Apr
27
Nextwave Spectrum Value In Question
Filed Under WiMax
On Wednesday, April 23rd NextWave announced it would sell off its spectrum assets to top bidders. Nextwave holds WCS, AWS and EBS/BRS spectrum assets. Estimates for Nextwave’s spectrum on the open market total close to $900 million according to some market analysts. We believe that the company’s total spectrum holdings are likely not worth more than $450 million. We question why deep pocketed parties would not have bought Nextwave outright, the company’s market capitalization stands at roughly $600 million as of Friday April 25th, as opposed to paying premium prices for bits and pieces of multi-frequency bandwidth across the U.S.
There is an estimated value of roughly $400 million for NextWave’s EBS/BRS spectrum. The value ranges on a MHZ POP basis is $0.40-$0.50 per MHZ POP. We see the value of NextWave’s EBS/BRS holdings as being worth far less after lengthy research on the specifics of NextWave’s holdings. Our primary concern about the company’s EBS/ BRS holdings is that NextWave leases substantial portions of its claimed EBS/BRS coverage. We found this in NextWave’s 10-K:
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Our AWS, WCS and BRS spectrum is held directly through FCC licenses. Our EBS spectrum has been leased on a long-term basis from current license holders. |
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(5) |
We lease EBS spectrum from multiple parties in the greater New York, New York metropolitan area, including geographic areas in New York, New Jersey and Connecticut. These leases give us access to different amounts of spectrum in specific parts of the market area. The terms of these leases range from 20 to up to 60 years when their renewal options are included. |
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We lease EBS spectrum from The Orange Catholic Foundation in the Los Angeles, California (Orange County) area. This lease has an initial 10 year term and contains five renewal options for 10 years each to extend the term of the lease. |
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(7) |
We lease EBS spectrum from The University of California in the San Francisco, California area. The lease has an initial 10 year term and contains 2 renewal options for 10 years each to extend the term of the lease. |
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(8) |
We lease EBS spectrum from Bradley University in the Peoria, Illinois area. This lease has an initial 10 year term and contains two renewal options for 10 years each to extend the term of the lease. |
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(9) |
We sublease EBS spectrum from the North American Catholic Educational Programming Foundation in the Mobile, Alabama area. This sublease has an initial 29 year term and no renewal options to extend the term of the subleas |
In addition to the EBS leases we also found that the company in 2002 leased BRS spectrum from the Archdiocese of New York’s Department of Education.
Nextwave is currently obligated to roughly $1,000,000 per year in future EBS license lease payments. It cost Nextwave about $20,000,000 in 2007 to acquire additional California EBS license leases. Nextwave’s 10-Q & 10-Q/A financial filings with the Securities & Exchange commission reveal their overall spectrum lease expenses & liabilities; Nextwave does not specifically segregate out their EBS leases. In exchange for being able to commercially lease the surplus EBS bandwidth licensed by an educational institution, Nextwave gives hints of how they structure their leases financially; It appears that Nextwave probably: - pays initial fees to the licensee, - pays the capital equipment costs in order to use the FCC EBS license (for both FCC EBS licensee & Nextwave), - makes installment payments to educational institution, possibly including a percentage of Nextwave’s revenues from the use of the EBS license - they are also complicated by how they finance them with corporate notes, and how they account for their them in their financials to comply with IRS & FCC regulations, and lease terms. There are valuation estimates for NextWave’s EBS/BRS spectrum of $0.40-$0.50/MHZ POP. Given the company’s lack of ownership of spectrum in major metropolitan areas like New York, Los Angeles and San Francisco. NextWave’s BRS spectrum is not national and it would seem hard to believe that it could yield greater value than the more substantial network operated by Sprint and Clearwire in the BRS frequencies. It would appear that somewhere between $0.10-$0.15 per MHZ/POP would be a better estimate for the value of Nextwave’s BRS holdings than the ranges of $0.40-$0.50 we have seen published.
We find that many of NextWave’s AWS spectrum holdings reside in primarily low density population areas. In the AWS markets, we believe that a generous valuation for NextWave’s spectrum lies somewhere between $0.20- $0.25/MHZ POP, which is a relatively consistent metric with the average of the small market bids in the 2006 AWS auction as cited by Jupiter Research (http://weblogs.jupiterresearch
Nextwave’s WCS holdings may hold some value to independent bidders but again we see challenges in the fact that the WCS holdings are not national and would require essentially constructing many transaction to find buyers for each specific license. In a lengthy license by license sales process we cannot help but imagine that the buyers hold the advantage and would work Nextwave down on valution for each piece. We believe that the WCS spectrum should valued at a discount compared to comparables.
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