LightSquared is dramatically altering its plans for a high-speed wireless network because of interference problems with GPS services, in the latest setback for hedge fund manager Philip Falcone's telecom start-up.
Falcone and his Harbinger Capital Partners' investors have gambled billions of dollars on the success of LightSquared. The company said on Monday that it would now use a different block of wireless airwaves for its network than originally planned, after months of testing found the interference problems.
Analysts say LightSquared, which still needs billions of dollars more funding to build its network, may face more difficulty raising money in light of the interference problem with GPS services, which are used in everything from airline navigation to defense systems.
The new plan will also likely delay LightSquared's wireless launch, which is expected next year, analysts said.
To date, Harbinger has sunk about $3.1 billion into LightSquared -- making the hedge fund the company's largest single equity investor. The telecom venture also has sold over a $1 billion in short-term debt.
It is very hard to see how you justify an equity value for this business (in line with) what Harbinger has invested, unless it can show it will be able to use all the spectrum it owns within two or three years, Tim Farrar, an independent satellite industry analyst said.
Falcone -- one of the hedge fund industry's better-known traders -- has previously said he may take LightSquared public to raise funds this year. The venture has become one of the billionaire manager's riskiest and most high-profile bets.
LightSquared said it has paid satellite provider Inmarsat Plc an additional $40 million to prepare the alternative spectrum for use by early next year on top of its earlier agreement to pay Inmarsat $337.5 million. LightSquared is leasing some spectrum from Inmarsat for its network.
Under the revised plan, LightSquared's CEO Sanjiv Ahuja told Reuters that customers would be able to test its service in early 2012 and launch commercial services around mid 2012.
BTIG analyst Walter Piecyk said LightSquared could ill-afford any delays, given competitive pressure from well established rivals such as Verizon Wireless and AT&T Inc, which already offer high-speed wireless services.
It's questionable whether the new spectrum will be ready in time to meet that new timeline, said Piecyk who had expected commercial services in early 2012.
LightSquared said the new spectrum band it plans to use would be largely free of interference from more than 99 percent of GPS devices. It expects to find a way to resolve interference with remaining devices, Ahuja said.
In the meantime, Ahuja said he would also try to remedy the larger GPS interference problems in the original spectrum in time to use that spectrum in a couple of years.
GPS service providers including Deere & Co, General Motors and Trimble Navigation had said they were concerned that LightSquared's network as it was originally planned would cause serious interference. Trimble had argued that LightSquared should use different airwaves.
The GPS camp was still unhappy with LightSquared's plans. The alternative spectrum would still interfere with many critical GPS receivers, said Trimble general counsel Jim Kirkland who represents the Coalition to Save Our GPS, a group that inclues big GPS users and suppliers. This latest gambit by LightSquared borders on the bizarre, he said.
Under the new plan, LightSquared said it had agreed to use more than 50 percent less power to transmit wireless signals in its network to provide additional protection to GPS. Executives for the company said this would not impair its mobile service.
LightSquared had to ask U.S. regulators for an extension to its June 15 deadline to file a report about interference issues until July 1. It was granted the extension.
LightSquared has been in talks with Sprint Nextel about a network-sharing agreement aimed at reducing network construction costs for LightSquared.
Falcone sent Harbinger investors a letter last week saying LightSquared had signed the Sprint deal but did not provide financial details, according to sources familiar with the letter who asked not to be named because the letter was not made public.
Ahuja declined comment on whether a deal had been finalized or how much it might be worth. Reuters had previously reported that the deal would involve LightSquared paying Sprint about $2 billion a year for 8 years.
Harbinger investors have said they are worried about Falcone's plan to set up a new wireless operator and say he may have bet too much of their money on its success. The LightSquared investment represents a little over half of Harbinger's assets under management.
Falcone is giving some investors who have asked to get their money out of his fund some non-tradable LightSquared shares instead of cash.
For Falcone, the sudden change in direction for LightSquared further illustrates his own ups and downs as a hedge fund manager in the last few years.
Thanks to a bold, contrarian bet that U.S. mortgage defaults would surge, he became an investment-industry darling in 2007 when his returns rose 116 percent. But since then, assets have shrunk from about $26 billion to about $6 billion.
(Additional reporting Svea Herbst-Bayliss in Boston; editing
by Gary Hill, Bernard Orr)