On Wednesday night, April 23, 2008, Nextwave (OTC:WAVE) announced it has retained UBS and Deutsche Bank to explore the sale of its US spectrum. (251M people, 4.7B Mhz-POPs).
We believe that these are the actions of a failed company who must raise money in order to stave off bankruptcy. We also believe that WAVE’s spectrum has limited value and will not save them from impending bankruptcy. See our valuation below.
- Cash & ST: $59M
- Marketable securities = $28M + Restricted $54.9M = $82m
- Within cash (Auction Rate Securities = $102M)
- ARS failed at auction = $29.2M
- Total Cash: $141 (* see note later on term of restricted.)
- Debt: Series A preferred - $375M
Debt: 7% Senior Secured $350M due 2010 (net of unamortized discount and fair value warrants of $51.39M) – Note: If paid off pre-July 2009, it pays off 105%
- Was secured by $433M FCC licenses and Spectrum and $75M restricted cash
- Accrued Expenses = $76M ($11m accrued interest)
- Cash Burn TTM 2007 (CF Ops and Cap Ex) = $225M
- Cash Burn 1Q08 = $86M from ops (has 2 quarters of cash left)
- Total Debt $725M ( but $742.5m if paid off in next year)
On spectrum: 136M License POP’s at 20MHz & 98M License POPs at 10MHz
* Our valuation of the spectrum (taken from FCC auctions)
AWS was auctioned off in August of 2006. We do not believe this spectrum has gotten any more valuable.
- Average provisional winning price/MHz POP across all the market licenses was $0.15/MHz POP.
- WAVE paid $188M at this auction for 946.8M MHz POPs or $0.19/MHz POP.
We believe their AWS spectrum is worth $188M. No more.
*see here or spend the time, as they have done, digging through FCC auctions.
We believe that WAVE spectrum is worth $0.05 - $0.07/MHz POP.
WAVE currently holds 2,807M MHz POPs.
We believe that WAVE’s WCS spectrum is worth $140M to $196M (avg. $168M)
*see here or spend the time, as they have done, digging through FCC auctions.
BRS/EBS was originally auctioned off in 1996 for $213M
There are 1,767 BRS licenses and 2,571 EBS licenses.
EBS stands for Education Broadband Service.
While a 2005 ruling by FCC allowing this spectrum allows for commercial use in 2.5GHz, a valuable spectrum, the spectrum is not owned by WAVE. WAVE leases all their Metropolitan Spectrum in 15 and 20 year leases.
Clearwire (CLWR) is the second largest holder of EBS/BRS spectrum.
Clearwire controls 15.1B MHz POP of US Spectrum and 8.7MHz of International Spectrum. The market cap of Clearwire is $2.3B. Allowing for nothing else, Clearwire trades for $0.10 per/MHz POP.
Based on that valuation, WAVE’s 972.3M MHz-POP’s are worth $97M.
Last week, on May 5, 2008, Sprint (NYSE:S) and Clearwire came to a JV that valued their total 40B MhzPOP spectrum at $0.28 per MHzPop.
So an updated price is $0.28 x 972 = $272m.
This is for a nationwide network. S and CLWR have determined that they need 40B Mhz-Pops. Unless there is a secret hidden spectrum holder sitting on 39B Mhz-Pops (and there isn’t), WAVE’s spectrum is a rounding error not needed by the only company using this spectrum. S/CLWR stated that 80% of their 40B is in urban areas. WAVE might state that they have urban spectrum and should be valued higher, but 80% of S/CLWR’s is in Urban as well. They don't need WAVE's spectrum.
Total = $188 + $168 + $272M = $628m
We could stop here, because $628m - $750 gets WAVE to into bankruptcy, but keep reading. (Plus WAVE won’t be able to sell all its spectrum at once anyway.)
Other Valuation Determinations:
From WAVE’s press release about sale of Spectrum & 10Q
On April 23, 2008, we retained Deutsche Bank and UBS Investment Bank to explore the sale of our wireless spectrum holdings in the United States. As of March 29, 2008, the aggregate net carrying value of our wireless spectrum license assets in the United States was $538.7 million, which includes $81.3 million of deferred tax liabilities…
That’s only $457M NET and that is from the company!
Or refer to the 7% $350M debt, which was used to purchase the US spectrum in 2006, where it listed as $433M of collateral for wireless spectrum and Licenses. ($75M in restricted was also part of the collateral.)
The Company’s recent 10Q states the following.
Cash flow issues. In order to starve off liquidity, the company had to borrowed money from the CEO and Board. Effectively they are paying 14% interest on $100M.
