8/26/02 Barrons -- NextWave Saga Clouds the Wireless World.
Monday, August 26, 2002
NextWave Saga Clouds the Wireless World
By MARK VEVERKA
The next act in what has become the never-ending NextWave Telecom saga will star the Supreme Court. The briefs have been filed, and now lawyers for NextWave and the federal government are slated to begin oral arguments before the high court in October. And while rulings technically can be rendered this year, we are not likely to hear from the court until January at the earliest and as late as May.
Thus, that leaves several months of nail-biting between now and then for investors who took a flier on this wireless-spectrum gambit. As some of you may recall, as part of our annual Roundtable, Meryl Witmer, general partner of Eagle Capital Partners, recommended NextWave as a highly speculative pick that could double, triple or go to zero ("It Ain't Over," Jan. 14). Currently, we could consider calling the company Next-to-NothingWave, since the shares are now trading on the Pink Sheets at under $1 a share, down from 7.35 in January.
The bet depended on whether the Supreme Court would hear an appeal by the Federal Communications Commission.
To recap: NextWave won a 1997 auction for wireless spectrum and subsequently defaulted on its payments and filed for Chapter 11 bankruptcy protection. The agency swiftly reclaimed the licenses and re-auctioned them, this time fetching a much higher price. NextWave, in turn, sued the FCC, claiming the license rightfully belonged to it. And the case has been working its way through the courts ever since.
If the Supremes had turned down the FCC's request for a hearing, it would have been a quick victory for NextWave and its shareholders. But when the court agreed in March to hear the case, the chances for a quick payday diminished.
In an attempt to read the jurisprudence tea leaves before this fall's oral arguments, Legg Mason telecommunications analyst Blair Levin gives a razor-thin edge to the FCC. "I think it is almost too close to call, but if I had to guess I would pick the government," says Levin, who is a former FCC official. "The reason I think that the government wins the case is because four justices must think that the lower courts might have screwed up."
Thus, says Levin, in agreeing to review a lower-court decision, the Supreme Court appears to be predisposed toward ruling in favor of the FCC.
Aside from that logic, however, he says the decision could easily go either way. "Having read the briefs, I think it is a very close legal question," Levin says.
The stakes here are high. NextWave's winning bid in 1997 was $4.7 billion. But when the FCC re-auctioned the licenses in January 2001, the bidders raised the ante to $16 billion.
Now here's where it gets tricky. Days before the spectrum was re-auctioned, NextWave filed a re-organization plan that promised to pay off its debt to the FCC. As such, it claims, the FCC's repossession of the licenses was illegal -- a position that was upheld by the lower courts. Obviously if NextWave can succeed at paying $4.7 billion for spectrum now worth even half the $16 million that the bidders once pledged -- it would be a big win for shareholders.
While NextWave sits at the center of this case, the entire U.S. wireless industry is affected. The winning bidders of the re-auction are collectively on the hook to Uncle Sam for $16 billion. Verizon Wireless, in particular, bid about $8.7 billion and plunked down a $1.7 billion deposit. After holding the cash at no interest for more than a year, the government refunded most of it this year. Still, the threat of having to pony up billions to the Feds has had a paralyzing effect on the entire industry.
Needless to say, if relieved of these obligations, Verizon and the other bidders could spend more now to shore up their flagging companies. This would not only lift the entire moribund telecommunications industry, but it also could give the broader economy and the technology-telecom sector a boost.
Meanwhile, the now-struggling carriers must wait. And if the government wins, the FCC could ask for billions in full payment just days after the decision. Talk about your Internet-bubble overhang. The next time you hear an economist talk about a 2003 economic recovery, just remember that this potential bombshell is locked and loaded for the first quarter of next year.
Still, there is hope that sanity will prevail. Levin points out that pressure for the FCC to essentially cancel the re-auction for spectrum rights and relieve the bidders of their total $16 billion liability. Recently, economists who follow spectrum auction policy sent FCC Chairman Michael Powell a letter asking him to do just that. On top of that, a major wireless trade industry also wrote a similar letter to Powell.
Levin predicts that the auction eventually will be declared null and void, making a Supreme Court win for the FCC a moot issue. But that's not likely to happen until after the Supreme Court makes its ruling. Additionally, Levin suggests that cancellation of the spectrum offering would be a pragmatic solution to fix FCC policy run amok. Auctions were intended to get spectrum into the right people's hands as quickly as possible, which should be good for the marketplace and a free economy, he explains. But in this case, it simply did not work out that way.
E-mail: mark.veverka@barrons.com
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