WASHINGTON-The number of bidders participating in the C-block broadband personal communications services auction who are flying by the seats of their pants is staggering. The thought of committing millions of dollars to build a network that is expected to directly compete with numerous established wireline and wireless carriers has given even some of the most seasoned players pause. And when it comes time to ante up the payments, C-block licenses also could prove to be the biggest bust of the ’90s.
The auction part of licensing is relatively simple compared with the payments, network-building and marketing that follow. Cash will be an ongoing problem. Investment bankers currently continue to remain entrenched in their cellular holdings. Venture capitalists don’t want to wait five to 10 years down the road for a return. Manufacturers aren’t coming across with the kind of financing that was readily available in the past. New C-block licensees either must rely on themselves for buildout capital or on help from major minority partners-some legitimate, some speculative-who may wish to gain control the minute the controlling party falters.
While the Federal Communications Commission believes it did everything it could to stop speculators from entering the auction, the sheer number of applicants hoping to turn spectrum into dollars was too much for its Auction Division to pre-screen. Instead, it hopes to weed out the unacceptables by waiting for new licensees to reveal all their investors-who did not need to be named on the original Form 175 application-or until the inevitable petitions to deny are filed. Even if they suspect wrongdoing on the part of their competitors, most C-block players will not disrupt an ongoing auction with FCC petitions. Except NextWave Telecom Inc., that is.
NextWave Telecom, parent company of NextWave Personal Communications Inc., an aggressive C-block bidder, has asked the commission to clarify immediately how it will ferret out and discipline any C-block bidder who was “fronted” by any organization not named in its Form 175. NextWave even suggested temporarily shutting down the auction process until such clarification could be made.
To make matters worse, the commission admits knowledge of current bidders who were involved in licensing scams in the past, although staffers said they had not seen specific marketing tools that were used by some of them to gain investors this time around. The impact of speculation or the discovery of real parties of interest on PCS could be staggering.
There were 136 defaults following the auction for interactive video and data service licenses, with one Florida designated entity divested of multiple licenses because she couldn’t come up with the first payment; there also was some question regarding the real party of interest. It won’t be known until after the March 11 construction cut-off date how many 220 MHz land mobile licenses will be taken back.
Many high-profile bidders-U.S. AirWaves Holdings, Cook Inlet BellSouth PCS L.P., and PersonalConnect Communications Inc./Craig McCaw-already have left the C-block arena because market prices have exceeded their real-world valuations. Indeed, total net revenues for the C-block auction have eclipsed the total combined A- and B-block revenues of $7 billion, even though the players in those auctions were the nation’s largest telecommunications entities.
Other C-blockers, those with a higher threshold for pain, continue to bid carefully, even though there are questions as to who the real party of interest is. At least one dropout, U.S. AirWaves, has intimated that part of its reasons for quitting the race involve improprieties by other bidders.
One of the most interesting races being run in C-block is for the New York City license. North Coast Mobile Communications Inc., a Long Island, N.Y., concern headed by John Dolan, has been playing tag with NextWave, run by industry veterans Janice Obuchowski and Allen Salmasi, for the property.
North Coast committed $79 million in earnest money (reportedly from a bank loan) just to participate. On the other hand, Dolan’s Form 175 auction application claims no backers, no partners, no income and assets of less than $10,000-yet he has been able to bid up to $858 million for New York and $106 million for the Cleveland/Akron market.
North Coast’s bidding strategy was not difficult to figure, once it was revealed that Dolan is the nephew of Cablevision founder and current chairman Charles Dolan; he also is on a leave of absence from his job as Cablevision’s director of wireless communications. Cablevision has systems operating near both markets, and a PCS license would be an added bonus. Cablevision also has operations in Boston, but North Coast has stayed away from that market so far.
While the younger Dolan has stated that Cablevision is completely separate from North Coast, he also has said that there could be an alliance if he wins any licenses in markets Cablevision needs to expand its empire and enter the wireless business.
The commission did not require C-block applicants to outline their entire business structure, including certain types of financiers, until after the auction ends. Under FCC rules, Cablevision could hold up to a 49.9 percent interest in North Coast if a partnership is struck; however, if it turns out that most of North Coast’s bidding capital was fronted by Cablevision-without it being named as a partner at the beginning, it would be a violation of auction regulations.
