WSJ -- High Court Gives NextWave Control of Wireless Licenses.
January 28, 2003
High Court Gives NextWave Control of Wireless Licenses
Justices Find FCC Erred in Repossessing Spectrum Despite Carrier's Failure to Pay
By YOCHI J. DREAZEN and JESSE DRUCKER
Staff Reporters of THE WALL STREET JOURNAL
Ending a legal fight that roiled the nation's wireless market for almost seven years, the Supreme Court ruled that federal regulators erred when they reclaimed dozens of wireless licenses from NextWave Telecom Inc.
The 8-1 decision is a huge victory for NextWave, which has been operating under bankruptcy-court protection. It will regain full control of licenses valued at around $6.5 billion that it can use on its own or try to sell to other wireless carriers as it works to emerge from bankruptcy. People familiar with the matter said NextWave already is working on a deal that would allow at least one national wireless carrier to use NextWave's spectrum and, in exchange, allow NextWave to use the carrier's towers and other equipment. NextWave then could begin rolling out its own network, but many analysts believe that is unlikely.
NextWave, of Hawthorne, N.Y., now holds spectrum licenses for Chicago, New York and dozens of the nation's largest wireless markets. It bought them in a Federal Communications Commission auction in 1996, bidding $4.7 billion. Two years later, it filed for Chapter 11 bankruptcy protection, having paid the government just $500 million.
The FCC repossessed the licenses and reauctioned them in 2001. Several large carriers bid a collective $16 billion, only to see the licenses ensnared in the long legal tussle. The FCC brought the case to the Supreme Court after a federal appeals court ordered the agency to return the spectrum to NextWave.
With Monday's ruling, carriers interested in the NextWave spectrum can negotiate with the company, with the certainty they can take possession of any spectrum they buy. Cingular Wireless, a joint venture of BellSouth Corp. and SBC Communications Inc., is considered most likely to bid for the NextWave licenses because it has pressing spectrum needs. Verizon Wireless, the biggest bidder at the 2001 auction, also might try to purchase some of the spectrum. Verizon Wireless is a joint venture of Verizon Communications Inc. and Vodafone Group PLC.
The ruling is a mixed blessing for the spectrum-starved wireless market, which has long waited for a final decision on whether the licenses belonged to the government or NextWave. The prospect of freeing NextWave's licenses would seem to be a good thing for the industry, but at least one potential merger could unravel because the NextWave licenses would remove the main force driving the deal -- a need for spectrum. Cingular has had talks with Deutsche Telekom AG's T-Mobile USA Inc., formerly VoiceStream Wireless, about a merger, but it might not need to do so if it could buy NextWave's licenses. Without consolidation, the wireless industry may well continue the brutal pricing war that has driven down many of the companies' profits and share prices.
Left unclear in Monday's legal developments is the value of the licenses themselves. Because of the wireless industry's continued woes, analysts estimate that NextWave's licenses would fetch significantly less than half the nearly $16 billion that carriers bid on them two years ago. Based on a $750 million purchase of licenses announced last month by Verizon Wireless, the NextWave licenses would go for about $6.5 billion, according to Merrill Lynch Global Securities. Some analysts even said that number is high since Verizon Wireless, the biggest bidder in the last NextWave auction, no longer would be pursuing many of the licenses.
The sharp drop in the value of the licenses themselves, combined with the fact that NextWave will still need to pay the FCC the remaining $4.2 billion of its bid plus at least $1 billion in interest, could have a big effect on NextWave's creditors and investors.
People close to the company said NextWave believes it can fully meet its obligations while giving investors a healthy return on their money. However, an analysis by Legg Mason, based in part on NextWave's filings in its bankruptcy proceedings, raised questions about how much of the potential value of NextWave's licenses will trickle down to the company's shareholders, given the company's significant debt obligations. "I just think there is not a windfall for NextWave equity holders," said Craig Mallitz, a wireless analyst for Legg Mason. In over-the-counter trading Monday, shares of NextWave rose nearly 22% to $2.80.
In bringing the case to the Supreme Court, the FCC argued that it had a regulatory interest in reclaiming the licenses and getting them to companies whose finances were strong enough to put them to use. The high court rejected that reasoning, concluding that federal bankruptcy law, which bars government agencies from repossessing assets for nonpayment, doesn't make an exception for regulators such as the FCC.
"We think Congress meant what it said: The government is not to revoke a bankruptcy debtor's license solely because of a failure to pay his debts," Justice Antonin Scalia wrote for the majority. As for the FCC's claim that it had a "valid regulatory motive" for canceling the licenses despite the bankruptcy code's seeming mandate to the contrary, Justice Scalia bluntly stated that "in our view, that factor is irrelevant." Justice Stephen Breyer was the lone dissenter.
NextWave officials applauded the decision, saying it would finally be able to put the legal fights behind and move out of bankruptcy. The officials said they planned to use the spectrum to build a network and had no current plans to sell it. They did say, however, they would consider serious offers for the licenses.
"It's up to the marketplace to decide what it wants us to do," said NextWave spokesman Michael Wack. Mr. Wack confirmed that the company has had talks about sharing the spectrum with other carriers but declined to comment further. "We've had discussions with lots of different people about lots of different deployment strategies," he said.
At the FCC, which has been on a recent losing streak in the courts, Chairman Michael Powell said the decision "brings much needed certainty to an unsettled area of the law" and promised to implement the ruling fully.
Legal experts differed over how much of a precedent the decision would set for the burgeoning number of cases at the intersection of regulatory and bankruptcy law.
James H.M. Sprayregen, a bankruptcy lawyer at Chicago's Kirkland & Ellis, said that the "Supreme Court in essence treated the FCC as any other creditors in a bankruptcy case," sending a "strong message in favor of the ability of a debtor to reorganize around assets without the government being able to revoke those assets, except in extraordinary circumstances."
But other lawyers said the unique facts and arguments of the NextWave case limited its applicability. The decision "doesn't answer the question of whether regulatory law or bankruptcy law would override one another," said Jay M. Goffman of Skadden, Arps, Slate, Meagher & Flom LLP.
(FCC v. NextWave)
-- Mitchell Pacelle contributed to this article.
Write to Yochi J. Dreazen at yochi.dreazen@wsj.com and Jesse Drucker at jesse.drucker@wsj.com
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