WASHINGTON-In a decision almost surely headed for the appeals court, the Federal Communications Commission last Friday conditionally awarded NextWave Personal Communications Inc. its C-block licenses after NextWave submitted a plan to bring its foreign-ownership percentages into compliance with federal rules.
Wireless Telecommunications Bureau chief Michele Farquhar said awarding the licenses best serves the public interest. The FCC required NextWave to restructure its foreign-ownership percentages within six months, to keep the bureau informed of its progress on a monthly basis and to report any dealings with the Securities and Exchange Commission as they happen.
The full text will be released by the end of the month, and any reconsideration period will begin at the release of that text.
The six-month hold on NextWave’s $4.7 billion personal communications services licenses tentatively was resolved at a Dec. 27 ex parte meeting between NextWave, Antigone Communications L.P., PCS Devco Inc. and the bureau to iron out the last of the problems with NextWave’s FCC Form 600 and subsequent paperwork. Antigone and PCS Devco are C-block players that submitted petitions to deny licenses to NextWave.
At that gathering, according to attorneys for Antigone/PCS Devco, “the bureau chief orally ruled that NextWave’s foreign ownership exceeds the 25-percent threshold established [in] the Communications Act of 1934 as amended, agreeing with petitioners that NextWave’s foreign promissory notes and convertible bridge notes are equity and not debt. The bureau chief further ruled that NextWave be given an opportunity to cure its violation.”
In its “cure” plan submitted to the bureau Dec. 30, NextWave reiterated that the two financial instruments in question were believed to be debt “in good faith” by the company. “NextWave continues to believe that such characterization is reasonable,” it wrote. “However, it is not our purpose here to argue with the bureau’s tentative conclusions. Rather … NextWave will change its financial structure (i.e., the two instruments in question) within a nine-month period so as to eliminate altogether any source of concern. Specifically, NextWave plans to secure additional financing through private and public equity stock offerings.”
“We will wait to see the entire text before we make a final decision regarding what to do next,” said Robyn Nietert of Brown Nietert & Kaufman Chartered, attorneys for Antigone/PCS Devco.
It’s a pretty sure bet that NextWave will move forward on its pending public offering now that it has licenses in hand, but the question remains: Will Wall Street welcome a stock offering from a company with no collateral and just the chance to build out a network? And there are those in the industry who believe a company as highly leveraged as NextWave or one whose licenses could be tied up in court for an indeterminate period has little to no chance of getting an IPO done.
If NextWave determines within its nine-month cure period that an initial public offering did not perform to expectation, it will “work with its existing domestic investors to facilitate their purchase of a portion of the foreign notes and the April [1996] securities purchase agreement from foreign investors so as to reduce the number of shares held by foreign investors, as calculated under the staff’s characterization of the notes. Certain of NextWave’s domestic investors have indicated an interest in purchasing a portion of such notes, and have expressed a desire to work with the company to effect such purchases if necessary.” Two additional notes, belonging to Qualcomm Inc. and LG Infocomm, were not part of the Dec. 30 equity calculation.
NextWave also promised to better monitor its foreign-ownership levels to question each investor as to citizenship; to “continue its practice of incorporating into its convertible debt instruments, warrants and options a provision that blocks conversion or exercise if the company would thereby violate [foreign ownership] limitations;” to periodically monitor its public shareholders [following completion of an IPO] to determine the percentage of foreign ownership; and to report quarterly to the FCC its fund-raising progress or its efforts to reform its convertible debt instruments.
NextWave also forwarded an intricate proposal regarding how current shares of common stock owned by foreign entities will be counterbalanced by newly released shares that will be sold to domestic investors to swing the 25-percent pendulum back into compliance. It plans to convert notes held by Hughes Network Systems Inc. into equity, and then it will issue an additional 25 million shares to U.S. buyers and 5.5 million shares to its control group to bring foreign ownership within acceptable limits.