Such a scenario gives credence to those who have criticized the commission for allowing large companies to participate in an auction that was designed primarily for small- and medium-sized players who never would have had access to deep-pocketed partners. Other bidders, including NextWave, GO Communications Corp. and Omnipoint Corp., have heavy-hitting backers, but the companies have been upfront about them.
Players also have been keeping a wary eye on every move PCS 2000 L.P., an elusive San Juan, Puerto Rico-based designated entity, has made since the auctions began. After submitting one of the largest down-payments on record, PCS 2000 started out bidding aggressively on a number of major markets-Pittsburgh, Kansas City, Mo., St. Louis, Salt Lake City/Ogden and Anchorage, Alaska-but its strategy has lost focus as time has passed.
Instead of keeping to the plan outlined in its 1994 prospectus, which was marketed by Romulus Telecommunications Inc., also based in San Juan-“Ease of management and economies of scale suggest that it is better to buy a smaller number of larger markets instead of a larger number of smaller markets”-PCS 2000 has focused its bidding on cheaper pops in singular or a few clusters in second- and third-tier markets, which change from round to round, including parcels in California, Oregon, Iowa, Illinois, Idaho, Texas and Maine. In some cases, it has bid on small markets located adjacent to larger venues, perhaps in hopes of a future alliance or buyout.
According to its amended Form 175, Delaware-registered PCS 2000 is 25 percent owned by Unicom Corp. of Puerto Rico, the controlling and sole general partner. The remaining 75 percent of the company is made up of 1,641 partners, each of whom invested at least $25,000 in the venture. Revenues for the bidding venture totaled $65.1 million, with Romulus taking an immediate $13 million off the top for expenses; $50 million was submitted to the FCC for upfront fees to bid on all 493 markets, and the whereabouts of the remaining $2 million is not clear.
It is difficult to tell from the application just who are the women and minorities who head PCS 2000, making it eligible for bidding credits and special financing; first names are indicated by an initial only. While Unicom president Javier Lamoso, a San Juan attorney, told RCR that there were women and minorities heading PCS 2000. He declined to name them.
So far, PCS 2000 has bid anywhere from $500 million to less than $200 million, round by round. Even
with the FCC’s generous long-term payment plan to which PCS 2000 has access as a small business, the cost of building out any and all markets it wins will dwarf that sum. Lamoso would not reveal how additional capital would be procured, although he did say that no new investment partnerships were being pursued at this time.
What will happen to these partners if they win any market is anyone’s guess. PCS 2000’s 1994 prospectus was clear as to the limits of its post-auction obligations: “Romulus is providing application preparation, engineering and bidding services only. The applicant retains the sole and exclusive right to determine the manner in which any FCC license issued to applicant will be used. Applicant is solely responsible for constructing and operating facilities once a license is granted by the FCC and marketing PCS services once facilities are constructed and in operation. Romulus has no management authority respecting any market or any license resulting from this agreement. Applicant is not controlled, directly or indirectly, by Romulus.”
This may not be the case today, however. According to Lamoso, PCS 2000 general partner Unicom is putting together an internal management company that he says will act as the governing body for the limited partners. He also told RCR that talks were ongoing with possible manufacturers; no particular technology has been embraced.
Lamoso also mentioned that Romulus will not play any part in a possible management scenario, even though many Romulus incarnations-Romulus Corp., Romulus Engineering Inc. and Romulus Telecommunications-are equity partners in Unicom.
PCS 2000’s Form 175 also lists as equity partners a number of trusts owned by Quentin Breen and Anthony Easton along with several of their family members. Other equity partners are made up of trusts that involve other principals, including Lamoso.
According to the Federal Trade Commission, family trusts sometimes have been used by companies to shield assets from the government in the event of a lawsuit.
Among PCS 2000’s investing partners, there is little if any telecom experience. However, two of Unicom’s principals, Breen and Easton, have been down this licensing road before. The two headed the joint groups Romulus Engineering and General Cellular Corp./General Cellular International during the late 1980s that put together partnerships to build rural cellular networks.
The companies acted as application mill, engineer, equipment procurer and manager, with the added possibility of buying out a licensee if financial obligations could not be met. This happened more often than not, because the singular partnerships contained hundreds of people, rendering decisionmaking difficult. Breen put together the PCS 2000 prospectus.
