Washington Post -- NextWave Could Collect Billions.
Thursday, September 2, 2004; Page E01
There's Gold In That There Dead Air
NextWave Could Collect Billions
By Christopher Stern
Washington Post Staff Writer
At a time when the nation's wireless companies are increasingly desperate for more airwaves to serve a fast-growing base of 160 million customers, little-known NextWave Telecom Inc. has networks up and running in 26 markets but has never served a single paying customer.
NextWave's wireless licenses are the 21st-century equivalent of undeveloped beachfront property. After winning a battle with the Federal Communications Commission over its airwaves that went all the way up to the Supreme Court, the New York-based company is preparing to put them to use.
It plans to emerge from bankruptcy protection next month, and either open for business or sell its rights to the airwaves for what many analysts believe could be about $3 billion.
For now, the company is making sure the valuable assets do not slip from its grasp. NextWave built the networks to satisfy a 10-year old FCC regulation and solidify its claim to the licenses.
In Washington, NextWave's operations are typical of the bare-bones networks it operates in other cities such as New York and Los Angeles. It transmits signals that cover most of an area inside the Capital Beltway from the Potomac River east to the Maryland suburbs. But the airwaves carry no phone calls, no text messages, and no streams of data like those on the networks of established companies such as Nextel Communications Corp. or Verizon Wireless.
Michael R. Wack, NextWave senior vice president, said the company is barred from serving paying customers without the approval of the bankruptcy court. "It's not an elaborate network but it works 24 hours a day, enough to satisfy the FCC's requirements," he said.
Having put its networks in operation, NextWave plans to file a reorganization plan with U.S. Bankruptcy Court in New York next month and depart Chapter 11 protection by year-end.
Analysts estimate that the company's market value, based entirely on the resale value of its licenses, will be $2.9 billion to $3.5 billion. They also expect that once it emerges from Chapter 11, the next logical step will be a sale.
"This is a good time for the company. It's a good feeling, everyone who put their faith in NextWave will get it rewarded," said Wack, who has not ruled out the possibility that the company will go into business for itself.
The value of NextWave's spectrum is two to three times what it bid in 1996, according to Igor Volshteyn, an analyst with Tejas Securities Group Inc. who owns shares of the wireless company.
Allen B. Salmasi started NextWave in 1995 with a plan to become a wholesale provider of wireless spectrum to other companies. Salmasi made a fortune when he sold his satellite communications company to QualComm Inc. in 1988. He hoped that NextWave would help boost a wireless technology he helped develop at QualComm at a time when many U.S. companies were focused on a rival European technology.
But NextWave became mired in bankruptcy and its drawn-out fight with the FCC. The company would not even exist had it not engaged in a fiercely fought lobbying and litigation campaign in Washington, much of it funded by Wall Street financiers. At times, the company seemed to living from court decision to court decision as it wrestled with the federal government over possession of licenses to frequencies that it won in the 1996 auction but never paid for.
Critics, including three FCC chairmen, have characterized NextWave's management and investors as little more than speculators who were trying to use the courts to poach billions of dollars in public assets.
In response, NextWave accused the FCC of trying to reclaim the airwaves just so it could sell them to higher bidders. In 2001, the FCC did just that, selling NextWave's spectrum for $15.8 billion.
The Supreme Court threw out the results of that auction, saying the FCC had improperly taken the assets of a company that was protected by its bankruptcy filing.
Wack noted that over the years, NextWave has put three different plans on the table that would have allowed the company to pay the FCC and build its networks, only to have its offers rejected or undermined by further litigation.
Even in the highly regulated telecommunications market, NextWave stands out as company that was, in effect, a creation of Congress and the FCC. It was founded in response to an FCC auction that gave entrepreneurs a chance to compete with bigger players as the government sold off huge pieces of the nation's airwaves in the mid-1990s.
In the 1996 auction, NextWave bid a total of $4.8 billion for 98 wireless licenses, giving the company a much sought after nationwide footprint. Like other so-called designated entities, NextWave qualified for the entrepreneur's auction by having total assets of less than $500 million.
So how did a company with less than $500 million in assets bid $4.8 billion?
In an effort to attract entrepreneurs that lacked the deep pockets of established telecommunications giants, the FCC decided to allow the upstarts to pay for their licenses through an installment plan. But the policy was a failure. Almost every participant ended up filing for bankruptcy before making the first payment.
For economists, the NextWave case has become a prime example of government policies gone awry. "They should never have had installment payments which turned the government into a creditor," said Simon J. Wilkie, a senior research fellow at the California Institute of Technology and former chief economist at the FCC.
Wilkie said NextWave and other participants in the auction overbid because they didn't need to have the money on hand and were betting they could raise more money from investors as the installment payments came due. But shortly after the auction, capital markets dried up. The value of the licenses plummeted as the FCC put more frequencies on the auction block.
Wilkie presaged the outcome in an academic paper published in 1996, two years before NextWave filed for bankruptcy. In an auction, Wilkie wrote, the goal is usually to buy an asset worth more than the final bid. "On the other hand, if the value is less than my bid, then I can default and my loss is now only my down payment." That is exactly what happened to NextWave when it defaulted after making a $500 million down payment.
During the eight-year legal battle between the company and the FCC, the central point of contention was whether bankruptcy or telecommunications law should apply to the case. NextWave argued for bankruptcy law, which meant that the agency was just another creditor eligible for potential payments of pennies on the dollar. The FCC argued that telecommunications law should apply and that the company was obligated to return the licenses since it had violated the agency's rules by failing to pay as scheduled.
In January 2003, the Supreme Court resolved the case in NextWave's favor and after almost 18 months of negotiations the company settled with the FCC last April. The deal called for NextWave to give up a portion of its airwaves as payment on the $4.3 billion it still owed. In effect, NextWave secured about $3 billion worth of licenses with a $500 million down payment.
After maintaining for years that it would operate a business if only the government got out of the way, NextWave officials now say that it may be too late. "The litigation consumed our original business plan but there are still market opportunities," Wack said.
Wack points out that although NextWave has no customers, it is living up to its promise dating to 1995 that it would build a network with national reach that uses the QualComm technology. "Everyone laughed at it, but it all came true," Wack said.
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