NextWave's mixed victory: licenses intact, it now must find a buyer

America's Network, Feb 15, 2003 by Shira Levine

After seven years, the NextWave saga finally may have come to a conclusion in the courts, but the future of the disputed spectrum is nowhere near settled.

The Supreme Court ruled 8-1 late last month that the Federal Communications Commission acted illegally when it revoked a bankrupt NextWave's wireless licenses, upholding a lower court decision. The carrier won the licenses in the 1996 C-block auctions, but was unable to pay for them and filed for bankruptcy. The FCC canceled the licenses and re-auctioned the spectrum for nearly $16 billion, more than three times the amount that NextWave originally agreed to pay. NextWave challenged the validity of the reaction, and the U.S. Court of Appeals for the District of Columbia agreed, restoring the licenses to NextWave in June 2001. The FCC then appealed that decision to the Supreme Court, which heard the case last October.

Meanwhile, there was considerable jockeying for position going on behind the scenes. All involved parties reached a settlement in late 2001 in which NextWave would turn over the licenses to the re-auction winners.

In exchange, the carrier would receive $5.85 billion after taxes and the federal government would receive $10 billion. However, the agreement was contingent on Congressional approval, and Congress ended its session without passing authorizing legislation, essentially voiding the settlement.

Late last year, the FCC finally bowed to industry pressure and returned $13.3 billion in deposits to the re-auction winners.

During the NextWave hearing, the Supreme Court seemed to be leaning in favor of the bankrupt carrier, with Justice Anthony Kennedy accusing the FCC of claiming the power to override bankruptcy laws. The FCC argued that it had considered other public policy factors when making its decision to seize the licenses--namely the fact that the spectrum was not being used.

The Supreme Court shot down that argument, stating that the FCC could not establish a policy-based exception to the law. "The fact that the FCC had a valid regulatory motive for its action is irrelevant," said Justice Antonin Scalia in his majority opinion. Scalia also stated that bankruptcy law does not conflict with the Communications Act, as the FCC had claimed.

Bankruptcy attorneys see the case as a significant affirmation of the bankruptcy code. "All the bankruptcy lawyers out there were watching case closely, because if the FCC could, for policy reasons, avoid this part of bankruptcy code, we would expect other government agencies to avoid other provisions of the bankruptcy code for policy reasons," says Eric Brunstad, partner at law firm Bingham McCutchen and special bankruptcy appellate counsel to NextWave. "The IRS could argue if you owed taxes, it could seize your assets, even if you were in bankruptcy."

SPECTRUM UNCERTAINTY

The question now is what NextWave will do with its licenses. The company is still considering its options, says Michael Wack, NextWave's senior vice president and deputy general counsel. "There are two ends of a continuum--full deployment in all markets and selling the licenses--and many points in between," he says. "There was no reason for people to engage in serious discussions with NextWave on the next step until the litigation cloud was lifted."

Both ends of that continuum present problems, though. While NextWave has landed a $2.5 billion debt financing commitment from UBS Warburg and an additional $500 million in equity investments, it still owes the federal government more than $4 billion for the licenses. It seems unlikely that the carrier will be able to come up with the money to build out and operate a nationwide network, says Jane Zweig, chief executive officer of consulting firm The Shosteck Group.

Selling the licenses is another option, but in today's economic climate, the spectrum won't be fetching $16 billion this time around. According to a Legg Mason research note, NextWave estimated the value of the spectrum at just under $9 billion in its most recent bankruptcy filing, but the spectrum is worth closer to $6.4 billion today. The risk, then, is that even if NextWave were to sell its licenses, it may face liabilities that exceed its assets.

Ironically, after all this, the licenses may end up in the FCC's hands after all. According to the original auction rules, if NextWave fails to build out its network to a certain degree in a set amount of time, the Commission can reclaim the licenses, although the history of the licenses makes it difficult to determine when the clock started for the buildout requirements.

But Craig Mallitz, wireless services analyst at Legg Mason, says he doubts the FCC will seriously consider taking that path.

"After what the FCC has been through with NextWave, I think that would be highly unlikely for them to do that," he says.

Timetable:

1995   NextWave Telecom founded
1996   NextWave wins 63 wireless licenses for $4.7 billion
1997   NextWave files for bankruptcy
2000   FCC cancels the licenses and re-auctions the spectrum for a
       total of nearly $17 billion
2001   * D.C. Circuit Court issues a remand mandate
       * FCC returns licenses to NextWave
       * NextWave obtains funding
       * FCC files appeal with Supreme Court
2002   Supreme Court hears NextWave case
       FCC returns deposits to re-auction winners
2003   Supreme Court rules in favor of NextWave