JANUARY 16, 2002
NEWS ANALYSIS
NextWave Misses Another One
Congress won't let the bankrupt wireless carrier reap $16 billion for its
spectrum licenses, sending the would-be buyers scrambling
It had the makings of a major coup. In November,
bankrupt startup NextWave Telecom (NXLC )
signed an agreement to sell wireless licenses it had
won at a government auction to Verizon Wireless,
AT&T Wireless, and others for $16 billion. After
the government took its share, NextWave investors
were to split $6 billion. Founder Allen B. Salmasi,
who started the company seven years ago with just
$5 million, would have walked away with at least
$396 million. It was quite a reversal of fortune for a
company that had been in bankruptcy court since
1998, having defaulted on $4.2 billion in fees and
back taxes it owed the government for the licenses.
Too bad NextWave's fortunes were reversed once
more. First, Congress balked at signing off on the
agreement, blowing through the Dec. 31 deadline to
enact a law approving the deal. Some legislators
were furious that a bankrupt company that had
defaulted on its debts to the government was going to get a rich payday. "I'm
going to fight till the end," Senator Ernest F. Hollings (D-S.C.) vowed on Dec.
6.
Then on Jan. 10, Verizon Wireless (VZ ), which had planned to buy $8 billion
worth of NextWave's licenses, bailed out of the deal. The company lost
patience because it was losing $1.5 million a week on the $1.7 billion deposit
it had paid to the Federal Communications Commission.
BANDWIDTH HUNTING. Now the deal's collapse is certain to reverberate
throughout the wireless industry. For starters, it will take longer for Verizon,
Cingular, and others to get their hands on the spectrum they sorely need so
their networks can carry more voice and data traffic. One possibility is that
wireless players will hunt for acquisitions. Verizon may make a run at Nextel
(NXTL ), Alltel (AT ), or even Sprint's (PCS ) wireless business. "Everything's
on our radar screen," says one senior Verizon executive.
AT&T Wireless (AWE ) may also make a bid for Nextel. Such acquisitions
could help solve the spectrum shortage, but they could take a year or more to
complete, which may not be a huge problem since demand is flat.
NextWave's investors are the big losers. Even if they can put together some
new deal, it won't be worth anything like the $16 billion Verizon Wireless,
Cingular, and others were ready to pay last year. "When these companies
agreed [to that price], it was a different world, and they bid more than they
want to pay now," says analyst Chris Larsen of Prudential Securities.
WHATEVER IT TAKES Absent a deal to sell its licenses, NextWave has no
choice but to gamely promise to build a business that few think can succeed.
The company plans to spend $3 billion on a network offering high-speed
mobile Internet access and voice service in 95 markets around the country.
"We have $100 million devoted to the initial build-out. We will use all of that
and whatever more it takes," says NextWave Deputy General Counsel
Michael Wack.
It may be folly. It's unclear how NextWave will raise the additional money it
needs to construct its network, let alone settle its $4.2 billion debt to the
government. Today, it has just $100 million in the bank.
NextWave had commitments for $5 billion in debt and equity -- half from
UBS Warburg and half from other investors. But that was contingent upon
NextWave having clear title to the licenses. In October, the FCC threw the
company's ownership into question when it filed an appeal with the Supreme
Court, challenging a lower court ruling that the agency illegally seized the
spectrum from NextWave in 2000.
SEVEN IS A STRETCH. Even if NextWave somehow manages to build its
network, its troubles will continue. The U.S. already has six national wireless
carriers, and competition is so fierce that Verizon Wireless is the only one
making money. What's more, all are upgrading their networks to provide the
same kind of data services NextWave promises. "Give me a break," says
analyst Blair Levin of Legg Mason and a former FCC staffer. "No one
believes they can exist as the seventh national provider."
One way or another, it looks like the nation's wireless players will get their
hands on the spectrum they need to upgrade their networks for fast Internet
access. Unfortunately, the collapse of the NextWave deal means that the
process will drag on longer than expected. As for NextWave, it shouldn't
count on yet another reversal of fortune.
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