in bankruptcy court. NextWave and FCC are seeking to “resolve the total amount of the FCC’s claims against the estates, as well as claims the debtors believe they have against the FCC,” the filing said. The agreement with Cingular doesn’t foreclose other alternatives for the remaining NextWave licenses not involved in the Cingular transaction, the filing said. NextWave already has paid $500 million of the roughly $4.8 billion it originally bid for its licenses in 1996 and 1997. Sources have said that estimated interest payments could be adjusted based on a final agreement with the govt. on the outstanding debt.

As expected, the licenses covered under the proposed agreement primarily would bolster Cingular’s spectrum position in its existing markets. It plans to pay $1.4 billion in cash for 10 MHz of PCS spectrum in 32 markets, including Atlanta, Boston, Chicago, Dallas, Houston, L.A., San Diego, San Francisco, Washington. The proposal also includes 20 MHz licenses in Tampa and El Paso. Cingular provides service in all markets covered by the deal except for Portland, Ore., Salt Lake City, El Paso, Manchester, N.H., Hagerstown and Salisbury, Md., and Kankakee, Ill. The proposal would leave NextWave with a nationwide footprint because it holds the rest of the 30 MHz licenses in each of the markets as well as authorizations in 27 other markets.

The agreement proposes a court-overseen bidding procedure under Sec. 363 of the Bankruptcy Code. Such procedures are designed to ensure that a debtor receives the best price for an asset. That potentially opens a window for another carrier to come in with a better price. That was the case in a similar bidding procedure in U.S. Bankruptcy Court, N.Y., for WorldCom to sell its wireless assets. BellSouth initially offered $61 million for that spectrum but ultimately was topped by a Nextel offer of $144 million. The bidding procedure would use the $1.4 billion offer from Cingular as a baseline. Initial bids would have to include that purchase price plus $61 million, which would include a break-up fee of $21 million to Cingular. The proposed break- up fee represents 1.5% of the $1.4 billion purchase price, the filing said. Other stipulations include that potential rivals not condition their offers on obtaining financing.

In a hearing before Bankruptcy Judge Adlai Hardin Aug. 21, NextWave said it would seek approval of the bid procedures and proposed sale terms. The carrier said the initial approvals essentially are procedural. It attributed the timing of a request for an expedited motion to the amount of time needed to obtain regulatory approval of the license transfer and an approaching maturity date of certain financing, it told the court. Potential bidders would have from that date until Sept. 15 to make a higher and better offer to enter the auction, which would be held Sept. 22. If a better offer surfaced, it would be reviewed by the court Sept. 25.

Under the term sheet, the FCC would be paid at least $714 million for the licenses involved in the Cingular proposal, depending on whether a higher offer was made. The agreement would pay the FCC in full. NextWave told the bankruptcy court that by selling its stake in the licenses, it would generate enough cash to satisfy the FCC’s claims and repay a $220 million debtor-in-possession loan. NextWave said that would leave more than $460 million to spend on its reorganization.

Under the agreement with the FCC, if an offer exceeded $1.5 billion, the Commission would receive 34% of any amount above that figure up to a cap of $734 million, the court filing said. Several sources said the figure was greater than the principle associated with the licenses -- $687 million. Including both principle and interest before the carrier’s Chapter 11 bankruptcy filing, the dollar figure for the licenses is closer to $750 million, a source said, meaning the $714-$734 million range agreed to would create a middle path between the numbers. “The resolution enables the debtors [NextWave] and the FCC to resolve a portion of the disputes between them without resorting to additional litigation,” the carrier said in the court filing.

“This spectrum will allow us more room to provide additional services and products, to expand coverage in some of our key markets and to better accommodate overall growth,” Cingular COO Mark Feidler said. NextWave Chmn. Allen Salmasi said the deal marked a key step forward in his company’s reorganization process, which began when it filed for Chapter 11 protection in 1998. “The proceeds of the deal will enable us to satisfy a significant portion of our obligations to the government and to other creditors,” he said.

Several industry observers said they didn’t necessarily expect a higher alternative bid to turn up in the auction for the licenses that Cingular proposed to acquire. But the process did open a procedural window for a better offer. Tejas Securities Group analyst Igor Volshteyn said Verizon Wireless had made bids in Auction 35 for some of the markets covered under the Cingular agreement, winning spectrum in Chicago, San Francisco, Sacramento and Salt Lake City, before courts overturned the results. After that auction was completed in Jan. 2001, raising nearly $16 billion, the U.S. Appeals Court, D.C., ruled the FCC had erred when it cancelled NextWave’s licenses for nonpayment. The U.S. Supreme Court ultimately upheld that decision, meaning the licenses that had been cancelled by the FCC would remain in NextWave’s hands. “This is the last available spectrum in those markets,” Volshteyn said of the PCS spectrum that Verizon won in markets such as Chicago and San Francisco before that auction was overturned. While that didn’t guarantee that the carrier would try to top the Cingular offer, “Verizon will be interested for that reason,” he said.

The Cingular-NextWave announcement prompted Moody’s to place Cingular’s senior unsecured debt rating on review for possible downgrade. The rating agency said it placed the carrier’s senior unsecured A3 rating on review out of concern over: (1) “Such a large use of cash with no immediate revenue or cash flow contribution.” (2) Weak 2002 subscriber growth. (3) Continued need for relatively high capital expenditures until Cingular completed its GSM overlay. (4) “Risk that transitioning TDMA customers to GSM service could modestly increase churn.” Moody’s said Cingular indicated the transaction would increase its average spectrum depth in the top 25 markets from 23.4 MHz to 30.7 MHz and increase its operating efficiency as a result, in part because it would reduce the need for cell splitting. Referring to the Jan. 2001 re-auction of NextWave’s spectrum, Moody’s said: “This transaction differs significantly from Cingular’s earlier plans to use spectrum bid for in the early 2001 FCC auction by its partner, Salmon PCS, to expand network coverage.” Moody’s said it was concerned that the proposal wouldn’t increase near-term revenue, although it said it eventually could provide a good return. In the Jan. 2001 re-auction, “the licenses for which Cingular is now bidding $1.4 billion elicited bids of $3.2 billion, representing a 56% differential.”

At the same time, Standard & Poor’s affirmed its long- term corporate credit and senior unsecured debt ratings for Cingular Wireless. Analyst Catherine Cosentino said the additional spectrum would help Cingular operationally and the magnitude of the transaction was not material to the company’s rating.