Something on Nextwave -----------------NY-Times
Critics Doubt Nextwave's Leap of Faith in Wireless Market
By MARK LANDLER
For Nextwave Telecom Inc., last week was a milestone. The company was finally granted government licenses to offer a new type of wireless telephone service, called personal communications services.
But the milestone could quickly turn into a millstone. Nextwave owes $4.2 billion for the PCS licenses; annual interest payments of $274 million fall due in quarterly installments. That works out to $68 million every 90 days, or about $755,000 a day.
"How the hell do they get that kind of money to make the payments?" asked George F. Schmitt, the president and chief executive of Omnipoint Corp., Nextwave's rival in the nascent PCS business.
Schmitt is not the only person asking blunt questions about Nextwave, a tiny company that was formed in 1995 solely to bid for wireless personal communications licenses. From Wall Street to Washington, wireless executives, analysts and government officials are questioning whether Nextwave will ever be able to pay for its 63 licenses -- let alone realize its dream of building a nationwide PCS network to take on AT&T Corp. and Sprint Corp.
Allen B. Salmasi, the chairman and chief executive of Nextwave, said on Friday that the company would be able to cover the cost of obtaining the licenses and to pay for the construction of its network by raising $650 million in a series of public and private financings.
But Nextwave has already delayed one stock offering for several months. And even if Salmasi raised the $650 million -- which several investment bankers say they doubt -- Nextwave would have to raise hundreds of millions of dollars more before it could switch on its network. By any yardstick, the venture is a breathtaking risk for the company and its investors, who are predominantly foreign companies.
It is also a risk for the Federal Communications Commission, which awarded the licenses to Nextwave after a frenzied auction raised $10 billion for the U.S. Treasury. Under Reed E. Hundt, the FCC chairman, the agency has championed the idea of selling the nation's airwaves to raise money for the government.
If Nextwave defaulted on its license payments, the FCC would have to reclaim the licenses and sell them again, which industry executives said could delay or even preclude the emergence of a new competitor in the wireless telephone business.
"The bad news for Nextwave bodes well for the existing players because it would take years to pull back the licenses and re-auction them," one wireless analyst, who insisted on not being identified, said.
Hundt also declined to comment on Nextwave. But he said that the FCC knew it was taking a risk last year when it decided to reserve one of its PCS auctions for start-up companies. Even if Nextwave or another wireless company went out of business, he said, it would not invalidate the concept of selling the airwaves at auction.
"Any time a potential competitor goes out of business, it's not a plus for a competition policy," Hundt said. "But this country survived the collapse of Studebaker when I was in knee pants. And we still have several competitive car manufacturers."
True, wireless communications will become more competitive, without or without Nextwave. The FCC is currently wrapping up a third round of auctions of personal communications service licenses. In the first round, it raised $7.7 billion from major players like AT&T and Sprint. Sprint and Omnipoint have already begun offering personal communications services in some markets.
But Nextwave was not the only wireless company that came out of the auctions with onerous financial obligations. Three small companies -- BDPCS Inc., a unit of Questcom Inc.; National Telecom PCS Inc., and CH PCS Inc. -- have already defaulted on their payments and lost a total of 19 licenses.
Moreover, the second- and third-highest bidders -- Pocket Communications Inc. and GWI PCS -- must make total license payments of $1.4 billion and $1.1 billion, respectively. Analysts said they could also have trouble raising enough capital in the public market to meet these payments. Executives at Pocket and GWI said they both planned to offer stock in the coming months.
With $4.7 billion in total bids, however, Nextwave was by far the most aggressive player in the auction, and its fiercely aggressive approach drove up the prices of the licenses for everyone else. So if Nextwave were to fail, it would cast a long shadow over the industry.
Nextwave has been a focus of controversy from the start. Much of the company's financing comes from Asian investors like the Sony Corp. of Japan and the Pohang Iron and Steel Co. of Korea. Nextwave's major American backer is Qualcomm Inc., a manufacturer of wireless equipment.
Those foreign connections prompted two other PCS companies -- Antigone Communications and PCS Devco -- to challenge Nextwave on the ground that it had violated the commission's rule that foreign investors cannot own more than 25 percent of an American license holder.
After holding back Nextwave's licenses for several months, the FCC concluded that Nextwave was slightly above the foreign-ownership limit. And in granting the licenses, the commission told Nextwave to reduce its foreign ownership to 25 percent within six months, or risk losing the licenses. Salmasi said that the company would soon announce a revamping of some of its debt that would accomplish that.
Complying with the ownership rules may be the least of Nextwave's problems. The company has repeatedly delayed a stock offering because of weak market conditions. Its lead underwriter, Merrill Lynch & Co., resigned in October after disagreements over how to structure a deal, people familiar with the two companies said.
Investment bankers said the climate for wireless stock offerings had remained weak. Omnipoint's stock tumbled last month after it suffered glitches in the rollout of its personal communications services in New York.
Salmasi, however, said the climate would improve now that Sprint and Primeco Personal Communications LP have successfully inaugurated their services.
An engineer who now spends most of his time with bankers, Salmasi is frustrated by recent criticism of Nextwave by analysts and some rivals' executives.
He even suggested that critics of Nextwave's transmission technology -- which is called code division multiple access, or CDMA -- were trying to discredit his company as a way to undercut the technology. "This is a very well-orchestrated smear campaign being conducted by people who have no interest in our success," he said.
Nextwave's success hinges on Salmasi's strategy of selling air time on his network to other carriers. Its biggest deal so far is with the MCI Communications Corp., which has agreed to buy 10 billion minutes of air time over 10 years and resell it under its brand name. Analysts said the deal could be worth $70 million a year.
Industry executive give Salmasi credit for raising $550 million in private capital -- one of the largest war chests ever assembled by a start-up company. The problem is, Nextwave spent $474 million of that on its down payment for the licenses. That means the company has only $80 million on hand to make its interest payments to the FCC. And it explains why Salmasi is still scrambling to raise more funds.
Janice I. Obuchowski, the vice chairman of Nextwave and a onetime communications adviser to President George Bush, said, "We don't want to have gone through a fascinating pregnancy only to yield an unsuccessful baby."
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