If history repeats itself, Unicom, under the stewardship of Breen and Easton, could be positioning itself to enter the PCS marketplace as owners, rather than as just managers. Instead of buying a property for cash from its PCS 2000 investors as early as five years from the date of license, the proceeds of which would be taxable as capital gains, Unicom could issue investors stock in the management body, which then would be regarded as a tax-free exchange by the Internal Revenue Service. Both men had proposed making past partners such an offer during their RSA days, according to General Cellular attorneys who handled the tax portion of the company’s failed initial public offering attempt.
Although the original prospectus did not outline any tax-sheltering clauses for potential C-block investors, such measures could be put in place once any licenses were awarded and business began. Breen is somewhat of an expert in this area, although sometimes his deals have been unsuccessful. In the past, he had been instrumental in setting up such shelters for clients through off-shore banks, trusts and annuities with the goal of minimizing or avoiding the payment of U.S. taxes. In at least two court cases (1967 and 1983), such set-ups were ruled to be shams by the U.S. Tax Court, and Breen’s clients (one of whom was a relative) were ordered to pay back taxes and some additions as a result. This is not to say that the same mechanisms would be used in any way with PCS 2000 investors. Breen refused to be interviewed for this article.
If PCS 2000 investors are successful in gaining a few licenses, and if Unicom puts together a management team that is hired by the licensees, the next step will be to raise additional funds for buildout. Breen, in particular, also has had some experience with this since the early 1960s, albeit some of his ventures-such as putting together funding for the making of Dalton Trumbo’s movie “Johnny Got His Gun” and for some RSA ventures-were less than successful.
For example, Breen and Easton, through their General Cellular venture, got much of their funding to buy out licensees from now-defunct Calgary-based NovAtel Communications Ltd., a manufacturer that wanted to compete with Motorola Inc. in the U.S. cellular arena and which fronted the two as much as $79 million in acquisition funds alone. NovAtel also signed commitment letters with many of Breen’s and Easton’s partnership clients to self-finance the expensive cellular site equipment; many times, equipment was sold to partners having no business experience or credit history in addition to not being able to meet a $750,000 to $1 million net worth requirement.
Shortly after RSA licenses were awarded by lottery, their values rose and then took a dive, and many NovAtel/Breen/Easton-backed RSA systems failed; NovAtel lost at least $50 million when 27 licensees it had agreed to fund lost their licenses. Breen and Easton, who were suffering their own financial woes, tried to salvage General Cellular by going public, but the offering failed. The company filed for Chapter 11 bankruptcy in 1990, which cost NovAtel a $33 million capital loss.
In the wake of financial disaster attributable in part to its RSA financing practices, NovAtel was broken up and sold piecemeal in 1992. NovAtel was unsuccessful for the most part in recovering any of its loans along with a $4.3 million judgment against Breen and Easton regarding a South American cellular venture. Ken Hoffman of the Office of the Auditor General in Alberta told RCR that the case against Breen had been settled, but that no details could be released.
In addition, the Alberta government and its taxpayers, following a 1992 auditor general report, may have to absorb some $614 million in losses after failing in its attempts to recoup more than $128 million from failed RSA licensees. Because litigation is continuing, Hoffman could not detail where the proceeding stands.
According to Fred Chapin Marsh II, who competed as Communications Capital Group Ltd. in the RSA partnership-making arena against Romulus, “Breen and Easton were quarterbacks. They loved the rough and tumble, but sometimes not the aftermath.”
On another note, there also is impending doom on which PCS 2000 principals had not counted: a possible devastating fine related to a bidding mistake made in an earlier round. An extra zero was added to a $18 million bid for a Virginia market, making it 10 times what it should have been. Claiming operator error, PCS 2000 pulled the bid in the following round and filed a petition for reduction or cancellation of any penalty. According to FCC Auction Division Chief Kathleen Ham-O’Brien, no penalty waivers have been granted in the past, but each case will be decided individually.
“We don’t want to reward sloppiness, and we don’t want to encourage any `strategic errors,’*” she told RCR. “In cases where it is pretty well-documented that there was human error, the FCC could grant some relief.”
PCS 2000’s waiver along with two others was put out for industry comment; only two opinions have been submitted so far-one for the maximum penalty and one against any penalty. A decision won’t be rendered until after the auction has ended.
Lamoso told RCR that the specter of a major penalty would not put
a crimp into PCS 2000’s bidding strategy, and that it would continue to participate in a “business as usual” fashion.