On March 2, 2008, we amended the original purchase agreement for the Notes. Under the amended purchase agreement, we may withdraw up to the full amount of the $75.0 million cash reserve account for use in funding our business plan, subject to the payment of a consent fee of $3.5 million per $25.0 million withdrawn. The amended purchase agreement also permits us to incur an additional $25.0 million of indebtedness to fund a working capital line of credit subject to specified subordination terms, and an additional $100.0 million of second lien indebtedness our ability incur the second lien indebtedness remains subject to negotiation of intercreditor terms that are reasonably satisfactory to the holders of at least two-thirds in aggregate principal amount of the Notes and the provider of such funding must be reasonably satisfactory to the holders of a majority in aggregate principal amount of the notes. In addition, the amended purchase agreement restricts the types of investments that can be held in the cash reserve account to exclude auction rate or similar securities.
The company only has liquidity through March 2009. We believe they could run out of money sooner (from 10K):
Based on the operating plan for the year ended December 27, 2008 approved by our board of directors, management believes our existing cash, cash equivalent and marketable securities, the release of the $75 million of restricted cash based on the First Amendment to the Purchase Agreement for our 7% Senior Notes and cash forecasted to be generated by operations will be sufficient to meet the our estimated working capital and capital expenditures requirements through at least March 2009.
Updated for this quarter (from 10Q):
…cash forecasted to be generated by operations, as well as a combination of the following potential sources of cash will be sufficient to meet our estimated working capital and capital expenditure requirements through at least March 2009…
This company burns through $90M a quarter and has two quarters of cash left.
The company will have $750M in debt due after cash runs out, and has assets worth substantially less than the debt. The equity of WAVE is worthless.
What happens in a BK: see who owns the Series A Preferred and the Debt.
Management puts money in at Series A preferred. Shareholders get the bag.
Related Party Transactions
On March 28, 2007, we issued and sold 355,000 shares of our Series A Senior Convertible Preferred Stock at a price of $1,000 per share. In addition to other investment funds and institutional investors, 14%, 14% and 28% of the Series A Senior Convertible Preferred Stock was sold respectively, to Navation, Inc., an entity owned by Allen Salmasi, our Chairman and Chief Executive Officer, Manchester Financial Group, L.P. ("Manchester Financial"), an entity indirectly owned and controlled by Douglas F. Manchester, a member of our board of directors, and affiliates of Avenue Capital, of which a member of our board of directors, Robert Symington, is a portfolio manager. Kevin Finn, our Chief Compliance Officer, also purchased less than 1% of the Series A Senior Convertible Preferred Stock (Note 8).
On July 17, 2006, we issued 7% Senior Secured Notes due July 17, 2010 in the aggregate principal amount of $350.0 million. The purchasers of the 7% Senior Secured Notes were investment funds and other institutional investors, including affiliates of Avenue Capital, among others. Neither Mr. Symington nor Avenue Capital or its affiliates received any compensation in connection with the financing (Note 4).
On July 18, 2005, we issued options to purchase 83,000 common shares to Manchester Financial as consideration for services rendered in connection with our acquisition of certain licensed spectrum leases. The options were immediately vested with a one year term at an exercise price of $6.00 per share and were subsequently exercised in 2006. The fair value of these options was estimated at the date of grant to be $108,000 using the Black Scholes method of valuing options with the following assumptions: risk free interest rate of 3.64%, dividend yield of 0%, expected volatility of 51% and an expected life of 1 year. The fair value was recorded to general and administrative expense at the date of grant.
Additional info on management from the 10K.
In addition to other investment funds and institutional investors, we sold 14%, 14% and 28%, respectively, of our Series A Senior Convertible Preferred Stock to Navation, Inc., an entity owned by Allen Salmasi, our Chairman and Chief Executive Officer, Manchester Financial Group, L.P., an entity indirectly owned and controlled by Douglas F. Manchester, a member of our board of directors, and affiliates of Avenue Capital, of which a member of our board of directors, Robert Symington, is a portfolio manager. Kevin Finn, our Chief Compliance Officer, also purchased less than 1% of the Series A Senior Convertible Preferred Stock.
Only one analyst has a rating.
He raised his price target when WAVE made public that they would look to sell their spectrum (did it get $1 more expensive in a day?)
Then he kept his price target when they lost $1 per share in cash last quarter. (I guess it got another dollar more expensive that day as well).
He has hinted to investors that a large silicon valley web search company would invest, which is not only illegal, if he has the information, but wrong. In addition, that web firm just invested in the Sprint/Clearwire deal for more than all of WAVE’s spectrum is worth. This web search firm is not hard up for cash, meaning they could have bid on WAVE’s spectrum , and they have already made their statement of partnerhip. They won't buy WAVE’s spectrum.
This stock has been driven up on speculation that WAVE’s spectrum will unlock its value, partially fueled by a foolish analyst. The numbers are the numbers, and the analyst is walking a fine line of information in our opinion.
I haven’t discussed the Chip business, but believe that it will continue to lose money. (The financials speak for themselves here)
Even if the spectrum could be sold to cover the 7% senior notes, the cash burn alone would drive them into bankruptcy. (See the most recent filings).
This company is a forced seller. They need money and their spectrum won't cover their debt. Their cash flow burn will them into bankruptcy.
Disclosure: Author holds a short position in WAVE