What is so unusual about this cure deal is the commission’s move to allow a company that has been charged with violating federal statutes to fix the problem after the fact; if a licensee or potential licensee is found to be in noncompliance, the commission normally rules negatively. In its proposed cure plan, NextWave cited the recent FCC case involving media mogul Rupert Murdoch and his purchase of Fox Television Stations Inc. “In Fox, the commission had before it a proceeding in which foreign entities invested 99 percent of the capital contributed to the licenses,” NextWave wrote. “The commission accorded the applicant time during which it could either elect to proffer a renewed public interest showing in support of its existing ownership structure or, in the alternative, file a statement that it would elect to comply with the 25-percent statutory benchmark and how such compliance would occur.” Even though the commission finally found that Murdoch’s plan did not meet FCC standards, it renewed the licenses anyway “in the public interest.”
In its Dec. 31 response and opposition to NextWave’s proposed capitalization plan, Antigone/PCS Devco remained adamant that NextWave’s licenses be withheld. “NextWave should not be afforded any opportunity to cure its violations at this time,” it wrote. “NextWave should be judged based upon its ownership when the C-block auction concluded.” Antigone/PCS Devco added, “Petitioners were entitled to a fair auction, and any post-auction cure by NextWave still leaves unfair and skewed auction results in place. To afford NextWave an opportunity to cure here would also put every future auction applicant on notice that commission rules can be wantonly violated as it suits an applicant’s needs-all violations (except payment defaults) can be cured at a later date.” Attorneys took to task NextWave’s dependence on the Fox decision, saying that the example was “inapplicable to the instant situation” and that the case “was an assignment or renewal case respecting an operating station. None was an initial licensing case, and none involved the rights of mutually exclusive applications … Therefore, those cases have no bearing on this proceeding, which involves the initial licensing of new allocations, where nothing has been constructed and the rights of competing applications, particularly petitioners, have been adversely affected. If NextWave cures now, petitioners do not receive any concomitant opportunity to bring in foreign funding and bid again, nor does NextWave have to re-bid for its licenses without the extra foreign funding. So a `cure’ is no real cure at all.”
In their opposition, petitioners pointed out that NextWave’s proposed equity-instrument restructuring would be no good if holders of the notes did not agree to convert their shares at fair market value-which petitioners say NextWave puts at between $5 and $7 per share-and the current convertible price of $3 per share for the foreign promissory notes and $4 per share for the convertible bridge notes. “If the equity instrument holders are not willing to agree to such a restructuring, then the equity instruments must continue to be classified as equity,” they wrote. “So long as the equity instruments, for which NextWave already has t
he full funding, are convertible into stock at or below market, they will remain equity.”
Antigone/PCS Devco also wondered why NextWave did not identify any of the domestic investors who were interested in buying foreign shares and at what price. “If the foreign ownership in excess of the 25-percent threshold was allowed to be liquidated at market value, then the foreign owners will have reaped all of the profit they bargained for as equity owners, all of the profit that is supposed to be out of their reach [under the FCC’s foreign affiliates order].
NextWave also continues to fail “the capital contributions” test, Antigone/PCS Devco wrote, because it only calculated foreign ownership based on the “count the shares” test. According to petitioners, the foreign affiliates order requires both types of accounting.
Not so, said NextWave spokeswoman Jennifer Walsh, who said the FCC only requires the count-the-shares test. Walsh also said that her company’s use of Murdoch/Fox as an example of the FCC’s willingness in the past to allow an after-the-fact cure was correct, and that the commission decision was not limited to waiving its rules to apply only to renewed or transferred licenses.
Harking back to two recent FCC letters charging NextWave with improper ex parte communications with certain commission officials, Antigone/PCS Devco ended its comments with, “The bureau should resist NextWave’s improper pressure tactics, reconsider its notion of allowing NextWave to `cure’ its violation, dismiss NextWave’s applications and reauction the licenses.”
“If all this is true, and if it was made clear that NextWave broke the rules, it should not get its licenses,” said Kevin Inda of C-block winner Pocket Communications, which also had to endure a long petition-to-deny cycle. “This opens a whole Pandora’s box of problems.”
On the other hand, George Schmitt, principal of Omnipoint Communications Inc., which just began its first multimedia ad campaign in the New York City market last week, welcomed NextWave into the competitive fold. He did, however, point out that NextWave’s gaining its licenses was one thing, and building a network is another.
