An ad hoc group of creditors in LightSquared’s Chapter 11 proceedings today expanded on its theory that Dish Networks founder Charlie Ergen purposely withdrew a $2.22 billion stalking-horse bid for LightSquared’s assets, at the last minute, as part of a long-running strategy to acquire the company’s spectrum at an even lower price.
Blackstone Senior Managing Director Steven Zelin, a financial advisor to the ad hoc group, took the witness stand this morning as LightSquared’s two-week reorganization plan confirmation hearing continued in Manhattan. After a contentious and disorganized day of witness testimony from Charlie Ergen on Wednesday (see “LightSquared lenders accuse Ergen of ‘scheme’ in pulling $2.22B bid,” LCD News, March 26, 2014), ad hoc group lawyer Glenn Kurtz today asked Zelin a series of questions outlining his experience dealing with Ergen in both LightSquared’s Chapter 11 and that of another bankrupt spectrum company, TerreStar. (See “TerreStar nets plan confirmation,” LCD News, Feb. 15, 2012).
LightSquared has previously brought up Ergen’s role in the TerreStar bankruptcy, and that of DBSD, to argue that he has a pattern of maneuvering in Chapter 11 cases to acquire wireless spectrum at a discount.
The ad hoc group backed a $2.22 billion bid for LightSquared’s spectrum assets from L-Band Acquisition Corporation (LBAC) – a Dish special purpose vehicle originally created by Ergen to acquire LightSquared’s assets – in an auction scheduled for Dec. 11, 2013. Bid procedures for the auction were approved in September, followed by a process of contract negotiation and diligence that Ergen’s lawyers conducted, Zelin testified. “On a number of occasions, [Ergen lawyer] Rachel Strickland clearly expressed to me that Ergen had more money to spend,” Zelin said. Without giving a specific extra dollar amount Ergen was willing to pay, his lawyers said LBAC was willing to spend more money to get LightSquared’s support for the sale, Zelin noted.
As Ergen testified on Wednesday, he and a team of advisors and Dish board members flew from Denver to New York for the auction, where LBAC was willing to spend up to $2.4 billion at auction. The auction was cancelled at the last-minute, however, when LBAC’s team raised a technical issue, the true impact of which they claimed to have discovered that day, “in real time,” Ergen said.
The “technical issue” has been discussed in court numerous times in recent months, but details have been kept largely confidential. References in court records to a “Qualcomm issue” suggest the problem concerns Qualcomm’s development of chipsets for LightSquared handsets and their potential interference with GPS signals. Generally speaking, GPS interference problems helped drive LightSquared into bankruptcy in the first place – the company has lobbied the FCC for several years now seeking approval for terrestrial use of its wireless spectrum, the centerpiece of LightSquared’s business plan. Phil Falcone, founder of LightSquared majority equity holder Harbinger Capital Partners, testified this January that he believes the FCC will approve LightSquared’s spectrum use applications by the end of 2015. If those regulatory hurdles were cleared, Ergen’s financial advisors have pegged the LightSquared’s spectrum value at as high as $8.9 billion. LightSquared’s own advisors valued it as high as $9.8 billion.
Zelin said today the “technical issue” had been revealed in public documents as early as mid-2011, nearly a year before LightSquared filed for bankruptcy protection. LBAC first raised the issue last November, after it had agreed to serve as the stalking-horse bidder at auction. LBAC lawyer Rachel Strickland specifically asked that details of the technical issue be put into a data room for other bidders at the auction, Zelin testified. “It was quite strange,” he said. “I’ve never been in a situation where a stalking horse bidder tried to convince me that an issue like this needed to be disclosed.”
Still, Ergen continued to express interest in the purchase and discussed with the ad hoc group whether it might spend more at auction, Zelin said. But on the day of the auction, when it became clear that a rumored competing bid from Centerbridge Partners had not materialized, LBAC added new conditions to its bid that the ad hoc group would not agree to, and in January LBAC withdrew its offer altogether.
After the fact, Zelin saw documents produced in discovery that showed Ergen’s lawyers at Willkie, Farr & Gallagher drafted a presentation for Dish showing how LBAC could reduce its purchase price if there were no other bidders at auction, he testified.
“Why in the world did he pull the bid if [Ergen] doesn’t mean what he really says, that there’s a technical issue,” Judge Chapman asked Zelin. “How do you explain what’s transpired?”
“He doesn’t want to pay any more for an asset than he has to,” Zelin said. “That’s the simplest explanation I have. When he found out he didn’t have to pay so much, he created a set of circumstances he claimed were brand new, which were in fact not brand new,” he added, referring to the “technical issue.”
GLC Advisors Managing General Partner J. Soren Reynertson took the stand after Zelin, answering questions about the LightSquared valuations he produced for Ergen. Ergen’s team hired GLC five weeks ago, paying $1.25 million in fees for the firm’s expert testimony, Ergen testified on Wednesday.
The confirmation hearing continues Friday with testimony from Omar Jaffrey, a founding partner of LightSquared plan sponsor Melody Capital Partners, and Jake Rasweiler, a technical expert from Sublime Wireless Inc. The witness testimony portion of the confirmation hearing will conclude on Monday, with Philip Falcone. – John Bringardner