Private Equity-Backed Satellite Co. Signs $7B Deal With Nokia Siemens

In a deal that sparks memories of the go-go 90s, Harbinger Capital Partners is putting billions into a combination satellite and cell phone network to provide data services.

LightSquared, the company that will sell the network capacity, has signed a deal with Nokia Siemens for $7 billion over the next eight years to build, operate and maintain a 4G LTE network. LightSquared will sell the network capacity as a wholesaler.

LightSquared is the new name of SkyTerra, the satellite communications company originally set up by Harbinger. Harbinger had already put $500 million of equity into the venture, which carried $1.2 billion in debt. In a conference call in March SkyTerra said it would need a cash infusion to continue operating. Later that month Harbinger bought all the remaining stock for $225 million.

After the merger, there was a reshuffling of management. Sanjiv Ahuja, who was CEO of Orange, the British mobile phone operator from 2004 to 2007, took over as CEO. LightSquared said it has lined up $1.75 billion in a combination of debt and equity, but Ahuja declined to give details, except to say that Harbinger had invested $2.9 billion in total. A spokesman for Harbinger said among the advisers for the company are UBS and Bank of America Merrill Lynch.

As a wholesaler, LightSquared will not compete with retail mobile phone outlets or providers. "Our interests are aligned with theirs," Ahuja said. Rather, LightSquared will sell capacity on its network for telecom providers for both voice and data.

The satellite will supplement the terrestrial network, providing coverage for areas where the cell signals are weak or absent. One satellite has already been launched; two more are planned by the end of 2011.

A major milestone was the Federal Communications Commission's approval of the change of control for SkyTerra's licenses, and the designation of LightSquared as an ancillary terrestrial component, or ATC provider. Frank Boulben, chief marketing officer, said that enabled the company to make the best use of the spectrum SkyTerra had already bought.

Combined terrestrial and satellite networks have been tried before. Teledesic was a plan to launch hundreds of satellites into orbit to provide high-speed Internet service.

Bill Gates, CEO of Microsoft, invested $30 million in the system, which was also backed by Craig McCaw, founder of Nextel, and Saudi prince Alwaleed bin Talal. The system was never built, and in 2002 the company suspended satellite construction.

Globalstar was another attempt, which was to be a constellation of 48 satellites providing voice services in conjunction with the cellular networks. In 1995 the company raised $200 million in an initial public offering, as well as billions in debt. Globalstar filed for bankruptcy in 2002, and has since reorganized. While it has more than 300,000 subscribers Global star has still shown net losses for the last year.

Boulben said LightSquared was a similar idea, but that the timing was very different from its predecessors. The big difference, he said, is that when the first wave of satellite communications companies appeared, there was an overabundance of spectrum and little demand for data services. The Internet had yet to become as ubiquitous as it is today and many data services hadn't been invented yet.

Now the situation is reversed. There is a large and rapidly growing demand for data services, but a shortage of spectrum to offer them on. "The next generation of mobile technologies is just maturing now," Boulben said.

Whether LightSquared can be a success will depend on whether the growth of subscribers, and the carriers' need for capacity, grows fast enough, said Jeff Kagan, an independent telecom analyst and consultant. Clearwire, which was initially backed by Sprint, was able to grow enough to raise money and offset its large initial debts, he said.

Kagan said one thing that enabled Clearwire to succeed was selling its service via Time Warner and Sprint, both of which had a ready base of customers.

Others were less optimistic; one analyst, who declined to be named, said while the economics in some areas could be quite good, the question would be what niche the company wants to serve and whether it could capture that as a source of revenue.